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ACCEPT THE FISCAL YEAR 2019-20 THIRD QUARTER BUDGET UPDATE AND APPROVE THE RECOMMENDED BUDGET AMENDMENTS
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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) 2019-20.
2. Authorize the budget amendments to the FY 2019-20 Annual Budget in the General Fund and Downtown Marina Fund.
It is 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
Staff's review of the financial results for the nine months ending March 31, 2020, indicates revenues and expenditures are tracking close to budgeted estimates with variances of less than three percent. Through the third quarter, General Fund revenues totaled $157.9 million, and expenses totaled $174.2 million. If current trends continue, overall General Fund expenditures will end the year at approximately $248.5 million, coming in under the Approved Budget by $7.1 million (2.8 percent). Expenses are projected to exceed the budget by year-end for the Downtown Marina, Homeless Programs, and Other Administration. Revenue collections are currently projected to end the year approximately $1.7 million (0.7 percent) higher than budgeted. The net effect of projected revenue and expenditure variances is an $8.8 million increase to the General Fund ending available balance from the Approved budget. The revised total projected balance is $50.6 million. The updated projection of ending available balance for FY 2019-20 is more than both the Second Quarter Budget Update and the estimate available when Council adopted the FY 2020-21 Annual Budget on June 23, 2020. Staff will continue to monitor revenues and expenditures and return to Council with a year-end report in the fall.
Staff reviewed all other City funds to determine significant budget variances and identified the one amendment needed for the Downtown Marina Fund. A few additional funds are expected to experience overages by year-end with no recommended action at this time as revenues and expenses are finalized for FY 2019-20. These funds include the Recreation Fund, General Liability Internal Service Fund (ISF), Workers’ Compensation ISF, Unemployment ISF, and the Compensated Absences ISF.
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 2019-20 annual city-wide budget of $759.6 million, including $230.1 million in the City's General Fund, on June 18, 2019. Administrative and Council-approved amendments to the adopted budget increased total General Fund expenditure appropriations to $255.6 million. The Second Quarter Budget Report based on activity through December 31, 2019, projected net savings of $5.7 million, which increased the ending fund balance to $46.0 million. The FY 2020-21 Annual Budget released on May 15, 2020, projected an FY 2019-20 ending balance of $49.7 million in the General Fund.
Present Situation
General Fund Budget Status Update
General Fund expenditures and revenues for the first nine months of the current fiscal year are 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, 2020, Third Quarter Projection, and variance amounts. The Approved Budget assumed the General Fund would end the fiscal year with an available balance of $41.8 million. The revised projections indicate revenues will end the year above the budgeted level by $1.7 million, and expenditures will be approximately $7.1 million less than budget for a net increase in the available balance of $8.8 million. The third-quarter fund balance projections are higher than the year-end estimates included in the Second Quarter Budget Report. The projected ending available balance of $50.6 million is an increase of $4.6 million compared to the Second Quarter Budget Report projection. The change in projected fund balance is the result of higher revenues compared to prior estimates.
On June 30, 2020, the fund balance is anticipated to fully fund the Priority 1 Working Capital Reserve of $41.3 million in accordance with the Reserve and Fund Balance policy for the General Fund. The remaining $9.3 million will be beneficial in efforts to maintain sufficient General Fund reserves during the current tumultuous economic situation. The FY 2020-21 Adopted Budget spends $24.4 million out of reserves. Staff recommends that fund balance not needed to support future year operations be added to the Known Contingency Reserves, which reflects items that are planned expenditures. Per Council policy, the Known Contingency Reserve is used for recruitment and retention, the Enterprise Resource Program (ERP) project, pension costs, and other infrastructure needs. Because there is insufficient funding for the $46.5 million Known Contingency target, no additional funds will be provided towards the Risk-Based Reserve, which is intended to protect against economic uncertainties and unforeseen events. The Risk-Based Reserve will remain at $5.0 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 than revenues. However, the General Fund does include some budgeted items that will be paid in large lump sums and cause variances when reviewed quarterly. 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, the 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 subsequent Council agenda items, including labor agreements approved between April and June. The General Fund approved expenditure budget is $255.6 million, an increase of $1.5 million since the Second Quarter Budget Report as a result of the labor agreements mentioned above. The Approved Budget also reflects a $14.5 million transfer of General Fund reserve dollars to the Pension Trust account.
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, 2020, were $157.9 million, and projected year-end revenues are $238.2 million. The most significant variances compared to the budget are in utility users tax, franchise tax, business licenses, and Hotel/Motel taxes. Compared to the Second Quarter Budget Report, projected year-end revenues increased by $4.7 million. The revenue declines anticipated in the Second Quarter Budget Report due the COVID-19 pandemic stay-at-home orders have not materialized as quickly as expected.
Sales Tax receipts make up nearly 35 percent of the total annual General Fund revenue. Remittances received from the State in the third quarter represents sales through second quarters of FY 2019-20, due to the lag time involved in obtaining the tax collected. Year-end sales tax collections are projected to be slightly under budget. Measure A is projected to be $486,000 less than the budgeted revenue amount of $32.5 million. Before the COVID-19 pandemic, Sales Tax revenues were on track to exceed the budget by almost 9 percent. If not for the dramatic growth before the pandemic, projected revenues would be significantly below the budget. State measures to assist small businesses with extensions and payment plans on sales tax payments may further reduce revenues in the last quarter of the fiscal year.
Property Taxes are 26 percent of the City's total annual General Fund revenues and are remitted to the City each year by San Joaquin County in January and April. Receipts for the first nine months were 54.2 percent of the budget as of March 31, 2020, with San Joaquin County remitting approximately half of the annual property tax revenues in January 2020. Our tax consultants and the San Joaquin County Assessor indicate FY 2019-20 property tax revenues are expected to be $61.0 million. Property tax revenue growth is attributable to increasing home values and the Consumer Price Index inflation rate of 2 percent authorized by Proposition 13. As shown in Attachment B, the anticipated variance is less than 1 percent of the $60.4 million budget.
The City collects Utility Users Tax (UUT) revenues for four utility categories: Water, Electric and Gas, Cable TV, and Telecommunications. UUT is 15 percent of total annual General Fund revenue and is a tax imposed on the users of various utilities. Consistent with the varying collection schedules of this revenue category, the City collected approximately 68.9 percent of the budgeted amount through the third quarter. Overall, the FY 2019-20 projections for the Utility Users Tax category are 3.6 percent lower than estimated. Three of the four groups are projected to end the year below the budgeted levels. Cable is expected to exceed budget by approximately 4.7 percent, reflecting rate increases by the area's two water providers. Water is anticipated to fall below budget by 3.7 percent, Electric and Gas by 1.5 percent, and Telecommunications UUT revenues by 15.6 percent. Consistent with the Second Quarter Budget Report, UUT projections indicate this category will end the year $1.3 million below the budget estimate. UUT is subject to a certain degree of volatility as consumer use of utilities can be dependent on weather conditions, conservation efforts, and the availability of substitutes.
The City receives Franchise Tax receipts in three categories: PG&E, Cable/Video, and Waste Haulers. Franchise fees are charged to companies as a percentage of income. Because they are based on the revenue generated by a service provider, these fees tend to track parallel with UUT. Total franchise revenues are exceeding budget by $1.5 million entirely due to activity in the Waste Hauler category. Waste Haulers are expected to exceed budget by 17.8 percent in part due to new franchise agreements that took effect on January 1, 2020. PG&E receipts received in April for the full year were below budget by 3.4 percent. Cable/Video revenues are projected to end the year at the budgeted amount of $2.2 million.
Business License Taxes make up five percent of General Fund revenues. Revenues are exceeding budget, a reverse of the projection provided in the Second Quarter Budget Report. Revenues are estimated to end the year $990,000 above the $11.9 million budget. Actual receipts in this category were at 69.3 percent through the third quarter, with more than half of the business licenses renewals occurring for the last four months of the year. Second-quarter projections assumed reduced payments from local businesses because of the pandemic and recession, but revenues continued to come in at or above estimates. As of the third quarter, over $1 million had been received from cannabis-related businesses. Receipts year over year are fluctuating significantly as new companies join the industry and pay business license taxes based on estimated gross receipts. Staff is cautious in projecting revenues for this new business sector, given the lack of data for this industry and lowered revenue estimates at the state level.
Other Taxes combined are under two percent of the General Fund revenue and are expected to end the year below the annual budgeted estimates due to the impact of the COVID-19 pandemic on the tourism and real estate industries. Hotel/Motel Tax Revenues are estimated to be 30.9 percent below the budget. Document Transfer tax revenues are projected to be 23 percent under budget.
The Interest line item includes proceeds from investments as well as interest on cash holdings. Interest rates have not been as severely impacted as anticipated at the start of the pandemic. The revenue projection of $3.3 million is approximately 2.9 percent higher than what was budgeted for the year. While interest earnings were down in the final quarter of the fiscal year, total annual earning are still an improvement over FY 2018-19.
Program Revenues consist primarily of revenues from fines, licenses, service contracts with other agencies, and code enforcement fees, and are under six percent of total General Fund revenue. The quarterly update projects this category will exceed budget by $865,000 (6.3 percent). Revenue from Other Agencies is projected to be higher than budget by $471,000 (18.6 percent) with additional receipts for Peace Officer Standards and Training and Successor Agency tax increment. Preliminary projections for Police Department traffic and parking violation revenues are approximately $154,000 higher than budget resulting in a 42.8 percent increase in Fines and Forfeitures compared to the budget. Sales of fixed assets are estimated at $395,000 based on planned property sales.
Interfund reimbursements consist of cost recovery to the General Fund from other funds and other agencies for administrative services and facility space. This category constitutes five percent of General Fund revenues. These reimbursements are projected to come $115,000 or 1.1 percent above the budget of $10.5 million
Expenditures
Staff reviewed the first nine months of General Fund expenditure data as reported in Attachment A. Expenditure trends in most departments are in line with budget, except for Downtown Marina, Homeless Programs, and Other Administration. Projected expenditures increased by $139,000 compared to the Second Quarter Budget Report projection. The significant variances from budget are explained in detail in the following sections of the report. Staff has not accounted for expenses that may be able to be offset with the State's $27.2 million CARES Act allocation. Those figures will be further refined later this year and will be incorporated into the year-end update.
The chart below summarizes the spending levels of all departments and programs as a percent of their respective budget.
As shown above, most departments are running close to or below the 75 percent expenditure level anticipated at the end of the third quarter. The higher spending rate in Program Support of 83.9 percent is the result of a one-time $14.5 million contribution to the Pension Trust from General Fund reserves. Most of the lower spending levels are a result of programs that spend more in the last half of the year for items like debt, labor negotiations, election, tax collection, and audit contract costs. In addition, several departments experience higher than budgeted staff vacancies during the year, including Police, Fire, Economic Development, City Manager, City Clerk, Administrative Services, and Human Resources.
As shown below, the FY 2019-20 Adopted Budget included a total of $6.0 million in budgeted salary savings, which was divided into two areas: $5.1 million in the non-Marshall Plan portion of the General Fund, and $931,000 specific to Marshall Plan positions. Through the third quarter of the fiscal year, actual General Fund savings from vacancies increased slightly to 7.9 percent (compared to 7.7 percent in the second quarter), still well above the 4 percent assumed in the budget. Total salary expenditures were approximately $5.1 million less than estimated in the budget.
Below is a summary of salary savings results for the three quarters of the fiscal year.
Department Expenditures
The Police Department is afforded 51 percent of the General Fund budget. During the third quarter, 11 new officers were hired while 13 departed (one retired, eight resigned or were released during probation, and four left to other agencies), resulting in 459 of the 485 authorized sworn positions being filled at the end of March 2020. Police Department expenses were at 70 percent of budget as of March 31, 2020. When labor agreement compensation increases effective in June 2020 and higher protest-related overtime costs in the fourth quarter of the fiscal year are factored into the third quarter expenditure trend, the year-end projection shows the department under budget by $3.0 million (2.3 percent).
The Fire Department accounts for 18 percent of the General Fund. The Fire Department was at 69.0 percent of budget as of March 31, 2020, and expects to be under budget by $1.7 million (3.5 percent) by year-end.
The Economic Development Department budget includes approximately $2 million for economic incentive programs. Although these funds were not spent to date, the funded projects are expected to be underway or in contract by year-end. If most of the economic incentive funding is committed by year-end, the Economic Development Department will spend $3.4 million, leaving $229,000 in savings from vacant positions and reduced training and travel costs.
In the Program Support for Other Funds category, the Downtown Marina Fund is anticipated to need additional funding of approximately $92,000 by year-end due to unanticipated expenses that were realized during the audit process for fiscal year 2018/19. Also, revenues did not keep pace with event expenditures during fiscal year 2018/19. Two grants received matching funds for the General Fund in FY 2019-20, leaving an unspent balance of $91,000. The remainder of the programs in this category is trending to end the year at budgeted levels, with no additional General Fund support required.
In Administration, departments projected to end the year under budget, except for the Other Administration and Homeless Program category. Four departments (City Manager, City Clerk, Administrative Services, and Human Resources) experienced higher-than-planned vacancy levels. Other Administration, while showing an overage, includes budgeted vacancy savings for smaller departments that have not been spread. The City Attorney's Office spent 55 percent of its budget in the first nine months and is currently projected to underspend by year-end due to savings in salaries and benefits. In addition to position vacancies, one attorney was re-allocated mid-year from the General Fund to the City's General Liability Internal Service Fund to bring more litigation cases in-house.
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 January and May. Sales tax administration fees are paid quarterly with two quarters paid through March. Election costs budgeted for the March 2020 election will be billed to the City in the next few months. Savings of approximately $165,000 are anticipated in this category reflecting savings in property tax administration costs and property assessments.
Other Administration contains a variety of city-wide costs that are not attributable to an individual department or specific group of programs. This category includes a negative budget for indirect cost charges and vacancy savings. The year-end projection currently shows a minor overage of $6,000, which will be resolved by redistributing budgeted vacancy savings at year-end to other departments experiencing vacant positions.
The Homeless Program category includes funding for local non-profits assisting the homeless population, the Sheriff contract for small scale clean-ups, and the large-scale homeless clean-up completed by Police and Public Works. The large-scale clean-up debris removal expenses are causing this category to exceed the budget by $27,000. The cost of service and the amount of debris has increased compared to prior years.
Budgeted Contingency dollars were used to complete the Weber Point Events Center fountain and to support revenue shortfalls in the Entertainment Venues fund.
Other City Funds
In addition to the detailed review of General Fund expenditures and revenues described above, all City funds were reviewed as part of this report. Attachment C summarizes the FY 2019-20 third-quarter results for other significant City funds. The year-to-date activity listed on Attachment C is similar to the General Fund in that revenues and expenses can be seasonal and subject to irregular schedules. The Emergency Communication Fund, for example, looks out of balance with expenditures exceeding revenue by $773,000, but this difference is a result of quarterly billings processed after the close of each quarter. All expenses incurred will be fully paid by year-end.
As discussed above and in previous projections, the Downtown Marina Fund is expected to need an additional $92,000 of General Fund support in FY 2019-20. Staff are closely monitoring the Recreation Fund, General Liability ISF, Workers’ Compensation ISF, Unemployment ISF, and the Compensated Absences ISF as year-to-date information indicates expenses in these funds will likely need additional General Fund assistance or exceed budget. The Recreation Fund is experiencing severe revenue loss with the closure of City facilities during the last few months of the fiscal year. The Community Services Department has cut expenses to offset the revenue loss, but many costs are fixed and paid regardless of closures. While the Recreation Fund is not exceeding budgeted expenditures, it is likely to need additional General Fund assistance. The Human Resources Department has concerns that the General Liability ISF and Workers’ Compensation ISF may exceed the authorized budget if settlement costs, legal fees, and medical claims continue on the current trend. City unemployment claim costs are expected to be double the normal amount in the last quarter of the fiscal year. It is likely that the Unemployment ISF budget will not be sufficient to cover this abnormal level of claims. There is adequate fund balance to cover the additional budget appropriation, or the City may be able to use its CARES Act allocation from the State to cover these increased costs. Vacation sell back and employee leave payouts at separation are paid centrally out of the Compensated Absences ISF. Separation pay expenses as of the third quarter were slightly more than the total annual budget for this purpose. By year-end, expenditures are projected to be $624,000 more than the $1.1 million budget. Staff recommends these items be addressed at the end of the fiscal year when final costs are more defined.
Year-end projections for all funds were included in the FY 2020-21 Annual Budget released May 15, 2020. No other significant variances from the projections contained in the FY 2020-21 Annual Budget were noted.
FINANCIAL SUMMARY
This report provides an analysis of the FY 2019-20 General Fund third-quarter results update. The review indicates that revenues are on track to achieve budget projections, while expenditures are likely to be less than budgeted targets.
Staff also reviewed other significant City funds and recommends adjustments to the General Fund and Downtown Marina Fund, as listed below:
• Increase General Fund transfer to Downtown Marina Fund by $92,000
• Increase Downtown Marina Fund expenditure appropriation by $92,000
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 the Council with future recommendations for changes where appropriate.
Attachment A - FY 2019-20 Third Quarter Budget Update - General Fund
Attachment B - FY 2019-20 Third Quarter Revenues - General Fund
Attachment C - FY 2019-20 Third Quarter Budget Update - Other Funds