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ACCEPT FISCAL YEAR 2017-18 FIRST QUARTER BUDGET STATUS UPDATE AND AUTHORIZE BUDGET AMENDMENTS
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RECOMMENDATION
It is recommended that the City Council adopt a Resolution to:
1. Accept the budget status report on the financial results for the first quarter of Fiscal Year 2017-18.
2. Authorize budget appropriations to complete the purchase of the Waterfront Office Towers property and accompanying building operations as listed below:
a. Appropriate $1.0 million from Office Space Public Facility Fee fund balance for the purchase of the Waterfront Office Towers,
b. Authorize transfer of the remaining balance in the Waterfront Office Tower purchase project after completion of the purchase, to the Waterfront Tower Tenant Improvement project for building improvements and moving costs,
c. Establish a revenue estimate of $540,000 for the remaining six months of the year from building lease revenue, and
d. Appropriate $150,000 for building operating costs in the Non-Departmental budget.
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 reviewed the financial results for the first quarter of Fiscal Year (FY) 2017-18. The results of our review indicate that General Fund revenues are within budgeted levels and expenditures are slightly under budget. In the first quarter, General Fund revenues totaled $24.4 million, and expenses totaled $50.3 million. If current expenditure trends continue, higher-than-budgeted savings may occur in some departments. However, General Fund salary savings in the first quarter were approximately $100,000 less than the budgeted amount. Salary savings will be monitored throughout the fiscal year and adjusted later in the year if necessary when more fiscal data is available. Overall first quarter expenditures of $50.3 million were at 22 percent of budget and are projected to end the year within the total annual expenditure budget of $231.1 million.
Staff also reviewed all other City funds to determine significant budget variances and identified no issues.
DISCUSSION
Background
One of the strategic initiatives developed to support the City Council’s “Fiscal Sustainability - Getting our Fiscal House in Order” goal was to provide regular analysis and reporting of the City’s financial status. This report is part of that effort.
Council adopted the FY 2017-18 annual city-wide budget of $626.4 million on June 20, 2017. The adopted General Fund expenditure budget was $217.1 million of the total City budget.
Present Situation
General Fund Budget Status Update
Attachment A presents the revised annual General Fund budget with actual revenues and expenditures for the first three months of the current fiscal year. The City does not receive General Fund tax revenues in a regular monthly pattern, so first quarter revenues are less than 25 percent of annual budgeted revenues. The timing of monthly 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 first three months of revenue and expenditure transactions do not typically provide enough information to draw precise conclusions and judgments regarding year-end projections, so this report does not include a revised projection for year-end, however, subsequent quarterly reports will include year-end projections. The information below indicates our best analysis of the trends evident within the first few months of available data. Staff continue to monitor revenue collections and expenditure trends in all categories against the annual budget, the Long-Range Financial Plan (L-RFP) and department projections.
Budget Adjustments
Throughout the fiscal year, Council can authorize adjustments to the budget. Attachment A shows the Adopted Budget and all adjustments made in the first quarter that total the Approved Budget of the General Fund, as of September 30, 2017. Below are the details of those approved changes.
The first adjustment listed is the encumbrance rollover from the prior fiscal year. The City uses encumbrance accounting to avoid overspending the budget by earmarking appropriations for expense before paying for products or services. On a budgetary basis, encumbrances are reported as spent in the fiscal year they are committed, even if not paid for by year-end. At the end of FY 2016-17, the General Fund had $4.5 million encumbered for approved purchases not yet received or paid for during the fiscal year. The appropriations related to those encumbrances are re-appropriated in the FY 2017-18 budget.
The approved carryover is related to projects and priorities from the prior fiscal year that were not yet encumbered. This includes $318,000 contained in the Resolution of the Adopted FY 2017-18 Annual Budget on June 20, 2017, and$488,000 approved by Council on November 7, 2017, as part of the Fourth Quarter Budget status update report.
The final category of budget adjustments represents $8.7 million of funds allocated from General Fund reserves for the purchase of the Waterfront Office Towers, approved by Council on September 19, 2017.
As of September 30, 2017, the General Fund Approved Budget was $231.2 million, and the projected ending available balance was $40.2 million. The Approved Budget column on Attachment A does not include any budget adjustments on tonight’s Council agenda or other adjustments effective after September 30, 2017.
Revenues
First quarter revenue collections for significant General Fund categories (sales tax, property tax, utility users tax, franchise fees, business license tax, hotel/motel tax, and program revenues) were all below a 25 percent pro-rated collection rate because receipt of funds does not follow an even monthly pattern. For example, the City receives the majority of property tax from San Joaquin County in two payments towards the last half of the fiscal year. Each major category has different collection schedules, and the City receives almost all the larger revenue sources in the later months of the fiscal year.
While sales tax revenue received from the State in the first quarter are revenues related to the prior fiscal year and are accrued to the prior year appropriately. Thus, the reported first quarter sales tax and Measure A/B revenues include an advance payment from the State for one month’s estimated revenue. The City does not accrue its sales tax revenue quarterly.
Similarly, San Joaquin County remits the majority of property tax revenue in December and May, in line with the December 10 and April 10 due dates for property owners to pay their annual taxes. Thus, the City received only $170,000 of an expected $55.6 million total in the first three months of the year. Early property tax data from San Joaquin County and the City’s property tax consultants indicate FY 2017-18 property tax revenues are likely to be in line with the 3.6 percent growth assumed in the budget.
Interfund reimbursements consist of billings to outside agencies, indirect cost recovery, and a lump sum payment from the Municipal Utilities Department for property rentals. As of September 30, 2017, interfund reimbursements totaled $1.5 million, which is approximately 17 percent of the budgeted revenues. Revenues in this category earned in the first quarter of the fiscal year are billed for reimbursement, but are generally received in the following quarter or later.
Year-to-date collections and information from the City’s revenue consultants indicate General Fund revenues are likely to be close to the budgeted level of $221.1 million. Staff will continue to monitor revenues and report performance in future quarterly reports.
Expenditures
Staff reviewed the first three months of General Fund expenditure data reported in Attachment A. As is the case with revenues, it is too early in the fiscal year to draw firm conclusions, or judgments about observed trends, especially in salaries and benefits as vacancies often take months to fill. However, expenditure trends in many departments are running close to or just below expectations due to anticipated vacancies. The chart below summarizes total departmental and program spending as a percent of total budget.
As shown above, departments are running at or below the 25 percent expenditure level, however, actual vacancy savings in the General Fund fell short by approximately $430,000.
Marshall Plan savings were approximately $330,000 higher than budget resulting in a net shortfall compared to the budgeted vacancy savings of $100,000. The Police Department achieved higher savings due to a higher attrition rate than anticipated with seven police officers retiring unexpectedly. The Fire Department assisted in several statewide fire operations due to the heavy fires in California, which created an increase in overtime expenses and caused the Fire Department to realize none of its planned savings in the first quarter. These costs will be recovered through reimbursements later in the fiscal year.
Due to staff vacancies in the first quarter, the City Clerk, Administrative Services, and Economic Development are also experiencing higher-than-projected vacancy savings. Actual savings from vacancies may not align with the budgeted savings, so staff will continue to monitor the actual salary savings and report any necessary adjustments in future quarterly reports.
At the end of the first quarter, the Police Department had filled 444 out of 485 authorized sworn positions. Hiring for sworn and non-sworn personnel in the Police Department is expected to occur throughout the year. During the quarter, the City hired nine new officers, and 19 officers separated, resulting in a decrease of ten sworn officers. Of the 19 lost officers, four failed the academy, five resigned or were released during probation; three left to other agencies, and seven retired. The Police Department continues its robust recruiting efforts through attending various career fairs, outreach in the community and social media. These efforts resulted in an increase in the sworn staff by December to 452 filled positions.
The Economic Development Department appears to be under budget as most of the $2.2 million budgeted for economic development incentives and activities remains unspent. The department anticipates the Council-approved Open Window project will begin drawing on its $1.9 million allocation late in FY 2017-18 and the remaining incentive resources will be committed during the third and fourth quarters of FY 2017-18.
In the Program Support for Other Funds category, most transfers are completed on a monthly basis. The Grant Match transfer is only recorded if needed when grants with required matching funds are expended. Approximately $50,000 of the Grant Match funds have been earmarked for specific grants year-to-date. General Fund reserve dollars of $8.7 million allocated for the Waterfront Office Towers purchase will be transferred to the Capital Improvement Fund after Council approval and closer to the purchase closing date, which is anticipated to be in January 2018.
The City Auditor budget does not include any salaries, and the expenses are posted as the City receives invoices from its internal and external audit firms. Only 2 percent of the budget was expensed as of September 30, as the auditors typically perform their annual audit work between September and January of each fiscal year. Human Resources budgets include items that will have more expenditure activity later in the fiscal year such as recruitment exam costs.
Tax Collection and Election expenses are for the most part incurred later in the year. The City typically pays property tax administration fees to San Joaquin County in December and May. Sales tax administration fees will be paid quarterly starting in December. Payment for taxes and assessments on City-owned properties will begin in November. The election budget is for the June 2018 election and costs are billed to the City once a year.
The Other Administration category holds a variety of citywide costs that are not attributable to an individual or specific group of programs or departments. By far the largest amounts are offsets to expenditures in other areas of the budget, such as indirect costs allocated to the Fire Department for reimbursement by fire districts. This category also included the unallocated portion of the Council Priority Budget. As part of the FY 2017-18 Adopted Budget, the Council set aside $750,000 to be allocated on various special projects based on Council priorities. To date, the Council has appropriated $245,000. The balance of $505,000 is still available to be allocated at Council’s discretion.
The small amount of first quarter Labor Litigation expenses reflects the level of activity during this quarter. Legal expenses do not occur regularly throughout the year.
Debt Service payments made in the fall for several city facilities are greater than the spring payments as the fall payments include principal and interest payments whereas spring and summer are only interest payments. This disparity is reflected in the first quarter expenditures of 53 percent of the budget. The first quarter debt service expenditures also reflect three months of debt administration costs based on the budget estimate. The costs of administering the City’s bonds are charged to the Debt Administration Fund during the year and allocated to the General Fund and other city funds with bond payments. Staff makes any needed adjustment between the budgeted transfer and the final allocation based on actual costs at year-end.
The City did not need to access contingency funds in the first quarter of the fiscal year. Staff will continue to monitor General Fund expenditures and return later in the year with quarterly reports that include year-end projections, additional Council appropriations, and any necessary budget adjustments.
Other Budget Status Updates
Office Space Public Facility Fee Fund Budget Amendments
On September 19, 2017, the City Council approved the purchase of the properties known as Waterfront Office Towers for the relocation of City Hall. Part of the identified project funding was from the Office Space Public Facility Fee Fund. The City collected these fees for the expansion of city office space facilities. The Waterfront Office Towers purchase is an appropriate use of these funds as it increases the City’s office space by more than 15,000 square feet. It is recommended through this report to allocate $1.0 million toward the purchase of the Waterfront Office Towers property for the 15,000 square feet of expanded office space consistent with Council’s direction in September.
Following the acquisition of the buildings, the City will be responsible for building operating costs and will collect lease revenues. The current leases of approximately $90,000 per month will more than offset the projected monthly operating costs of $25,000 for the remaining six months of the fiscal year. It is recommended that the FY 2017-18 Budget be amended to increase the revenue estimate by $540,000 for lease revenues and expenditure appropriations by $150,000 for building operating costs in the General Fund Non-Departmental budget. Lease revenues in excess of operating costs at year-end will be transferred to the capital project for tenant improvement and moving expenses. It is also recommended that any unspent funds from the purchase of the Waterfront Office Towers be allocated to the capital project for tenant improvement and moving expenses.
FINANCIAL SUMMARY
This report provides an analysis of FY 2017-18 General Fund first quarter results. Staff’s 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. Also, staff reviewed other significant funds of the City, and no amendments are needed at this time. Staff will continue to monitor trends and potential budget variances and will return to Council with future recommendations for changes where appropriate.
An amendment to the FY 2018-17 Annual budget establishing the following budget appropriations is recommended in relation to the purchase of the Waterfront Office Towers:
a. Appropriate $1.0 million from Office Space Public Facility Fee fund balance to the Waterfront Office Tower purchase project ED7002, account number 930-1750-610.
b. Authorize the balance in the Waterfront Office Tower purchase project ED7002 after completion of the purchase to be transferred to the Waterfront Tower Tenant Improvement project PW1615 for building improvements and moving costs.
c. Establish revenue estimate of $540,000 for the remaining six months of the year for lease revenues in the General Fund Non-Departmental account 010-0160-362.
d. Appropriate $150,000 for building operating expenses to the General Fund Non-departmental budget (account number 010-0160-510) using lease revenues as an offset.
Attachment A - FY 2017-18 First Quarter Budget Update - General Fund