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Consider approving an increase of $116,620 in the Solano County Fair Association’s (SCFA) CY2016 Adopted Budget, for a total of $2,979,650; Approving the SCFA’s CY2017 budget totaling $2,992,373, including capital expenses; Approving the extension of the term of the Agreement for the Management and Operation of the Solano County Fairgrounds to expire January 31, 2020; and Authorizing the SCFA to pursue federal and state grant and other revenues and delegating to the County Administrator approval of associated applications
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Published Notice Required? Yes ____ No _X _
Public Hearing Required? Yes ____ No _X _
DEPARTMENTAL RECOMMENDATION:
It is recommended that the Board of Supervisors:
1) Consider approving an increase of $116,620 in the Solano County Fair Association’s CY2016 Adopted Budget, for a total of $2,979,650;
2) Consider approving the SCFA’s CY2017 budget totaling $2,992,373, including capital expenses;
3) Consider approving the extension of the term of the Agreement for the Management and Operation of the Solano County Fairgrounds to expire January 31, 2020; and
4) Consider authorizing the SCFA to pursue federal and state grant and other revenues and delegating to the County Administrator approval of associated applications.
SUMMARY:
The Solano County Fair Association (SCFA) operates on a calendar year budget and per the Agreement for the Management and Operations of the Solano County Fairgrounds, the following budget items are forwarded to the Board of Supervisors for concurrence and approval. Due to increased business activity and unanticipated equipment and facility repairs, the SCFA Board of Directors approved on October 19, 2016 an $116,620 increase in its CY2016 Budget for a total of $2,979,650. The CY2016 Budget projects a net profit before depreciation of $78,029. The CY2017 SCFA Proposed Budget totaling $2,992,373 was approved by its Board of Directors on October 19, 2016. The CY2017 Budget projects a net profit before depreciation of $559 and includes an appropriation for contingencies of $19,000. The overall expenditures reflect a status quo budget with actual operations in 2016 and include a cost of living adjustment of 3% for year-round employees. The CY2017 Budget addresses the anticipated operations of the annual Solano County Fair, the annual Youth Ag Day on March 14, year-round operation and rental of the Fairgrounds, the Solano Race Place satellite wagering facility, an electronic billboard, and management of several property leases.
In accordance with the amendment to the Agreement for the Management and Operation of the Solano County Fairgrounds approved by the Board on February 10, 2015, the SCFA requests the Board of Supervisors affirmatively take action to extend the term of the agreement for one additional year to expire on January 31, 2020. As directed by the Board, the amendment contains language to allow for early termination of this Agreement at any point with notice to coincide with any future development of the Solano360 project at the site.
FINANCIAL IMPACT:
The SCFA is an enterprise fund and must operate within the operating revenues generated by the annual Solano County Fair, year-round activities, and available resources. The SCFA’s CY2017 Proposed Budget does not impact the County’s General Fund.
DISCUSSION:
Overview of 2016 Fair Association Activities
The Solano County Fair Association continues to produce and present an active schedule of events and activities throughout the year for the education and enjoyment of its guests and a variety of other uses of the Fairgrounds property.
Youth Ag Day on March 15 produced impressive numbers. In four hours 119 classes from 41 schools visited 44 presenters who connected with 2,870 third-graders, 115 teachers and 570 chaperones thanks to 54 volunteers and over 95 generous supporters that raised over $31,000. The Fair Hands Silent Auction, held during the Celebrate Solano BBQ, raised an additional $4,284 for Youth Ag Day and youth programming during the Fair.
The annual Solano County Fair from July 27 to July 31 reflected several fine tuning efforts to expand opportunities for different aspects of the community to get involved. The Cultural Pavilion exhibits and stage were relocated to the Family Fun Zone to keep the active entertainment going later into the evening. Amateur boxing and mixed martial arts competitions were added in the Outdoor Arena. The concert line up featured a Gospel Rocks Solano! event on opening night that featured local, regional and national gospel entertainment. The Mad Hatter Parade expanded from Friday night in 2015 to Friday through Sunday night in 2016. The Fine Arts and Floriculture returned to the County Building and the Health Solano! Health Fair moved into a giant tent outside. Exhibit entries were up 6.8% with 2,379 entries and exhibitors were up 7.2% with 522 exhibitors. This increase is due in part to the addition of “We Are Family Awards” that gave entries in the Fine Arts an opportunity to have their work on display at family health clinics in Solano County. The Junior Livestock Auction sales were $114,514 or 99.3% of 2015 sales despite youth entering more fowl and fewer steers and other large livestock. This was due in part to the participation of the local nonprofit Bids for Kids strategically keeping the bidding momentum going and providing a bid floor on most lots. Total attendance for the 5-day Fair was 40,455, which was up by 2.3% over 2015 and reflects the second year of positive increases in attendance.
Among the year-round uses of the Fairgrounds were 17 trade and product shows, 15 and counting public and private gatherings, six competitive and sporting events, five dog shows, two concerts and one circus. In addition, the SCFA manages an RV park, Solano Race Place (satellite wagering facility) and leases with New Horizon Pre-School, Vallejo Gem and Mineral Society, Courtyard Marriott, Six Flags, AT&T, Matina (Chevron/Carl’s Jr.) and CBS Outdoor.
2016 Financial Overview
The SCFA is projecting to end 2016 with revenues of $3,010,309 and expenditures of $2,932,280 for a net profit before depreciation of $78,029. This reflects an increase in net profit over the 2016 Budget by $35,232 but a decline net profit of $80,321 over 2015.
As a result of this increased business activity and unanticipated equipment and facility repairs, the SCFA is requesting to increase its budget by $116,620 for a total budget of $2,979,650. The table in Attachment B illustrates the variances between budgeted and projected revenues and expenses for 2016, with the most significant increases in revenues in facility rentals of $112,158 and the 2016 Fair of $45,593. This increased business activity would have resulted in additional net profits; however, nearly $45,000 in unanticipated repairs to facilities and equipment have occurred so far in 2016 - water leaks, air conditioning systems and electrical systems - that are all associated with aging facilities. This is in addition to the increase in the cost of business related to more facility rentals than anticipated and additional promoter-reimbursed expenses during the Fair. These unanticipated expenses were offset by deferring planned projects and equipment purchases, including repainting the interior of the barns, re-sanding the livestock arena, replacing an aging truck with a new utility vehicle, and upgrades to the electronic sign.
The list of unanticipated expenses, totaling $116,620, requiring action to increase SCFA CY2016 appropriations includes:
• Costs associated with increased facility rentals, $55,800
• Repair a concourse water leak, $12,200
• Promoter-reimbursed costs associated with MMA and Boxing events during the 2016 Fair, $10,000
• Repair a golf course water leak, $8,150
• Replace two compressor units for the air conditioning system at Solano Race Place, $6,970
• Rebuild utility tractor engine, $6,180
• Repairs to parking lot electrical systems, $5,050
• County costs associated with the Courtyard Marriott lease transfer, $3,520
• Rental of temporary cooling fans for the Livestock Barns during the 2016 Fair, $3,360
• Providing alternative power during a PGE-initiated project to the replace an aging transformer, $2,890
• Additional premiums for “We Are Family” awards, $2,500
Annual Fair - Paid attendance during the Fair was up 4% and overall attendance was up 2.3%. Revenues of $615,712 reflect $45,593 or 8.0% more than budget and $58,042 or 10.4% more than 2015. Expenditures of $785,759 reflect $24,129 or 3.2% more than budget and $65,420 or 19.1% more than 2015. The SCFA is projecting an operating loss before depreciation of $170,047 for 2016, which is $21,464 or 11.2% less than budget and $7,378 or 4.5% more than 2015. Revenues from other activities are designed to offset the cost of the annual Fair, which keeps the cost of providing the entertainment more affordable to the community.
Youth Ag Day - Donations in 2016 exceeded the direct costs associated with putting on the event; however, donations did not exceed the total cost of the event when considering the event’s share of administration overhead. Donations in 2016 totaled $31,150 and expenditures $27,466, resulting in an excess over direct expenses of $3,684 that will be placed in the Fair Hands Reserve to provide funds for future Youth Ag Day events and to enhance youth programming on the Fairgrounds.
Facility Rentals - Revenues from the rental of facilities for year-round events are projected at $855,858, which is $112,158 or 15.1% more than budget and $105,367 or 14.0% better than 2015. Expenditures are projected at $308,436 or $56,085 or 22.2% more than budget and $72,935 or 31% more than 2015. The net profit before depreciation is projected at $547,422, which is $56,073 or 11.4% better than budget and $32,432 or 6.3% than 2015. The increase in expenditures is primarily due to the costs associated with higher than anticipated rental activity.
Solano Race Place - Satellite wagering revenues for 2016 are projected to be $560,448, which is $36,502 or 6% less than budget and $44,669 or 7.4% less than 2015. The lower revenues represent a continuation of the downward trend in attendance. Expenditures are projected at $387,715, which is $2,582 or 0.7% more than budget and $3,368 or 0.9% more than 2015. The net profit before depreciation is projected at $172,733, which is $38,634 or 18.3% less than budget and $48,037 or 21.8% less than 2015.
Electronic Sign - 2016 revenues are projected at $125,417, which is $15,417 or 14% better than budget and $14,943 or 13.5% better than 2015. Expenditures are projected at $59,364, which is $801 or 1.4% more than budget and $4,796 or 8.8% more than 2015.
Other Sources - Other Sources is revenue from leases, interest and other revenues not directly attributable to the other activity centers. 2016 revenues are projected at $821,724, which is $5,393 or 0.7% more than budget and $17,824 or 2.1% less than 2015. The decrease in revenue compared 2015 is primarily due to .33 funds available in 2015 represented two years of revenues following a decision in December 2014 to allow the SCFA to retain the .33 funds not used on County services and reinstated 2014 funds. Expenditures are projected at $182,700, which is $40,587 or 28.6% more than budgeted and $54,896 or 43.0% more than 2015. The increase in expenditures is primarily due to the unanticipated repair projects identified above.
Administrative Overhead - Costs for administration, maintenance and guest safety in 2016 are projected at $1,180,840, which is $9,824 or 0.8% less than budgeted and $3,089 or 0.3% less than 2015. Administrative Overhead, as a percentage of the total budget, is projected at 40.3% in 2017, slightly less than the 42.2% budgeted in 2016 and 43.3% in 2015.
Use of CY2016 Projected Net Profits
The SCFA is projecting to end CY2016 with a net profit before depreciation of $78,029. There are insufficient net profits to distribute these funds in accordance with strategic policy adopted by the SCFA in 2015 to rebuild its reserves. A total of $27,968 will be directed to the Fair Hands Reserve to reflect a dedicated donation of $20,000, surplus donations over direct expenses of $3,684 and net proceeds from the Silent Auction during the Celebrate Solano BBQ at the Fair of $4,284. A total of $19,541 will be directed to the Capital Project / Maintenance Reserve to reflect excess .33 revenues of $8,022 and $8,000 for a livestock area improvement project. The balance of $34,039 will be directed to Unrestricted Reserves to provide cash assets to offset the lease obligation to the 2015 Six Flags Overflow Parking Lot Improvement Project.
SCFA CY2017 Proposed Budget
Overall, the SCFA CY2017 Proposed Budget (Attachment A) reflects a slight decrease in revenues, with declining satellite wagering revenues offsetting anticipated gains from increased Fair attendance and sustained facility rental operations. Net expenditure increases over 2016 actual expenditures are primarily the result of increases in payroll and related expenses and a state-funded project to improve the door safety of McCormack Hall. The SCFA CY2017 Proposed Budget includes a 3% Cost of Living Adjustment (COLA) for year-round employees. The COLA does not apply to the General Manager.
The proposed 2017 revenues of $2,992,932 reflects an increase of $129,902 or 4.5% over the 2016 Budget and $17,377 or 0.6% decrease over 2016 Projected. Proposed 2017 operating expenditures of $2,992,373 reflects an increase of $172,140 or 6.1% over the 2016 Budget and $60,093 or 2.0% increase over 2016 Projected. The proposed budget reflects a net profit before depreciation of $559, which reflects a decrease of $42,238 or 98.7% over the 2016 Budget and a decrease of $77,470 or 99.3% from 2016 Projected.
The CY2017 Budget includes $45,240 in planned expenditures for capital projects, fixed asset purchases and special projects. The projects include $29,240 for the safety upgrade to the doors in McCormack Hall, $8,000 for a livestock area improvement project that includes painting of the barn interiors and upgrading the cooling capacity of the Livestock Barns, and $8,000 for youth programming improvements that includes an ag education activity book, an enhanced agriculture display, audio equipment and small animal cages.
Annual Fair - Budget anticipates a 2% increase in paid attendance in 2017, approximately 420 more paid attendees, and anticipates per capita spending to remain flat with 2016. The increase in paid attendance was 6.9% in 2015 and 4% in 2016. As a result, the anticipated in revenue in 2016 is estimated at $606,535, which is $36,416 or 6.4% more than 2016 Budget and $9,177 or 1.5% less than 2016 Projected due anticipated one-time revenues in 2016.
The CY2017 Budget reflects no changes in admission prices, parking fees, or vendor fees and commissions. This is likely the last year in which modest increases in Fair attendance and consumer spending can absorb escalating expenditures from employee costs, cascading impact of minimum wage increases, utilities and maintenance of aging facilities. Admission and/or parking fees are likely to increase in 2018.
Expenditures are estimated at $819,461 in 2017, which is $57,831 or 7.6% more than in 2016 Budgeted and $33,702 or 4.3% more than 2016 Projected.
Youth Ag Day - Projected 2017 revenue decreased by $3,150 or 10.1% from 2016 actuals to account for in-kind donations that are not anticipated in 2017. Expenditure increases of $1,463 primarily reflect changes in payroll and a slight bump in anticipated cost of bus transportation.
Facility Rentals - The CY2017 Budget anticipates that the facility rental market will continue to reflect an upbeat economy. Revenues for 2017 are estimated at $870,200, which is $126,500 or 17% more than 2016 Budget and $14,342 or 1.7% more than 2016 Projected. The budget reflects a flexible parking rental structure ranging from $10 to $15 for regular parking and establishes a program for premium parking areas. Expenditures for 2017 are estimated at $305,011, which is $52,660 or 20.9% more than 2016 Budget and $3,425 or 1.1% less than 2016 Projected.
Solano Race Place / Satellite Wagering - Attendance at Solano Race Place continues to decline, which has a cascading impact on associated commissions from on-site wagering on horse racing. To manage costs in 2016, a janitorial position was converted to a part-time position upon retirement of the incumbent. An examination of the revenues by day indicates that the Solano Race Place does not generate sufficient revenues on most Wednesdays to cover the cost of operations. As a result, the Solano Race Place will reduce its hours of operations to close on Wednesdays that do not include California racing. The CY2017 Budget anticipates a 5% decline in attendance and 5% decline in track commissions. Revenue estimate for 2017 of $513,800 reflects an $82,700 or 13.9% decrease from 2016 Budget and $46,648 or 8.3% decrease from 2016 Projected. Expenditures for 2017 are estimated at $363,184, which is $21,949 or 5.7% less than 2016 Budget and $24,531 or 6.3% less than 2016 Projected.
Electronic Sign - Use of the electronic sign increased significantly in 2016, often resulting in turning away customers because space was not available. The 2017 projections reflect sustained activity at a 10% increase in rental rates, which is offset by reducing the potential number of slots available for rent to ensure slots are available to promote events on the Fairgrounds. Revenues for 2017 are estimated at $120,000, which is $10,000 or 9.1% more than 2016 Budget and $5,417 or 4.3% less than 2016 Projected. Expenditures for 2017 are estimated at $59,048, which is $485 or 0.8% more than 2016 Budget and $316 or 0.5% more than 2016 Projected.
Other Sources - The budget reflects a 2% Consumer Price Index on Six Flags Overflow Parking and applicable CPIs for other leases, no change in the state allocation of $32,487 for operational support and training, and a state infrastructure improvement grant of $29,240 to improve safety features on the doors in McCormack Hall. These new revenues are offset by a decrease of $4,113 in .33 Funds due to declining activity at Solano Race Place. Revenues for 2017 are estimated at $854,397, which is $38,066 or 4.7% more than 2016 Budget and $32,673 or 4.0% more than 2016 Projected. Expenditures for 2017 are estimated at $199,311, which is $57,198 or 40.2% more than 2016 Budget and $16,611 or 9.1% more than 2016 Projected. The increase in expenditures reflects increases in utility expenses and the McCormack Hall project.
Administrative Overhead - Overhead expenditures consist of administration, maintenance and guest safety costs that cannot be directly allocated to one of the SCFA’s six income activity centers. The 2017 expenditures are estimated at $1,198,428, which is $7,764 or 0.7% more than 2016 Budget and $17,588 or 1.5% more than 2016 Projected. Administrative Overhead represents 40% of the total operating budget in 2017.
Employee Positions - This budget reflects no change in employee positions and a reduction in hours for select employees due to the reduction of operating hours at the Solano Race Place.
Cost of Living Adjustments (COLAs) - This budget contains a 3% cost of living adjustment for year-round employees, except the General Manager. Since 2000, Association employees have only received three COLAs: 3% in 2006, 2% in 2008 and 3% in 2014. Additionally, in 2003 the SCFA stopped paying 2% of the employees’ share of PERS costs and the Miscellaneous PERS rate that employees paid increased from 7% to 8% in 2011.
Merit / Parity Salary Adjustments - This budget includes adjustments to reflect the impact of the increase in minimum wage to $10.50 per hour, which accounts for about $12,425 in increased wages and benefits in 2016. Continued escalations of the minimum wage will increase payroll costs, considering 58% of employees are compensated at or near the designated California minimum wage of $15 in January 2022.
Payroll Taxes and Employee Benefits - This budget anticipates a net increase of $43,925 in payroll taxes and benefit costs.
Retirement Contributions - This budget anticipates no additional employee positions becoming eligible for the Public Employees Retirement System (PERS) benefit, and an increase in the PERS and Pension Obligation Bond rate from 24.68% to 25.72% in July 2017.
Cash Flow Analysis - The analysis of the cash flow through December 2017 represents a significant improvement for the SCFA. In contrast to 2016 where cash flows were predicated to dip as low as $3,000, the projection for 2017 range from a low of $218,000 to a high of $610,000. The revenues reflect a conservative approach to anticipated revenues, while the expenditures reflect a more aggressive approach to anticipated expenditures. Despite the improved cash position for 2017, unanticipated events can quickly erode any cushion in the cash flow. As a result, the SCFA will continue to monitor expenditures to ensure sufficient cash is available to cover expenditures.
Allocation of Overhead Expenditures - Attachment B shows the distribution of overhead expenditures to the six activity areas, which indicate that the annual Fair ($740,234) and Youth Ag Day ($24,898) events will require the use of profits from the other activities on the grounds in 2017. After overhead allocations, the surplus revenues from Other Sources, $619,133; Facility Rentals, $109,786; Satellite Wagering, $42,757; and Electronic Sign $13,015 offset the costs of the annual Fair and Youth Ag Day.
2017 Pending Issues
While the CY2017 SCFA Proposed Budget provides continued optimism that operations on the Fairgrounds is now on an upward trend, the legacy of financial woes and aging facilities still haunts the nonprofit association.
Unrestricted Reserves - Based on 2016 Year-end Projections, SCFA will have an Undesignated Net Position of $88,337 in its Unrestricted Reserves (Attachment C). This will decline to a negative $3,611 at the end of 2017 due primarily to lease obligations associated with the Six Flags parking lot improvement project and the electronic sign. Restricted reserves total at the end of 2017 is estimated at $67,264 and a total of $32,856 can be diverted toward the Undesignated Net Position. This puts the SCFA in a precarious financial position in regards to meeting future reserve obligations and resources to address unanticipated expenditures.
Vallejo Water Rates - In 2016, the City of Vallejo pulled back a proposal to implement a new five-year rate structure that aggressively addressed aging infrastructure used to deliver water services. The City is conducting a new rate study that is anticipated to scale back the aggressive approach, but will likely result in increased water rates for the Fairgrounds. It is anticipated proposed new rates will come before the Vallejo City Council in the April 2017 timeframe. Based on the rate structure plan previously released, the base service charge for the Fairgrounds property would have increased from the current $537 per month to $5,416 per month by 2020. Over the same period, water consumption charges were reduced 60%. Under the previous plan, fees for water service for the Fairgrounds would have increased by approximately $21,000 in year one and by over $58,000 in year five. Costs associated with this increase have not been specifically identified in this budget; however, a contingency of $19,000 has been established.
Solano Race Place / Satellite Wagering - The decline in attendance at the Solano Race Place and the decline in track commissions reflect the overall decline in the horse racing industry in California. The SCFA has proposed a change in hours of operation for 2017 that aligns with the current driver of attendance - California racing. This has become the norm among most satellite wagering facilities in Northern California. The operation cannot be reduced beyond the proposed four-day a week operation without severely compromising the customer base. Assuming no further operational changes, an analysis of Solano Race Place determined that the operation will likely stop producing surplus revenues by 2021. This analysis assumed a continued annual decline in attendance of 5% and a 3% annual increase in operational costs.
Aging Facility / Solano360 Redevelopment - Nearly $45,000 in unanticipated repairs have occurred so far in 2016 - water leaks, air conditioning systems and electrical systems - that were all associated with aging facilities. There are a variety of reasons that can be stated to rationalize past decisions regarding the level of investment in the facilities, including deferring investment pending the outcomes of one of the several plans for redevelopment over the last 30 years. In hindsight, those decisions have proven to be short-sighted and resulted in facilities that now require significant investment before long-term revenue gains can be achieved so the Fairgrounds can be an economically sustainable operation. The current Solano360 Redevelopment process is still in the developer agreement stage.
ALTERNATIVES:
The Board of Supervisors could choose not to approve the CY2017 SCFA Proposed Budget as presented or approve this budget with recommended changes and instruct the Solano County Fair Association to modify the budget accordingly.
The Board could also not approve the extension of the Agreement for the Management and Operation of the Solano County Fairgrounds, which would result in the agreement expiring on January 31, 2019. This is not recommended because it diminishes the SCFA’s ability to negotiate multi-year contracts affecting its ability to contain costs and generate revenue.
OTHER AGENCY INVOLVEMENT:
The County Administrator’s Office has reviewed the Fair Association’s budget. The SCFA’s Board of Directors approved the budget at its October 19, 2016 meeting.
CAO RECOMMENDATION:
APPROVE DEPARTMENTAL RECOMMENDATION