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ACCEPT FISCAL YEAR 2018-19 FIRST QUARTER BUDGET STATUS UPDATE
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RECOMMENDATION
It is recommended that the City Council accept the budget status report on the financial results for the first quarter of Fiscal Year 2018-19.
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Summary
City staff reviewed the financial results for the first quarter of Fiscal Year (FY) 2018-19. That review indicates General Fund revenues are within budgeted levels and expenditures are slightly under budget. In the first quarter, General Fund revenues totaled $28.4 million, and expenses totaled $52.2 million. The budget assumes a certain level of anticipated vacancies. However, in the first quarter, more positions were filled than anticipated so personnel costs were approximately $903,000 higher than anticipated. Overall first quarter expenditures of $52.2 million were at 23 percent of the budget and are projected to end the year within the total annual expenditure budget of $226.5 million. First quarter revenue and expenditure activity are consistent with the same period in prior years.
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 2018-19 annual city-wide budget of $709.4 million on June 6, 2018. The adopted General Fund expenditure budget was $220.6 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. Year-to-date activity through September 30, 2018, was consistent with the same period in prior fiscal years. The first three months of revenue and expenditure transactions do not typically provide enough information to draw precise conclusions and judgments regarding year-end outcomes. Consequently, this report does not include a revised Long-Range Financial Plan (L-RFP) projection or a year-end projection. Subsequent quarterly reports will include updated year-end projections. The City does not receive General Fund tax revenues in a regular monthly pattern, which is evident by first quarter revenues being less than 25 percent of annual budgeted revenues. The timing of monthly expenses is more evenly distributed, but the General Fund does include some budgeted items paid in large lump sums that cause variances when reviewed on a quarterly basis. The information below is based on an analysis of the trends in the first few months of available data. Staff continue to monitor revenue collections and expenditure trends in all categories against the annual budget, the L-RFP and department projections.
Budget Adjustments
Throughout the fiscal year, Council can authorize adjustments to the budget. Attachment A summarizes the Adopted Budget, adjustments made in the first quarter, and the resulting Approved Budget of the General Fund, as of September 30, 2018.
Below are the details of those approved changes.
The first adjustment is the encumbrance rollover from the prior fiscal year. The City uses encumbrance accounting to avoid exceeding the budget by earmarking appropriations for expenses before paying for products or services. On a budgetary basis, encumbrances are reported as a reduction to available appropriations in the fiscal year they are committed, even if not paid for by year-end. At the end of FY 2017-18, the General Fund had $4.97 million encumbered for approved purchases not yet received or paid for during the fiscal year. The appropriations related to those encumbrances would be re-appropriated in the FY 2018-19 budget.
The approved carryover is related to projects and priorities from the prior fiscal year that were not yet encumbered. This amount includes $305,570 contained in the resolution of the Adopted FY 2018-19 Annual Budget on June 6, 2018, and $161,000 approved by Council on November 6, 2018, as part of the FY 2017-18 Fourth Quarter Budget status update report.
The final category of budget adjustments represents $450,000 of funds allocated from General Fund balance to Council Priority projects as approved by Council on August 21, 2018.
As of September 30, 2018, the General Fund Approved Budget was $226.51 million, and the projected ending available balance was $44.7 million. The Approved Budget column on Attachment A does not include any budget adjustments on tonight’s Council agenda or other adjustments effective after the first quarter.
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 consistent with the same period in prior years. Most categories are below a 25 percent pro-rated monthly collection rate because the receipt of funds is seasonal. For example, the City receives the majority of property tax from San Joaquin County in two payments, one at the end of the calendar year and another towards the end 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.
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 estimated revenue. The City does not accrue its sales tax revenue quarterly. Late and missing payments impacted the last two quarters in FY 2017-18. The late and missing payments are the result of a new software and reporting system implemented by the California Department of Tax and Fee Administration. The City will receive and post a portion of these receipts in FY 2018-19. The City’s sales tax consultants project sales tax revenue to come in approximately 2.3 percent higher compared to the Approved Budget. Sales tax revenues in the Building and Construction, Fuel and Services Stations and Restaurants & Hotels project double-digit increases from the FY 2018-19 budget projections. FY 2018-19 revenue projections are still preliminary as numerous adjustments are still occurring at the state level and sales tax collection data is only available through June 30, 2018. As data for the quarters ending September 30th and December 30th becomes available, the sales tax revenue projection will be updated and refined.
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 $487,000 of an expected $57.6 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 2018-19 property tax revenues are likely to be in line with the 3.0 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, 2018, interfund reimbursements totaled $1.8 million, which is approximately 18 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 or slightly above the budgeted level of $229.6 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. The chart below summarizes total departmental and program spending as a percent of the total budget.
As shown above, overall departments are running at or below the 25 percent expenditure level. General Fund personnel expenditure budget assumes a certain percentage of anticipated vacancies. However, in the first quarter, the personnel costs were approximately $903,000 higher than anticipated. This resulted in the vacancy savings targets not being met by the same amount as demonstrated in the table below.
Savings for Marshall Plan funded positions were approximately $47,000 lower than budget, while the remaining General Fund experienced vacancy savings $856,000 lower than planned for the first quarter. The Police Department and Fire Department both did not meet the vacancy savings targets. The Police Department experienced higher personnel costs due to more filled positions than anticipated. Public Safety is a top priority for City Council and the department has made tremendous strides to improve staffing level that is now beginning to reflect in the personnel costs. Fire Department experienced higher costs due to Wildland fire assistance as discussed later in this report.
Due to staff vacancies in the first quarter, the City Clerk, Administrative Services, Human Resources, and Public Works are 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.
The Fire Department assisted in several extensive statewide fire operations in California which created an increase in overtime expenses and caused the department to overspend its salary and benefits budget in the first quarter. To date, the City has billed over $400,000 for full reimbursement of its wildland fire costs which will be reflected on future quarterly budget reports when payment is authorized by federal and state agencies. The reimbursements, once recorded, will show an improved picture of the department’s vacancy savings which is not yet reflected in the table above.
Public Safety is one of the City Council’s highest priorities and the Police Department has been ramping up its efforts to hire and retain sworn officers to achieve Council’s goal. At the end of the first quarter, the Police Department had filled 467 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 12 officers separated, resulting in a net decrease of three sworn officers. Of the 12 lost officers, two failed the academy, seven resigned or were released during probation; one left to another agency, and two retired. The department continues to recruit qualified candidates by attending various career fairs, performing outreach in the community, and advertising through social media in its efforts to reach full staffing.
Overall the Police Department is at 24.8% of the budget as of September 30, 2018, with savings in other areas covering the salary overages. This is about 1% higher than the same period last fiscal year. A significant factor of the department not realizing the budgeted vacancy savings was overtime expenses of $1.6 million which is 37% of the annual overtime budget. The main drivers causing this are coverage for critical operations in Patrol Division, while newly hired Officers are being trained and a long-term investigation that concluded in September 2018. The department has taken several steps to monitor its budget and put checks in place to stay within its allocated overtime budget.
The Economic Development Department appears to be under budget as most of the $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 2018-19 as construction is expected to begin in early 2019.
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. As of September 30, 2018, there have been no requests for a grant match allocation from the General Fund.
The City Auditor budget does not include any salaries, and the expenses post as the City receives invoices from its internal and external audit firms. Only 2 percent of the budget was expensed as of September 30, 2018, as the auditors typically perform their annual audit work between September and January of each fiscal year.
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 year-to-date activity shows a negative amount based on election costs that cross fiscal years and are adjusted in the first quarter of the subsequent 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.
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 twice a year in the fall and spring. The largest debt payment impacting the General Fund is related to the settlement agreement with Assured Guaranty which is not due until June of 2019. First quarter expenditures at 17 percent of the budget reflect this situation. The first quarter debt service expenditures reflect a portion of the payoff of the bond issued for the Stewart-Eberhardt Building and 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.
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.
FINANCIAL SUMMARY
This report provides an analysis of FY 2018-19 General Fund first quarter results. Staff’s review indicates revenues are on track to achieve budget projections and the City is on track to come in at or slightly below the approved 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.
Attachment A - FY 2018-19 First Quarter Budget Update - General Fund