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ACCEPT THE FISCAL YEAR 2017-18 THIRD QUARTER BUDGET UPDATE, APPROVE A REVISION TO THE FY 2017-18 AND FY 2018-19 CALIFORNIA APPROPRIATIONS LIMITS; AND APPROVE THE RECOMMENDED BUDGET AMENDMENTS
recommended action
RECOMMENDATION
It is recommended that the City Council adopt a resolution to:
1. Accept this budget status report on the results of the third quarter of Fiscal Year (FY) 2017-18.
2. Adopt revisions to the FY 2017-18 and FY 2018-19 California Constitutional (Gann) Appropriations Limits.
3. Authorize the budget amendments to the FY 2017-18 Annual Budget in the General Fund for Office of the City Attorney and Other Administration category.
It is further recommended that the City Manager be authorized to take appropriate and necessary actions to carry out the purpose and intent of the resolution.
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Summary
A review of the financial results for the nine months ending March 31, 2018 indicates revenues and expenditures are tracking close to budgeted estimates with variances of one to two percent. Through the third quarter, General Fund revenues totaled $138.9 million, and expenses totaled $180.4 million. If current trends continue, overall General Fund expenditures will end the year approximately $2.9 million (one percent) below budget, due primarily to higher-than-budgeted position vacancies. Expenditures are projected to exceed the budget in five areas by year-end: Fire, Public Works, Office of Violence Prevention, Office of City Attorney, and Other Administration. Revenue collections are currently projected to end the year approximately $4.3 million (two percent) higher than budgeted. The net effect of projected revenue and expenditure variances is a $7.1 million increase to the General Fund ending available balance, which increases the total projected balance to $47.6 million. The FY 2018-19 Annual Budget released on May 15, 2018, projected an FY 2017-18 ending balance of $47.2 million. Staff will continue to monitor revenues and expenditures as final year-end transactions are posted and will return to Council with a year-end report in the fall.
Staff reviewed all other City funds to determine significant budget variances and identified two instances where amendments to the Adopted Budget are recommended to account for additional revenues and increased funding needs.
|
Fund |
Description |
Amendment Amount |
|
General Fund - Office of City Attorney |
Legal Services |
$178,000 |
|
General Fund - Other Administration |
Waterfront Office Towers |
$100,000 |
These amendments are described later in this report and included in the proposed Council resolution.
DISCUSSION
Background
The Council remains committed to transparency and financial responsibility with the continuation of Fiscal Sustainability as one of its strategic targets. This budget status update is provided in support of that objective.
The Council adopted the FY 2017-18 annual city-wide budget of $626.4 million, including $217.1 million in the City’s General Fund, on June 20, 2017. Administrative and Council-approved amendments to the adopted budget have increased total General Fund expenditure appropriations to $250.6 million. The Second Quarter Budget Report based on activity through December 31, 2017, projected positive revenue and expenditure results of $6 million, which increased the ending fund balance to $46.6 million. The FY 2018-19 Annual Budget released on May 15, 2018, projected an FY 2017-18 ending balance of $47.2 million in the General Fund.
Present Situation
General Fund Budget Status Update
Staff reviewed General Fund expenditures and revenues for the first nine months of the current fiscal year as shown in Attachments A and B. Attachment A summarizes the City’s General Fund revenues, expenditures, and available balance by Approved Budget, Year to Date Activity as of March 31, 2018, Third Quarter Projection, and variance amounts. As of March 31, 2018, the General Fund was budgeted to end the fiscal year with an available balance of $40.5 million. Staff’s revised projections indicate revenues will end the year above the budgeted level by $4.3 million and expenditures will be approximately $2.9 million less than budget. Third quarter projections are consistent with the year-end projections included in the Second Quarter Budget Report and the FY 2018-19 Annual Budget. The projected ending available balance of $47.6 million is an increase of $988,000 (two percent) compared to the Second Quarter Budget Report projection and $444,000 (one percent) compared to the projection included in the FY 2018-19 Annual Budget. The improvement in projected fund balance is the result of better revenues offset by an increase in projected expenditures.
At June 30, 2018, the fund balance is anticipated to be sufficient to fully fund the Priority 1 Working Capital Reserve of $36.8 million in accordance with the Reserve and Fund Balance policy for the General Fund. The remaining $10.8 million will then go toward the Known Contingency Reserve, which reflects items that are either future expenditures or items that are not fully budgeted today as the final cost is not available. Per Council policy, the Known Contingency Reserve is being used for: recruitment and retention, the Enterprise Resource Program, pension costs and other infrastructure needs. Because there is insufficient funding for the $59.8 million Known Contingency target, no additional funds will be provided towards the Risk-Based Reserve, which will remain at $5 million.
The City does not receive General Fund tax revenues in a regular monthly pattern, so third quarter actual revenues are less than 75 percent of budgeted revenues. The timing of expenses is more consistent, but the General Fund does include some budgeted items that will be paid in large lump sums that cause variances when reviewed on a quarterly basis. The information below indicates our best analysis of the trends evident from available data and projections for year-end performance compared to the budget based on this review.
Budget Adjustments
Throughout the fiscal year, Council may adjust the budget. The Approved Budget column on Attachment A includes all adjustments made through the third quarter including various adjustments approved in the Second Quarter Budget Report and other Council agenda items. The Approved Budget also reflects transfers for Weber Point fountain repairs, a Victory Park water connection, park maintenance, and an $18.6 million transfer of General Fund reserve dollars to the Pension Trust account. As of March 31, 2018, the General Fund approved expenditure budget was $250.6 million, and the budgeted ending available balance was $40.5 million.
Revenues
Attachment B displays staff’s analysis of revenue collections and projections through the third quarter of the year. Actual revenues received as of March 31, 2018, were $138.9 million and projected year-end revenues are $226.6 million. The largest variances compared to the budget are in program revenues and sales tax. Compared to the Second Quarter Budget Report, projected year-end revenues have increased by $2.3 million (one percent) and $1.6 million (0.7 percent) compared to the FY 2017-18 projection included in the FY 2018-19 Annual Budget. Increases in the Program Revenues category accounted for $1.3 million of the improvement in revenue projections.
Property Tax proceeds were 54.1 percent of the budget as of March 31, 2018, with San Joaquin County remitting approximately half of the annual property tax revenues in January 2018. Our tax consultants and the San Joaquin County Assessor indicate FY 2017-18 property tax revenues are expected to be $56.0 million, which is consistent with the 3.6 percent growth rate assumed in the budget. Property tax revenue growth is attributable to increasing home values and a Consumer Price Index inflation rate of 2 percent under Proposition 13. As shown in Attachment B, the anticipated variance is less than 1 percent of the $55.6 million budget.
Sales Tax revenue received from the State in the second and third quarters represents the first and second quarters of FY 2017-18, due to the lag time involved in receiving the tax collected. Once again, relying on the estimates from our consultants and review of current receipts, the Budget Office is projecting year-end sales tax collections will exceed budget by $610,000, a variance of less than 1 percent. The City’s incentive agreements with two fuel distributors and the impact of fuel prices on these companies is a significant driver behind the increase in the point of sale category. Measure A, which does not benefit from the incentive agreements, is projected to be $12,000 lower than the budgeted revenue amount of $31.0 million.
The City collects Utility Users Tax (UUT) revenues for four utility categories: Water, Electric and Gas, Cable TV, and Telecommunications. Consistent with the varying collection schedules of this revenue category, the City collected approximately 66.8 percent of the budgeted amount through the third quarter. As can be seen in Attachment B, staff project three of the four categories will end the year above the budgeted levels. Water is expected to exceed budget by approximately 6.7 percent, Electric and Gas by approximately 1.5 percent, and Cable TV by 13.7 percent. Telecommunications UUT revenues continue to fall, but by a larger margin than anticipated in the budget. Current projections indicate this category will end the year $452,000 below budget. Overall the FY 2017-18 projections for the Utility Users Tax category are 1.3 percent higher than budgeted.
The City receives Franchise Tax receipts in three categories: PG&E, Cable/Video, and Waste Haulers. All three categories are projected to end the year above budget with total franchise revenues exceeding the budget by $334,000. PG&E receipts are anticipated to exceed budget by approximately 5.2 percent, Cable/Video by 4.0 percent, and Waste Haulers by 1.6 percent.
Business License Tax revenues are running below budget, as reported in the Second Quarter Budget Report. They are estimated to end the year as much as $285,000 below the $11.8 million budget, but the revenue outlook in this category has improved since the Second Quarter Budget Report based on actual receipts. This category may continue to improve before the year end since the majority of business licenses renew in the last four months of the year.
Hotel/Motel Tax and Document Transfer Tax collections are both on track to exceed the estimate. The projected increase of 19.6 percent in Document Transfer tax is reflective of both the number of properties being sold and the value of those properties.
In the Program Revenues category, Code Enforcement is projected to end the year $571,000 or 16.6 percent above the budgeted amount due to increased self-certification application fees and from San Joaquin County payments related to properties that the City fines and liens for code violations. Charges for Services are projected to be higher than budgeted by $378,000 or 26.1 percent due mainly to $299,000 for the impound and animal shelter services agreement with San Joaquin County. The year-end true up based on the number of County animals sheltered is expected to be higher, reflecting increased operating costs at the shelter. Also, Police Department fees for false alarms and special events are coming in higher than expected. Revenues from Other Agencies are projected to be above the $2.5 million budget by approximately $906,000 due to a couple of factors previously discussed in the Second Quarter Budget Report. The Fire Department spent a large amount of time and resources assisting other jurisdictions in one of the worst wildland fire seasons in recent years. The year-end projection includes approximately $1.3 million in revenue that will be received, which will offset the department’s expenditure overages. Another factor of the overage is higher-than-anticipated City’s share of Redevelopment Property Tax Trust Fund monies. Four surplus properties have sold generating revenues of approximately $800,000 under Sale of Fixed Assets. This amount exceeds the budget and prior projections that did not include the sale of property located at Hogan Lake. The Misc. Other Revenues category is projected to exceed the budget by $122,000 as a result of a clean-up of stale balances from deposits beyond the statute of limitations for eligible reimbursement.
Interfund reimbursements consist of billings to outside agencies, indirect cost recovery, and a lump sum payment from the Municipal Utilities Department for property rentals. These reimbursements are projected to exceed the budget by $166,000 with increased Indirect Cost Allocation payments from various City funds. An increase of 6.2 percent is anticipated based on a preliminary Full Cost Allocation Plan being finalized by the City’s consultant.
Expenditures
Staff reviewed the first nine months of General Fund expenditure data as reported in Attachment A. Expenditure trends in most departments are running close to or just below expectations, with the exceptions of Fire, Public Works, the Office of Violence Prevention, Office of City Attorney, and Other Administration. The City Attorney Office and Other Administration projected overages are new information that was not known when the Second Quarter Budget Report was prepared. Projected expenditures have increased by $1.3 million (0.6 percent) compared to the Second Quarter Budget Report projection and approximately $975,000 (0.4 percent) compared to the projection included in the FY 2018-19 Annual Budget. The majority of the expenditure increase is in the Police Department.
The chart below summarizes the spending levels of all departments and programs as a percent of their total budget.
As shown above, most departments are running close to or below 75 percent expenditure level anticipated at the end of the third quarter. Program Support has currently expended 91 percent of the budget due to the $8.8 million purchase of the Waterfront Office Towers and the $18.6 million contribution to a Pension Trust from General Fund reserves. Program Support is not anticipated to exceed its appropriations by year end.
The FY 2017-18 Adopted Budget included a total of $8.4 million in budgeted salary savings. The Budget divided this amount into two areas: $6.1 million in the non-Marshall Plan portion of the General Fund, and $2.3 million in the Marshall Plan. Through the third quarter of the fiscal year, actual General Fund vacancy savings were $6.6 million, which is approximately $317,000 greater than three-quarters of the total budgeted vacancy savings. Departments with greater-than-anticipated vacancy savings include the City Clerk’s Office, Administrative Services, Human Resources, Economic Development, and the Police Department. Departments not achieving budgeted vacancy savings include Office of Violence Prevention, Fire, and Public Works. As of March 31, 2018, the Fire Department was under its targeted savings by approximately $227,000 from the heavy workload associated with one of the worst wildland fire seasons in years. The City will recover those costs through reimbursements from the State of California and the federal government.
Actual savings from vacancies may not align with the budgeted savings, and staff will continue to monitor the actual salary savings and report any necessary adjustments in the year-end reports. An adjustment may be needed by year-end to allocate the vacancy savings in the Other Administration budget to specific departments such as the City Clerk’s Office and Economic Development.
Below is a summary of vacancy savings results for the first three quarters of the fiscal year.
The Police Department continues to hire sworn officers to meet its Marshall Plan goals. Although the department hired 45 new officers in the first three quarters of the fiscal year, the department lost 38 officers (11 retired, 14 resigned, six were released during probation, two were terminated, and five left to other agencies). Fourteen of the 45 officers gained were in the third quarter. At the end of the third quarter of FY 2017-18, the Police Department had 452 sworn staff positions filled out of the authorized 485 positions. Police Department expenditure projections increased by $1.0 million since the Second Quarter Budget Report based on a reevaluation of actual salary and benefit expenses.
The Fire Department responded to over 40 State requests for emergency wildland fire assistance during the summer and fall of 2017 creating an overage in its General Fund budget. Reimbursements from the State and federal government will cover the additional expenditures incurred. By the end of the Third Quarter, the department had received and appropriated $763,000 as discussed in the Second Quarter Budget Report, leaving a shortfall of $78,000. An additional $506,000 reimbursement by the federal government is expected in the fourth quarter for the remaining wildland fire costs for total reimbursements of $1.3 million. After expenditure budget adjustments for the wildland fire activities are complete, the Fire Departments is anticipated to end the year within its budgeted level.
The Public Works Department is projected to overspend its General Fund budget by $663,000, a reduction from the $881,000 overage projected in the Second Quarter Budget Report. The causes behind the overage continue to be personnel costs and water for City parks. As reported in the Second Quarter Budget Report, the personnel costs overage will be reimbursed through the recently restructured Cost Allocation Plan. The City is in the process of finalizing the Cost Allocation Plan which was not available when it developed the FY 2017-18 budget. These revenues will offset additional staff costs that were redirected to the General Fund. The year-end report will include a budget amendment for the overage in the Public Works Department based on final transaction amounts.
The Economic Development Department is projected to end the year under budget by approximately $354,000 (10 percent). This variance reflects savings accrued from vacancies, thus resulting in anticipated delays in committing approximately $182,000 of the department’s Economic Incentive Program funds by year-end. Expenses as of March 31, 2018, were at 25 percent of budget reflecting the spending pattern of economic development incentive funds in the last part of the fiscal year.
The Office of City Attorney is projected to end the year over budget by approximately $178,000 (13 percent). This overage is due to an increased focus on code enforcement litigation efforts as authorized by Council. Staff recommends increasing the City Attorney budget to cover anticipated outside attorney fees.
The Office of Violence Prevention is projected to end the year slightly over budget by approximately $88,000 (5 percent). The annual budget assumes approximately $200,000 in grant-funded expenditures. However, the actual grants awarded are at a much lower level than planned. Staff will continue to monitor expenses and recommend any needed budget amendment by year-end.
In the Program Support for Other Funds category, the City completes most transfers monthly. The City only records the Grant Match transfer as grants with required matching funds are expended reflecting a pattern of below budget during the fiscal year. No net savings or additional General Fund support will be required. The remainder of the programs in this category are trending to end the year at budgeted levels, with no additional General Fund support required.
The Human Resources Department budget is running below budgeted levels. Annual spending is expected to be $367,000 (14 percent) less than budgeted, which is slightly less than the projection reported in the Second Quarter Budget Report. Fewer polygraph, psychological and written exams for sworn personnel were conducted during the fiscal year, attributing $186,000 of the savings. The remainder will be due to lower program and professional services costs and from vacant positions.
The Other Administration category holds a variety of citywide costs that are not attributable to an individual or specific group of programs or departments, including the operating costs for the Waterfront Office Towers since the purchase in January 2018. This category is projected to exceed the current budget by $153,000 due to increased Waterfront Office Towers operation costs and vacancy savings budgeted for multiple smaller General Fund departments. These other departments have achieved the targeted vacancy savings, and a portion of the budget overage can be addressed by distributing the vacancy savings budget.
The operating expenses associated with Waterfront Office Towers are offset by lease revenues. Operating costs are projected to exceed budget by $100,000, however, lease revenue is expected to be sufficient to cover the increased costs. The year-end projection includes an additional transfer to the General Capital Fund based on positive net operating revenues of $165,000 from the Waterfront Office Towers. The FY 2018-19 Budget Resolution included authorization for this action so that these revenues can be appropriated to the capital project created for the relocation of City offices to the Waterfront Office Towers. Staff recommends increasing the Waterfront Office Towers operating budget in the Other Administration category to cover building operation costs.
In addition to the detailed review of the General Fund expenditures and revenues described above, staff reviewed all City funds as part of the preparation of this report. No significant variances from the projections included in the FY 2018-19 Annual Budget were noted, and no budget amendments are recommended for other funds.
Gann Appropriation Limit
An amendment to the California Constitution intended to limit growth in local government spending requires the establishment of a maximum limit for expenditures from general taxes. The law, commonly known as the Gann Limit, requires that the limit is recalculated and approved annually by the City Council at the beginning of each fiscal year. Council adopted the FY 2017-18 Gann Appropriation Limit on June 20, 2017, and adopted the FY 2018-19 limit on June 5, 2018. The Gann Limit is indexed to specified growth factors approved by the Legislature and applied to revenue appropriations. The prior year’s limit is the basis of the next year’s calculation. Staff discovered an error in the population factor used in the FY 2017-18 calculation. The corrected FY 2017-18 Gann Appropriation Limit is $327,009,008 compared to $339,151,468 previously calculated. Using this new amount as the basis for the FY 2018-19 calculation, the adjusted FY 2018-19 Gann Appropriation Limit is $344,332,699. The City’s appropriations subject to the Gann Limit are still well below the limit for both fiscal years, with FY 2018-19 appropriations at $189,849,182.
Recommended Budget Amendments
As a result of this review, staff identified the following budget amendments requiring Council authorization and recommend them for approval in the Third Quarter Budget Report:
1. Increase appropriation to City Attorney legal services line by $178,000 from the General Fund Contingency Budget.
2. Increase appropriation to Waterfront Office Towers operations by $100,000 offset by revenues from building leases.
FINANCIAL SUMMARY
This report provides an analysis of FY 2017-18 General Fund third quarter results. The review indicates revenues are on track to achieve budget projections and the City is on track to achieve salary savings slightly greater than the budget. Staff also reviewed other significant City funds and did not find any significant issues.
Staff recommends the following General Fund budget amendments:
1. Office of City Attorney:
Increase 010-1401-510 Legal Services $178,000
Decrease 010-0131-510 Contingency $178,000
2. Waterfront Office Towers operations offset by revenues from leases
Increase 010-0161-510 Other Administration $100,000
The remaining budget overages identified will be addressed at year-end based on final transaction amounts. Staff will continue to monitor trends and potential budget variances and will return to Council with future recommendations for changes where appropriate.
Attachment A - FY 2017-18 Third Quarter Budget Update - General Fund
Attachment B - FY 2017-18 Revenue Projections - General Fund