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ACCEPT THE FISCAL YEAR 2023-24 FOURTH QUARTER BUDGET STATUS UPDATE, AUTHORIZE BUDGET AMENDMENTS, AND MAKE ALLOCATIONS TO GENERAL FUND RESERVES
recommended action
RECOMMENDATION
It is recommended that the City Council adopt a resolution to:
1. Accept this budget status report on the unaudited results of the fourth quarter of Fiscal Year (FY) 2023-24.
2. Allocate the General Fund Vacancy Savings budget reduction for FY 2023-24 from Other Administration (Non-Departmental) category to the following departments:
Reduce Expenditure Budget:
Department Division/Fund Amount
a. City Clerk 1110-100-000 $ 5,700
b. City Manager 1230-100-000 $147,100
c. Office of Violence Prevention 1220-100-000 $ 6,900
d. City Attorney 1410-100-000 $ 99,400
e. Economic Development 6000-100-000 $106,400
$365,500
Increase Expenditure Budget:
Other Administration 0010-100-000 $320,400
Office of Violence Prevention (Measure A)1220-100-115 $ 45,100
$365,500
3. Authorize a reserve for future appropriation of $1,073,000 from FY 2023-24 available funds for the estimated increase in the Assured Guaranty Settlement contingent payments for a total reserve of $3,010,000.
4. Authorize a FY 2023-24 General Fund appropriation of $23,225,000 for Council priority projects, as displayed in Table 4.
5. Allocate available fund balance to reserve categories consistent with the Council Reserve and Fund Balance Policy - General Fund Policy. The net increase in fund balance will be added to the current reserve levels, as displayed in Table 3, to achieve the total reserve amounts as follows:
Priority 1 Reserves
Working Capital $54,700,000
Known Contingency $73,500,000
Priority 2 Reserves
Risk-Based Reserves $10,800,000
6. Authorize the continuation of up to $404,681 in FY 2023-24 budget appropriations to FY 2024-25 for completion of identified programs as displayed in Table 5.
7. Authorize a FY 2023-24 budget amendment increasing expenditure and revenue appropriations in the Downtown Marina Fund by $25,310.
8. Authorize a FY 2023-24 budget amendment increasing Community Development Block Grant (CDBG) Revolving Loan expenses by $59,410.
9. Authorize the addition of one (1) full-time Fire Prevention Inspector I/II position to the FY 2024-25 Fire Prevention Development Services Fund budget, effective January 1, 2025.
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
City staff analyzes the City’s expenditures and revenues quarterly and provides reports to the City Council and the public to increase transparency, make financial recommendations in response to financial activities, and perform routine financial operations that require Council’s authority to complete.
The City has experienced higher than anticipated General Fund revenues and lower than anticipated expenditures. Projected revenues of $325.6 million are $20.1 million higher than the adopted budget. Projected expenditures of $335.3 million are $16.9 million less than the adopted budget. The fiscal year-end projected numbers reflect actuals as they currently stand but are unaudited and subject to changes before the Annual Comprehensive Financial Report (ACFR) is published.
The City has prudently adopted the Reserve and Fund Balance Policy - this policy attempts to set aside reserves using the Long-Range Financial Plan (L-RFP), a tool designed to help the City’s consultants and analysts understand how the City will respond to likely future economic factors. The L-RFP and the Reserve and Fund Balance Policy are designed to set aside fund balance during financially prosperous years so that City services can continue during financially lean years.
DISCUSSION
Background
One of the strategic initiatives developed to support the City’s long-term fiscal sustainability was to provide regular analysis and reporting of the City’s financial status. As a result, the Council and the public should anticipate quarterly reports.
A fund is a set of accounts designed to track a specific kind of financial activity. Each fund is its own business entity and consists of its own “set of books” and specific rules. This allows the City to provide and account for different kinds of activities and departments separately. The General Fund is the City’s largest and most important fund. It is the fund which provides for most of the City’s fundamentally necessary or “general” activities such as public safety. The City’s General Fund balance is also considered unassigned, which means that it is not tied to a specific service or type of expenditure, although most of the General Fund has been assigned to restricted balances. The remainder of the General Fund might be used to support or enhance any service that the City might require.
The City accrues or “moves back” transactions that occur up until 90 days after the fiscal year closes on June 30 that represent activity that occurred during the fiscal year. This practice is used to accurately reflect best accounting practice or Generally Accepted Accounting Principles (GAAP) to present the financial activity in the same accounting period in which it occurred.
To achieve long-term fiscal sustainability, the City Council adopted the Reserve and Fund Balance Policy - General Fund on March 29, 2016, that establishes reserves for known contingencies, unforeseen revenue changes, infrastructure failures, and catastrophic events in addition to the operating reserve. Accordingly, staff recommends increasing reserves from the available General Fund dollars.
Present Situation
General Fund
Staff analyzed General Fund unaudited expenditure and revenue results for the full 12 months of FY 2023-24, as shown in Attachments A and B. The City’s financial statements have not yet undergone the full annual audit process and are subject to change. Staff will provide audited financial statements for all funds through the publication of the ACFR. Attachment A summarizes the City's General Fund revenues, expenditures, and available balance by Approved Budget, Year-End Projection, and variance amounts.
Council adopted the FY 2023-24 Annual Budget of $912.1 million in appropriations, including $289.7 million in General Fund appropriations, on June 20, 2023. Throughout the fiscal year, Administrative and Council-approved amendments to the adopted budget increased the total General Fund expenditure appropriations to $352.2 million, mainly resulting from one-time appropriations for City-wide projects and operating budget adjustments based on approved employee labor agreements.
Summary Tables
Staff reviewed the City’s unaudited Fourth Quarter (Q4) FY 2023-24 financial activity in the General Fund (Attachment A). The following tables summarize the results of the Fourth Quarter / Year-End review of General Fund compared to the Approved Budget:
Summary Revenues and Expenditures
The General Fund ended FY 2023-24 with revenues that were 6.6% above the Approved Budget of $305.4 million. At year-end, City staff are reporting a total of $325.6 million in revenue. Investment income and business license tax revenues accounted for most of the variance between what was budgeted and actual receipts.
The General Fund Ended FY 2023-24 with expenditures that were 4.8% below the approved budget. The General Fund had an approved expenditure budget of $352.2 million. At year-end, City staff are reporting a total of $335.3 million in expenditures on a budgetary basis. Vacancy savings accounted for most of the variance between what was budgeted and what was spent.
Net Position
The net position is the difference between revenues and expenditures and represents how much of the fiscal year’s activity will be made available to fund future efforts, or, if negative, how much fund balance was used or committed to cover current or future activity.
The approved budget originally expended or committed $46.7 million more than anticipated revenues. At year-end, the City’s books show that the City only expended or committed $9.7 million in excess of anticipated revenues.
A combination of global and local economic factors and salary savings have led to the net position being $37.0 million more than initially anticipated. It is recommended that a portion of these savings be programmed towards Council priority items and that the remainder be put towards reserves, saving for future commitments and potential economic downturns.
General Fund Revenues
As generally described in the previous section, overall revenues came in higher than anticipated compared to the Approved Budget. Below is a discussion of selected categories of General Fund revenues (also displayed in Attachment B). Chart 1 shows the various revenue categories as a percent of total General Fund revenues.
Chart 1: Revenues by Category
Sales Tax Collections, the General Fund’s largest revenue source, are expected to be $1.3 million greater than the budgeted level of $123.8 million. Measure A is projected to be $124,331 less (0.3%) than the budgeted amount of $46.3 million. At $125.1 million, Sales Tax receipts make up approximately 38.4% of all General Fund revenues.
Current year-end sales tax receipts for FY 2023-24 are projected to be 1.1% more than budgeted and 1.2% less than FY 2022-23 receipts. Revenues have been difficult to predict in recent years but have been higher than usual due to national factors caused by a rapidly changing economy.
Property Tax revenue estimates (including Motor Vehicle In-Lieu Fees) are up $2.7 million or 3.6% compared to the Approved Budget. Property Tax receipts make up approximately 23.6% of the City’s General Fund revenues. They are remitted to the City each year by the County of San Joaquin in January and April. Property Tax growth is attributable to increasing home values, commercial and industrial construction, and new home construction.
Utility Users Tax (UUT) is a 6% tax imposed on the users of various utilities and represents 13.1% of General Fund revenues. The FY 2023-24 UUT receipts are projected to be $42.8 million, which is 5.7% higher than the Approved Budget of $40.5 million. UUT is subject to a certain degree of volatility as consumers’ use of utilities can be dependent on weather conditions, conservation efforts, and the availability of substitutes. Most of the additional revenue has come from Electric & Gas - projected to be $1.8 million more than budgeted and make up 9.7% of total General Fund revenues.
While electricity and gas, water and telecommunication revenues were higher than anticipated, cable and telecommunications revenues declined compared to prior year receipts. Telecommunication revenue is projected to be 10.3% higher than anticipated yet 6.2% lower than prior year. As wireless technologies continue to expand, telecommunications will decline in usage as an ongoing trend.
Franchise Tax revenues are collected from companies that provide municipal services in three categories--PG&E, Cable/Video, and Waste Haulers--and make up approximately 5.9% of revenues. These businesses are charged based on a percentage of income generated. Revenues from Electric & Gas came in 4.4% higher than budget, and Waste Haulers came in 9.1% higher than budget. The PG&E variance is attributable to the same reasons discussed in the UUT section above. The waste haulers’ variance is attributable to a City audit of businesses resulting in identifying entities that did not have required services and requiring them to sign up for the mandatory service. This audit resulted in more commercial waste hauler activity than in prior years.
Business License Tax revenues make up 5.8% of revenues. Business License Taxes are expected to end the year at $19.0 million or 27.9% more than budgeted. Approximately 50% of business license tax collections occur in the last three months of the fiscal year, and this timing contributes to the volatility of year-end revenue projections. In addition, new efficiencies and cleanup related to the implementation of the City’s new financial system have resulted in more accurate and timely billing and bringing old accounts current. The increased revenues also include new types of Cannabis businesses permitted in previous years but only recently generating business license revenues based on sales. Cannabis revenues are projected to be $4.1 million or 21.6% of total Business License Tax revenues.
Hotel/Motel Tax revenues were $66,997 greater than the budget of $3.5 million and came in 2.5% more than the prior year revenues of $3.4 million.
Motor Vehicle License revenue receipts of $399,537 are 18.1% more than the budgeted amount of $338,181 and almost $68,000 more than FY 2022-23.
Interest Proceeds are highly dependent on unpredictable market performance. These amounts include proceeds from investments and the benefit of paying the full amount of the CalPERS Unfunded Accrued Liability payment in July rather than over the course of a year. Interest income is estimated to be $7.4 million, coming in $5.1 million more than the budget. Additional investment earnings are due primarily to more cash on hand from one-time federal grant dollars and improved revenues as well as favorable performance of the City’s investment portfolio. This return on investments is not expected to be maintained as one-time funding sources are expended and the investment environment normalizes.
Program Revenues are above budget by $4.3 million (25%). The categories with the most significant variances are discussed below:
• Fines & Forfeitures revenues have fluctuated, falling short of budget expectations by $244,439, or 43.6%. Traffic and parking enforcement activities that result in fine and forfeiture revenues often decline when the Police Department is experiencing higher vacancies as employee resources are deployed differently.
• Revenues from other Agencies ended the year up by 83.4% or $3.5 million more than the budgeted amount, mainly due to $2.67 million above budget in the City’s share of Redevelopment Property Tax Trust Fund monies. The City also received State Mandated Cost reimbursements of $502,222 more than anticipated.
• Licenses & Permits came in 55.9% lower than budgeted or $381,331
• Miscellaneous Other Revenues are heavily influenced by the allowance for doubtful accounts adjustment as well as the year-end bank reconciliation. As such, it is very difficult to anticipate and varies widely depending on the timing of the entry. It ended the year at $164,197 after being budgeted at ($96,700) for an increase of $260,897.
Refund & Reimbursement revenues came in 33.4% higher than budgeted or $81,710, largely due to cash reimbursement for training costs, as well as escheated checks, which are difficult to anticipate and budget for as the City’s assumption is that no checks will remain unclaimed.
General Fund Expenditures
Staff reviewed year-end General Fund expenditures as detailed in Attachment A. General Fund expenditures are projected to end the year at $335.3 million, which is $16.9 million, or 4.8% less than the Approved Budget. Except for Other Administration and City Auditor, all General Fund departmental activities ended the fiscal year below their appropriation levels.
Chart 2: General Fund Income Statement Illustration (in millions of dollars)
The FY 2023-24 Budget included approximately $12.0 million in anticipated salary savings, which is 5.8% of the total salary and benefits budget of $206.5 million (includes full-time and part-time expenses). The competitive labor market continues to make retention and recruitment difficult. The high spike of prior years is starting to level off, through slower than anticipated. In FY 2022-23, the vacancy rate was 15.4% and came down in FY 2023-24 with a total General Fund vacancy rate of 12.3%. The unanticipated additional savings of $13.3 million is the most significant cause of expenditure savings in the General Fund.
Below is a summary of those savings by department before factoring in budgeted vacancy savings.
Table 2: FY 2023-24 General Fund Vacancy Savings
The Police Department spent $10.4 million (6.4%) less than its authorized budget primarily due to vacancy savings. The department expanded recruitment efforts during FY 2023-24 via attendance at local events, media advertisements and partnering with local educational institutions to pipeline students into a police field. As a result of these efforts, 48 officers were hired. Despite this, the department experienced 52 departures. Effective April 1, 2024, the City reprogrammed the efforts of recruitment to focus on retention benefits for all existing officers. It is expected that these expanded benefits will increase the City’s competitiveness in the law enforcement recruitment field.
The Fire Department ended the fiscal year with approximately $2.3 million in savings or 4.0% of the budget primarily due to vacancies. Fire Academy 23-2 and Fire Academy 24-1 successfully graduated Firefighter trainees that filled 20 vacant positions. Personnel attrition continued throughout the fiscal year and created additional vacancies of 22 sworn positions at the end of FY 2023-24.
In the Program Support for Other Funds category, the only notable budget variance is in the grant match category. There were no grants requiring matching funds from the General Fund in FY 2023-24, leaving an unspent balance of $100,000. Grant match needs vary from year-to-year based on grant award requirements.
The various departments under Administration (City Manager, City Attorney, City Clerk, City Auditor, Administrative Services, and Human Resources) cumulatively, came in 10.8% under budget primarily due to vacancy savings ($2.0 million out of a total $3.0 million). One item of note: The Other Administration category shows an overage because it includes budgeted vacancy savings for smaller departments in the General Fund. A recommended budget amendment to spread this negative budget to the City Clerk’s Office, City Manager’s Office, the Office of Violence Prevention, City Attorney, and Economic Development will result in a positive balance.
Fund Balance and Reserves
With the above General Fund revenue and expenditure results, the variance from the FY 2023-24 budget is approximately $37.0 million. Expenditure savings are one-time dollars that should be spent on one-time costs. The revenues received over the budgeted amount are also one-time funds but can be indicative of an ongoing source of funds. Of the $20.2 million revenue variance, $5.9 million was known and incorporated into long-term planning during the most recent budget cycle for the FY 2024-25 Budget. At that time, it was programmed toward a variety of new expenditures. The City Council also approved successor labor agreements with four employee units in September 2023 that added ongoing expenses which draw on these revenue sources. The table below shows the previous commitments against the $37.0 million budget variance.
It is recommended that one commitment be funded out of the year-end balance before reserves or special projects are considered.
1. $1,073,000 is set-aside for future payments to Assured Guaranty under the City’s bankruptcy settlement. The increased revenue receipts in FY 2023-24 will increase future payments by $1,073,000. The net increase in funding need is $483,000. This amount will be added to funds set aside in prior years for a total restriction of $3.0 million.
2. City Council previously approved Resolution 2024-11-19-1503, to transfer $2,000,000 from the General Fund Reserve balance to the Health ISF Fund to address the impact of health care premium increases of the City’s employees.
After the above commitments, there is expected to be $29.7 million in fund balance that is not assigned to any kind of reserve, made up of non-spendable assets (such as inventory), nor encumbered or carried forward for future years expenditures by prior Council action. This resolution recommends that $23.2 million be set aside for the Council projects and $11.2 million be assigned to the various reserves.
Per the City Council General Fund Reserve Policy, the target reserve levels are as follows. These target funding levels are based on calculations that are adopted each year as part of the annual budget process. The target under the reserve policy totals $237.0 million. With recommended increases to the Working Capital Reserve ($6.4 million) and to the Known Contingency Reserve ($4.8 million), the total funded reserves would be $138.1 million.
Target Level Recommended Funding
Priority 1:
1. Working Capital $54.7 million $54.7 million
2. Known Contingencies $93.3 million $73.5 million
Priority 2:
3. Risk-Based Reserves $89.0 million $10.8 million
While there is sufficient funding to fully fund the Priority 1 reserves, the recommendation is to use a portion of these funds to improve services and facilities for the community. This approach will balance the City’s priorities, follow the reserve policy, fund vital Council priority projects while safeguarding against the immediate economic slowdown.
Funding for Projects
City departments proposed over $39.0 million in potential uses for $23.2 million in year-end funds. Table 4 below is a summary of the recommended projects from that list. In addition to the listed projects, Staff is recommending that $3.0 million be reserved for one-time Council priority projects to be allocated as directed by the Council.
Long-Range Financial Plan
The City’s updated Long-Range Financial Plan (L-RFP) incorporates the revised year-end financial projections. The projected increase in the General Fund available fund balance will fund reserves essential to keeping the fund balance above the 5% warning level over the next 20 years.
The graph below illustrates the short and long-term impact on the General Fund available balance forecast compared to the 16.7% Working Capital reserve and the 5% warning level. The bars depict the General Fund ending available fund balance at each fiscal year-end beginning with actual balances for FY 2019-20 through FY 2023-24 and continuing forward based on forecasts. The light blue bars represent the Working Capital reserve. The dark blue portion of the bars includes both Known Contingency and Risk-Based reserves. The yellow bars represent the projected Pension Trust balance.
As shown in the graph, the available balance is above the 16.7% goal for all projected years due to updated revenue projections. The graph assumes that the City draws on the Pension Trust, represented by the yellow bars, to make annual payments to CalPERS starting around FY 2028-29.
Chart 3: Long-Range Financial Plan reflects the recommended actions to allocate $23.2 million to priority projects and to increase reserves by $11.2 million.
Other Funds
Attachment C summarizes the FY 2023-24 unaudited fiscal year-end results for all other significant City funds. All funds are coming in under budget except Economic Development’s Downtown Marina Fund and Federal Housing Grants Fund CDBG - Revolving Loan. Operation expenses for Marina continue to increase every year, primarily due to minimum wage increases and higher cost of security. Revenues are over budget by 7% and expenditures are over budget by about 4%. The additional revenues received will cover the overage in expenses, so a $25,310 budget amendment increasing both revenues and expenditures is recommended. For the Federal Housing Grant Fund CDBG - Revolving Loan an increase in outreach and marketing of the Single-Family Rehab program resulted in an increase of applications received and approved. There is sufficient fund balance to offset the overage of $59,410, so a budget amendment increasing expenditures is recommended.
In most cases, the other funds all experienced revenue at or greater than expected and expenditures below budget - this is largely attributable to salary savings. No other action is required to balance these funds.
Continuation of FY 2023-24 Appropriations
Pursuant to Section 1908 of the City Charter, operating budget appropriations lapse at the end of each fiscal year if not expended or encumbered. With this requirement in place, programs lose funding at year end unless Council takes action to continue the appropriation into the following fiscal year. Following a review of budgets and activities in FY 2023-24, departments have identified funded programs that could not be encumbered or completed prior to the end of the fiscal year on June 30, 2024. To complete these programs, it is recommended that the FY 2023-24 budgets identified in the table below be continued to FY 2024-25 to complete the specific programs listed in the following table. Budget balances for each program will be reviewed and only available balances will be continued to FY 2024-25.
Table 5: Carryforward Requests
|
Description |
Department |
Fund |
Not to Exceed Amount |
|
Data Warehouse Cloud Services Software |
City Manager - OPDA |
General Fund |
18,000 |
|
Chamber of Commerce STAART Program |
Non-Departmental |
General Fund |
20,000 |
|
Fire Truck No. 7 One-Time Equipment |
Fire Department |
General Fund |
116,681 |
|
El Concilio Community Center Repairs |
Economic Development |
General Fund |
250,000 |
|
Total |
|
|
$404,681 |
Mid-Year Position Request
Last year, the Fire Prevention Division conducted over 7,500 fire code inspections to ensure compliance with the California Fire Code (CFC). Additionally, the Division took on the responsibility of inspecting over 1,900 state-mandated R-2 multi-family dwellings. These inspections, previously performed by suppression personnel, were reassigned to Fire Prevention to maintain emergency response capacity and ensure all inspections are completed on schedule.
Currently, Fire Prevention approved budget includes eight (8) Fire Prevention Inspectors, one (1) Supervising Fire Prevention Inspector, and six (6) part-time Program Specialists (Fire Prevention Inspector I/II). However, reliance on part-time personnel has proven to be inefficient, as many leave for full-time opportunities after the City has invested in their training. This turnover results in the loss of training investments and impedes the Division’s ability to meet inspection targets.
To address these issues, staff recommends converting three (3) current vacant part-time Program Specialist positions into one (1) full-time Fire Prevention Inspector I/II position. This change would reduce turnover-related training costs, improve retention, and ensure Fire Prevention can meet inspection demands in compliance with CFC standards.
FINANCIAL SUMMARY
This report provides an analysis of FY 2023-24 Fourth Quarter budget status results. The unaudited 12-month period review indicates General Fund revenue increases and expenditure savings are estimated to result in a year-end balance that can fully fund the Working Capital Reserve and mostly fund the Known Contingency Reserve. No additional funding is being contributed toward Priority II - Risk-Based Reserves.
Following are the budget amendments and transactions needed to complete the recommended actions:
1. Accept this budget status report on the unaudited results of the Fourth Quarter of FY 2023-24.
2. Allocate Vacancy Savings budget reduction for FY 2022-23 from Other Administration (Non-Departmental) category to the following departments:
Reduce Expenditure Budget:
Department Division/Fund Amount
City Clerk 1110-100-000 $ 5,700
City Manager 1230-100-000 $147,100
Office of Violence Prevention 1220-100-000 $ 6,900
City Attorney 1410-100-000 $ 99,400
Economic Development 6000-100-000 $106,400
$365,500
Increase Expenditure Budget:
Other Administration 0010-100-000 $320,400
Office of Violence Prevention (Measure A)1220-100-115 $ 45,100
$365,500
3. Authorize a reserve for future appropriation of $1,073,000 from FY 2023-24 available funds for the estimated increase in the Assured Guaranty Settlement contingent payments for a total reserve of $3,010,000.
4. Authorize a FY 2023-24 appropriation of $23,225,000 from the General Fund balance for Council priority projects identified in the resolution.
5. Allocate available fund balance to reserve categories consistent with the Council Reserve and Fund Balance Policy - General Fund Policy. The net increase in fund balance will be added to the current reserve levels, as displayed in Table 3, to achieve the total reserve amounts as follows:
Priority 1 Reserves
Working Capital $54,700,000
Known Contingency $73,500,000
Priority 2 Reserves
Risk-Based Reserves $10,800,000
6. Authorize the continuation of up to $404,681 in FY 2023-24 budget appropriations to FY 2024-25 for completion of identified programs.
7. Authorize a FY 2023-24 budget amendment increasing expenditure and revenue appropriations in the Downtown Marina Fund.
Division/Fund Amount
Increase Revenue Budget
Downtown Marina 6050-640-000 $ 25,310
Increase Expenditure Budget
Downtown Marina 6050-640-000 $ 25,310
8. Authorize a FY 2023-24 budget amendment increasing expenditure and revenue appropriations in the Federal Housing Grant Fund CDBG.
Division/Fund Amount
Increase Expenditure Budget
CDBG Revolving Loan 6020-230-232 $ 59,410
9. Fire Prevention’s annual budget allocation for salary and benefit costs of three (3) part-time Program Specialists amounts to $101,805. One (1) full-time Fire Prevention Inspector, step 1, has an annual salary benefit cost of $110,080. Converting the three (3) part time positions to one (1) full time position is an increase of $8,275 in annual salary and benefit costs. There are sufficient vacancy savings in the part-time salaries account to offset the cost of the requested Fire Prevention Inspector I/II position for the remainder of FY 2024-25. Ongoing annual salary benefit costs will be incorporated into the Fire Department’s FY 2025-26 annual budget.
Attachment A - FY 2023-24 General Fund Year-End Budget Update
Attachment B - FY 2023-24 General Fund Year-End Revenue Summary
Attachment C - FY 2023-24 Year-End Report for Other Major Funds