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ACCEPT THE FISCAL YEAR 2024-25 FOURTH QUARTER BUDGET STATUS UPDATE AND AUTHORIZE BUDGET AMENDMENTS
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) 2024-25.
2. Allocate the General Fund Vacancy Savings budget reduction for FY 2024-25 from Other Administration (Non-Departmental) category to the following departments:
Reduce Expenditure Budget:
Department Division/Fund Amount
a. City Clerk 1110-100-000 $ 69,800
b. City Attorney 1410-100-000 $ 53,400
c. Economic Development 6000-100-000 $198,000
$321,200
Increase Expenditure Budget:
Other Administration 0010-100-000 $321,200
3. Authorize a FY 2024-25 budget amendment increasing expenditure and revenue appropriations in the Downtown Marina Fund by $900.
4. Authorize a FY 2024-25 budget amendment increasing expenditure and revenue appropriations in the General Liability Insurance Internal Service Fund by $29,600.
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 slightly lower than anticipated expenditures. Projected revenues of $334.4 million are $14.5 million more than the approved budget. Projected expenditures of $389.9 million are $0.6 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 2024-25, 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 2024-25 Annual Budget of $955.7 million in appropriations, including $328.3 million in General Fund appropriations, on June 18, 2024. Throughout the fiscal year, Administrative and Council-approved amendments to the adopted budget increased the total General Fund expenditure appropriations to $390.5 million, mainly resulting from one-time appropriations for City-wide projects and approved FY23-24 budget carryforwards.
Summary Tables
Staff reviewed the City’s unaudited Fourth Quarter (Q4) FY 2024-25 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 2024-25 with revenues that were 4.7% above the Approved Budget of $319.8 million. At year-end, City staff are reporting a total of $334.4 million in revenue. Investment income accounted for the largest variance between what was budgeted and actual receipts.
The General Fund Ended FY 2024-25 with expenditures that were 0.2% below the approved budget. The General Fund had an approved expenditure budget of $390.5 million. At year-end, City staff are reporting a total of $389.9 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 contributes to 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 $70.6 million more than anticipated revenues. This included $61.9 million in funds committed, encumbered, and carried forward from prior years. At year-end, the City’s books are showing that the City expended or committed $55.5 million in excess of anticipated revenues.
A combination of global and local economic factors and some salary savings have led to the net position being $15.1 million more than initially anticipated, of which $12.1 million will go to fulfilling the Working Capital Reserve. An ending available General Fund balance of $54.7 million (16.67% Working Capital Reserve) is required to be compliant with the City’s reserve policy. The projected ending available General Fund balance after the approved budget was only $42.6 million. It is recommended that a portion of the remaining $3.0 milling in savings be programmed towards Council priority items.
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 $2.0 million greater than the budgeted level of $124.4 million. Measure A is projected to be $170,091 more (0.3%) than the budgeted amount of $47.0 million. At $126.4 million, Sales Tax receipts make up approximately 37.8% of all General Fund revenues.
Current year-end sales tax receipts for FY 2024-25 are projected to be 1.6% more than budgeted and 1.0% more than FY 2023-24 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 $2.6 million or 3.3% compared to the Approved Budget. Property Tax receipts make up approximately 24.1% 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 13.6% of General Fund revenues. The FY 2024-25 UUT receipts are projected to be $45.6 million, which is 3.6% higher than the Approved Budget of $44.0 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 $1.5 million more than budgeted and make up 10.1% of total General Fund revenues.
While electricity and gas and water revenues were higher than anticipated, cable and telecommunications revenues declined compared to prior year receipts. Telecommunication revenue is projected to be 8.2% lower than anticipated and .5% 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 6.3% of revenues. These businesses are charged based on a percentage of income generated. Revenues from Electric & Gas came in 6.7% higher than budget, and Waste Haulers came in 8.2% 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 5.2% of revenues. Business License Taxes are expected to end the year at $17.5 million or 5.4% less 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. The revenues also include newer types of Cannabis businesses permitted in previous years but only recently generating business license revenues based on sales. This revenue has been difficult to predict. Cannabis revenues are projected to be $1.5 million or 8.4% of total Business License Tax revenues.
Hotel/Motel Tax revenues were $127,117 less than the budget of $3.3 million and came in 8.81% less than the prior year revenues of $3.5 million.
Motor Vehicle License revenue receipts of $505,004 are 48.5% more than the budgeted amount of $340,000 and almost $105,500 more than FY 2023-24.
Interest Proceeds 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 $9.6 million, coming in $7.1 million more than the budget and $2.1 million more than prior year. Additional investment earnings are due primarily to more cash on hand from one-time 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 slightly above budget by $157,659 (0.8%). The categories with the most significant variances are discussed below:
• Fines & Forfeitures revenues have fluctuated, falling short of budget expectations by $287,479, or (55.6%). 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 30.5% or $1.9 million more than the budgeted amount, mainly due to $1.73 million above budget in the City’s share of Redevelopment Property Tax Trust Fund monies. The City also received State Mandated Cost reimbursements of $166,473 more than anticipated.
• Charges for Services ended the year up by 39.2% or $1.0 million more than the budgeted amount, mainly due to misclassified Citywide Community Facilities District (CFD) revenues from CFD No. 2018-3. The revenue collected for this community facilities district is restricted to authorized services for citywide services and maintenance. The Citywide CFD revenues will be reserved in a special tax subfund and available for appropriation within the restrictions.
• 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 ($1,016,954) after being budgeted at ($163,700) for an increase of ($853,254).
Refund & Reimbursement revenues came in 125.5% higher than budgeted or $294,094, largely due to 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 $389.9 million, which is $549,910, or 0.2% less than the Approved Budget. Except for Police, Public Works, Other Administration, and City Manager, 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 2024-25 Budget included approximately $11.2 million in anticipated salary savings, which is 5.2% of the total salary and benefits budget of $216.4 million (including 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, with only a minor increase over budget in the fiscal year. In FY2023-24, the vacancy rate was 12.3% and came down in FY2024-25 with a total General Fund vacancy rate of 5.81%. The additional savings of $2.4 million contributed to the expenditure savings in the General Fund.
Below is a summary of those savings by department before factoring in budgeted vacancy savings.
Table 2: FY 2024-25 General Fund Vacancy Savings
The Police Department spent a combined total of $5.2 million (2.8%) more than its authorized budget primarily due to higher overtime and Measure A side letter costs. The department further expanded recruitment efforts during FY 2024-25 via attendance at local events, media advertisements, career fairs, and partnering with local educational institutions to pipeline students into a police field. As a result of these efforts, 61 officers were hired. Despite this, the department experienced 51 departures. With the continued expanded recruitment and retention benefits, it is anticipated that these efforts will increase the City’s competitiveness in the law enforcement recruitment field.
The Fire Department ended the fiscal year with approximately $1.1 million in savings or 1.6% of the budget primarily due to vacancies. Fire Academy 24-2 and Fire Academy 25-1 successfully graduated Firefighter trainees that filled 19 vacant positions. Personnel attrition continued throughout the fiscal year with a total of 17 vacant sworn positions at the end of FY 2024-25. Vacancy savings more than offset the additional overtime costs incurred by the department to maintain required emergency service levels.
In the Program Support for Other Funds category, a notable budget variance is in the Health Insurance ISF category. $2.0 million was requested from FY 2023-24 year end funds to lower the employee portion of increased health insurance premiums. The Health Insurance ISF was able to absorb the expense without the requested funds. Also, there was only one grant requiring matching funds from the General Fund in FY 2024-25, leaving an unspent balance of $93,645. 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 12.4% under budget primarily due to vacancy savings ($1.3 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 will spread this negative budget to the City Clerk’s Office, City Attorney, and Economic Development.
Fund Balance and Reserves
With the above General Fund revenue and expenditure results, the variance from the FY 2024-25 budget is approximately $3.0 million. Expenditure savings are one-time dollars that should be spent on one-time costs. The revenues received over the budgeted amount are a result of FY 2024-25 market conditions and consumer spending which are not considered permanent ongoing sources of funds and should also be spent on one-time costs. The City Council also approved successor labor agreements with three labor unions in August 2025 that added ongoing expenses which draw on any increasing revenue sources.
The City Manager is compiling midyear requests and it is recommended that city staff come back to Council in February after Council Priority Goals have been set.
Long-Range Financial Plan
The City’s updated Long-Range Financial Plan (L-RFP) incorporates the revised year-end financial projections. 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 50% of goal level. The bars depict the General Fund ending available fund balance at each fiscal year-end beginning with actual balances for FY 2001-02 through FY 2024-25 and continuing forward based on forecasts. The light blue bars represent the Working Capital Reserve. The L-RFP is a model that is updated constantly throughout the year. Since budget adoption the model has undergone revisions by management that capture new data and assumptions as it becomes available. Key updates and assumption changes; estimated FY 2024-25 year end actuals, the model no longer assumes a recession, the PERS discount rate assumption shifted from 6.2% to 6.5% and captures updated information from on-going labor negotiations and the graph no longer shows reserves set aside for specific purposes.
As shown in the graph, the available balance is projected to be only above the 16.7% goal until FY2024-25 due to stabilizing revenues and increasing costs. The balance from current year Working Capital reserves only enables the General Fund to weather 3 years of deficit spending starting in FY 2027-28 before reaching 50% of the Working Capital target. Expenditures are projected to be greater than revenues starting in FY 2025-26, which draws down the fund balance. To maintain the 16.7% Working Capital target corrective measures will need to be implemented.
Other Funds
Attachment C summarizes the FY 2024-25 unaudited fiscal year-end results for all other significant City funds. All funds are coming in under budget except General Fund Subfund Measure A, Economic Development’s Downtown Marina Fund, and Human Resources’ General Liability Insurance Internal Service Fund (ISF).
Operation expenses for Marina continue to increase every year, primarily due to minimum wage increases and higher cost of security. Revenues were over budget by 32% and expenditures were over budget by 13%. A budget amendment approved with the third quarter budget status report covered most of the overage but an additional appropriation is requested to cover year end entries for encumbrances carried forward into FY 2025-26 The additional revenues received will cover the overage in expenses, so a $900 budget amendment increasing both revenues and expenditures is recommended.
For the General Liability Insurance ISF, operational expenses to maintain coverage continue to increase every year. These costs are driven by a higher than expected payout of claims. A smaller contributing factor is higher than expected legal services due to increased case loads and settlements. Revenues were over budget 4% caused by increased investment income and expenditures were over budget by 0.14%. The additional revenues received will cover the overage in expenses, so a $29,600 budget amendment increasing both revenues and 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.
FINANCIAL SUMMARY
This report provides an analysis of FY 2024-25 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. Priority II - Risk-Based Reserves are unchanged from fourth quarter prior year.
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 2024-25.
2. Allocate Vacancy Savings budget reduction for FY 2024-25 from Other Administration (Non-Departmental) category to the following departments:
Reduce Expenditure Budget:
Department Division/Fund Amount
a. City Clerk 1110-100-000 $ 69,800
b. City Attorney 1410-100-000 $ 53,400
c. Economic Development 6000-100-000 $198,000
$321,200
Increase Expenditure Budget:
Other Administration 0010-100-000 $321,200
3. Authorize a FY 2024-25 budget amendment increasing expenditure and revenue appropriations in the Downtown Marina Fund.
Division/Fund Amount
Increase Revenue Budget
Downtown Marina 6050-640-000 $ 900
Increase Expenditure Budget
Downtown Marina 6050-640-000 $ 900
4. Authorize a FY 2024-25 budget amendment increasing expenditure and revenue appropriations in the General Liability Insurance ISF.
Division/Fund Amount
Increase Revenue Budget
General Liability Insurance ISF 2530-520-000 $ 29,600
Increase Expenditure Budget
General Liability Insurance ISF 2530-520-000 $ 29,600
Attachment A - FY 2024-25 General Fund Year-End Budget Update
Attachment B - FY 2024-25 General Fund Year-End Revenue Summary
Attachment C - FY 2024-25 Year-End Report for Other Major Funds