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ACCEPT THE FISCAL YEAR 2020-21 SECOND 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 financial results for the Second Quarter of Fiscal Year (FY) 2020-21, and
2. Authorize three budget amendments shifting General Fund support from the Golf Fund to the Recreation, transferring between capital projects in the Municipal Utility Department Water Utility Fund, and appropriating from fund balance to a capital project in the Street Improvement Public Facility Fee Fund.
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
The Second Quarter financial activity includes some significant variances as the global pandemic impacts the City’s revenues and expenses in ways that could not be anticipated this time last year. Lower-than-anticipated expenditures are expected to yield approximately $7.4 million more to the General Fund ending available balance than originally budgeted. Expenses totaled $115.8 million through the first six months and are expected to end the year 2.7% below budget due primarily to lower-than-expected salary, benefit, and travel costs.
Through the Second Quarter, General Fund revenues totaled $76.3 million, which is consistent with the expected cash flow cycles of the various revenues. Based on preliminary information, year-end revenue projections are expected to exceed the budget by $25.2 million (+11%). The impact on General Fund revenues was expected to be more extreme in the FY 2020-21 budget assumptions with the revenue budget at 11.4% less than FY 2019-20 actual revenues. While much higher than the budgeted $223.4 million, year-end revenue projections of $248.6 million are 0.5% less than FY 2019-20 actual receipts.
Staff reviewed all other City funds to determine significant budget variances and identified two instances where amendments to the current Approved Budget are necessary.
DISCUSSION
Background
The City Council remains committed to transparency and financial responsibility with the continuation of Fiscal Sustainability as one of its strategic targets. Staff provides this budget status update in support of that objective.
Council adopted the FY 2020-21 annual citywide budget of $787.6 million on June 23, 2020. The adopted General Fund expenditure budget was $247.8 million of the total City budget. Administrative and Council-approved amendments to the Adopted Budget increased total General Fund expenditure appropriations to $275.8 million.
Present Situation
General Fund Budget Status Update
Staff reviewed General Fund expenditures and revenues for the first six months of the current fiscal year as shown in Attachments A and B. Attachment A summarizes the City's General Fund revenues, expenditures, and available balance by approved budget, activity as of December 31, 2020, year-end projections, and variance amounts. As of December 31, 2020, the General Fund was budgeted to end the fiscal year with an available balance of $17.0 million. Revised projections indicate revenues will end the year greater than the budgeted level by $25.2 million, with expenditures projected to be approximately $7.4 million less than budget. The information below indicates our best analysis of the trends through the first half of the year, with known timing variations taken into account, and provides projections for year-end performance compared to the budget based on this review. Revenue and expenditure projections will continue to be refined and provided to the City Council as part of the FY 2021-22 Proposed Budget and subsequent budget updates.
Budget Adjustments
Throughout the fiscal year, the Council may adjust the budget. Adjustments made through the Second Quarter are incorporated in Attachment A in the column labeled "Approved Budget." The approved General Fund expenditure appropriation of $275.8 million has not changed from the amount presented in the First Quarter report.
Revenues
Attachment B displays General Fund revenues collected through December 31, 2020, of $76.3 million. These year-to-date receipts are 34% of the $223.4 million total annual revenue budget, which is consistent with prior years and with staff's expectations. At the end of the Second Quarter, the General Fund was on track to exceed budget expectations. The economic impacts from the COVID-19 pandemic did not reduce revenues as significantly as previously projected. The largest variance from budget is in the sales tax receipts.
Taxes are the primary General Fund revenue source and are received throughout the year in an uneven pattern. For example, almost all the City's property tax receipts are received from San Joaquin County in two payments in the last half of the year. Consequently, only $664,564 of the $62.6 million budgeted for property tax revenues was received by December 31, 2020. Staff takes these unique cycles into consideration when making year-end projections, and also receives analyses from consultants several times during the year.
Sales Tax receipts make up nearly 37% of the total annual General Fund revenue. Remittances through the end of the Second Quarter from the State of California reflect sales through the fourth month of the fiscal year. Using current information, staff project the year-end sales tax collections for the General Fund, including Measure A receipts, will be $91.0 million, more than $17 million above the $73.3 million budgeted. The year-end projection is about $550,000 more than sales tax receipts in FY 2019-20. While sales tax revenues from hotels and restaurants are down, other sectors such as autos and online sales have experienced growth.
Property Taxes are 26% of the total annual General Fund revenue and are remitted to the City each year by San Joaquin County in January and April. Receipts for the first six months are approximately one percent of the annual estimate; however, assessment information is available that provides advance notice of the forthcoming payments and indicates FY 2020-21 property tax revenues will be $63.8 million, which is consistent with expectations and represents a 4.3% growth from the prior year. The updated projected annual total, as shown in Attachment B, is $1.1 million greater than the approved budget of $62.6 million. New construction has been above average for the last few years contributing to property tax growth. FY 2020-21 property taxes have not been impacted by the COVID-19 pandemic. The next two fiscal years will likely see reduced revenue growth due to lower than 2% Proposition 13 inflation adjustments.
Utility Users Tax (UUT) is 14% of total annual General Fund revenue and is a tax imposed on the users of various utilities like water, electricity, natural gas, cable TV, and telecommunications services. 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.
FY 2020-21 UUT revenues are estimated to be $34.7 million, $1.9 million greater than the annual budget of $32.8 million. This revenue projection is 0.5% above FY 2019-20 actual receipts. Based on revenues received through the Second Quarter, Water, Electric, Gas and Cable UUT are projected to exceed the budgeted amount. Telecommunications UUT is expected to be at or slightly above the budgeted amount.
Franchise Fees generate approximately 7% of General Fund revenue and are charged to companies as a percentage of their income for the use of city streets and infrastructure. Because they are based on the revenue generated by a service provider, these fees tend to track parallel with UUT. Stockton charges franchise fees to PG&E, cable and video companies, and waste haulers. PG&E pays its franchise fees in two payments late in the fiscal year, so year-end projections for the line item are based on prior year activity and trends evident in the UUT revenue category.
PG&E, cable, and video fees are projected to be flat compared to prior year and to end the year close to budget. Waste hauler fees, under the franchise agreement that went into effect in January 2020, are projected to exceed the budget estimate by $2.1 million. FY 2020-21 reflects the first full year under the new franchise agreement. In total, Franchise Fees are estimated to be $16.4 million, or 15.6% greater than budget.
Business License Taxes generate 4% of General Fund revenues. The majority of receipts arrive in the last half of the fiscal year will likely continue to be impacted by the COVID-19 pandemic. Business license tax revenue is projected to be $11.2 million, a 17.7% increase compared to the approved budget and a 14.0% decrease compared to prior year revenues. The City will likely see lower business license tax revenues for at least a year after the economy recovers as payments are typically based on the business's prior year earnings.
Other Taxes combined are slightly over 1% of General Fund revenue and receipts are demonstrating the severe impacted the COVID-19 pandemic can have on individual revenue sources. Hotel/Motel Taxes are expected to be $2.4 million in FY 2020-21, which is 8.0% less than budget and 15.3% less than prior year revenues. Document transfer taxes are also experiencing a decline compared to prior years with projected revenues of $900,000.
The Interest line item includes proceeds from investments as well as interest on cash holdings. Interest earnings in the first half of the year were healthy. The City's investments are limited to secure/conservative instruments that are not expected to be hit as hard as other investment options. The revenue projection of $2.7 million assumes conservative earnings in the last half of the fiscal year and is $495,000 more than the annual budget.
Program Revenues consist primarily of revenues from fines, licenses, service contracts with other agencies, and code enforcement fees, and are 6% of total General Fund revenue in total. Year-end estimates for this category are $228,000 (1.6%) greater than budget. Revenue from Other Agencies is projected to be higher than budget by $463,000 (15.6%) with additional receipts for Wildland fire reimbursements and Successor Agency tax increment. Preliminary projections for Police Department traffic and parking violation revenues are approximately $131,000 less than budget resulting in a 24.9% decrease in the Fines and Forfeitures category compared to the budget. The decline is in part due to a temporary halt in the collection of these fines by the Franchise Tax Board. Sales of fixed assets are estimated at $20,000 with minimal activity on the sale of surplus properties this fiscal year. Most other program revenues are projected to be within 5% of the annual budget.
Interfund reimbursements consist of cost recovery to the General Fund from other funds and other agencies for administrative services and facility space and constitute 4% of General Fund revenue. As of December 31, 2020, interfund reimbursements totaled $3.9 million, or 36.5% of the category budgeted revenues. Revenues can be slow due to the timing of reimbursements as costs incurred in the first two quarters of the fiscal year are billed at the end of each quarter, and reimbursements are generally received in the next quarter. An decrease of 1.3% is anticipated in this category by fiscal year-end.
Expenditures
General Fund expenditures in most departments are running close to or just below budgeted levels and are reflected in Attachment A and are summarized in the Figure 1 below as a percent of the respective budgets with projected year-end expenditues.
Figure 1.
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, election, tax collection, legal expenses, and audit contract costs. In addition, several departments continue to experience higher-than-budgeted staff vacancies, including Police, Fire, Public Works, City Manager, Office of Violence Prevention, Administrative Services, and Human Resources.
As shown in Figure 2 below, the FY 2020-21 Adopted Budget included a total of $6.5 million in budgeted salary savings, which is divided into two areas: $5.5 million in the non-Marshall Plan portion of the General Fund, and $0.9 million in the Marshall Plan. Through December 31, 2020, actual General Fund salary expenditures were approximately $2.9 million more than the Budget anticipated at mid-year. The General Fund salary savings remained at 7.2% in the Second Quarter, above the budgeted level of 5.0%. Actual savings from vacancies may not align with the budgeted savings, and staff will continue to monitor the actual salary savings and report any necessary adjustments in future quarterly reports. Below is a summary of salary savings results for the first half of the fiscal year.
Figure 2
In addition to savings from vacant staff positions, the year-end expenditure projections include some city-wide trends resulting from the pandemic. Over $500,000 of the current year savings is the result of less costly training and travel options during the pandemic. Travel restrictions have also resulted in reduced fuel usage with year-end projections for fuel at $100,000 less than budget. Other program delays have impacted year-end projections when activities cannot be completed safely or resources have been redirected to COVID response.
Department Expenditures
The Police Department is afforded 55% of the General Fund budget. The hiring of eight new officers during the Second Quarter was offset by the attrition of 13 officers (two retired, five resigned or were released during probation, three failed the academy, and three left to other agencies), resulting in 462 of the 485 authorized sworn positions being filled mid-year. Police Department expenses were at 48% of budget as of December 31, 2020. Overall, the Department estimates it will end the year approximately $4.2 million under budget primarily due to vacant positions and new employees starting at lower pay than departing employees.
The Fire Department accounts for 19% of the General Fund. The Fire Department’s overall actual expenditures is $23.3 million or 47% of the budget at the end of the second quarter. Sworn personnel vacancies increased from 12 at the end of the first quarter to 18 at the end of the second quarter. On November 17, 2020, the City Council approved the allocation of funds to conduct a second Fire Academy to fill these vacant positions. Sufficient vacancy savings was generated to offset the additional overtime required to backfill the vacant positions during the period. Additionally, COVID -19 restrictions resulted to a reduction of specialized training opportunities for staff, limited availability of outside consulting/maintenance services, and delays in procurement of equipment and merchandise. As the COVID-19 pandemic improves and overall operations slowly go back to normal, the Fire Department is expected to be approximately 1% below the budget at the end the fiscal year.
The Economic Development Department budget includes approximately $2 million for economic incentive programs. Although these funds were not spent in the first half of FY 2020-21, the City is obligated to provide these incentives when the project does become active. With the economic incentive funding committed at year-end, the Economic Development Department will spend $3.6 million leaving $88,000 in savings from vacant positions and reduced training and travel costs.
The Office of Violence Prevention was at 38% of budget as of December 31, 2020 and is projected to end the year below the approved budget by 7%. The division is underspending in the salary and benefits category due to vacancies and temporary expense offsets in the first half of the year. As of April 30,2021, one Outreach Worker position remains vacant.
Program Support for Other Funds accounts for 15% of the General Fund budget and includes appropriations for City libraries, recreation activities, grants, entertainment venues, marina and golf course operations, and development services. Most transfers occur in regular monthly intervals, whereas grant match transfers are recorded when expended. On November 17, 2020, the City Council approved the additional allocation of funds for various projects resulting in new transfers to the Capital Improvement and Information Technology Internal Service Funds. These transfers will occur in the last half of the fiscal year. The transfer to the Pension Trust approved in December 2020 will also be booked in a future month.
The City has a separate fund to track Recreation activities which receives support from General Fund revenues. The General Fund was budgeted to contribute $3,565,500 to the Recreation Fund in FY 2020-21. Due to the COVID-19 pandemic, the Community Services Department had to close facilities and pivot to providing innovative, safe, and essential services to the community. As discussed in the First Quarter Budget Update, facility closures have resulted in the loss or elimination of approximately $1 million in revenues from recreational activities. The department has made efforts to reduce expenditures, bringing the net projected loss to $550,000 for the year. The Golf Fund, currently used for maintenance at the former Van Buskirk golf course and urgent needs at Swenson golf course not covered under the operating contract, is budgeted to receive $550,000 from the General Fund. Actual expenses for maintenance at Van Buskirk have been less than anticipated. It is recommended that $275,000 in unused funds planned for Van Buskirk be moved to support recreation activities.
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. Expenses were 15% of the budget as of December 31, 2020, as audit work performed during the first half of the year is was not fully invoiced. The year-end projection includes some savings in the new external audit contract approved in April and reductions in the amount of audit work preformed during the financial system implementation period.
The Human Resources Department is currently projected to end the year under budget by approximately $518,000 (21%). The anticipated savings is primarily due to the vacancy of a Director of Human Resources and two Training & Internship Coordinator positions. Staff training and travel costs are also coming in under budget because all planned trainings were cancelled and postponed as a result of the COVID-19 pandemic.
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 only one quarter paid through December. Election costs budgeted for the November 2020 election will be billed to the City in the next few months. Savings of approximately $520,000 are anticipated in this category reflecting savings in election fees, sales tax administration costs, and property assessments.
Other Administration contains a variety of citywide 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 is under budget by $57,000.
Expenses in the General Legal category were 16% of budget at the end of the Second Quarter with payments for services incurred through November of 2020. Expenses related to lawsuits and bankruptcy legal consulations vary greatly from month to month. The full appropriation is expected to be used by year-end.
Debt Service payments by the City are not expended in any regular pattern but instead by the scheduled due dates to bondholders. The budget has been adjusted to reflect the FY 2019-20 true-up and FY 2020-21 estimated contingency payments to Assured Guaranty. The full appropriated amount of $3.0 million will be paid out by year-end with the largest payment due in June 2020.
None of the Contingency Reserve was utilized through the first two quarters of the year.
Long-Range Financial Plan
Staff updates the Long-Range Financial Plan (L-RFP) as new information becomes available and evaluates the underlying assumptions during the annual budget process. Over the last month, staff has made numerous updates to the model in an effort to update revenue forecasts during this unprecedented global pandemic. The updated L-RFP incorporated FY 2020-21 year-end projections for revenues and expenditures.
The updated chart shows the General Fund balance staying above the 5% minimum for the full 20-year period with the balance very close to the minimum in the last 4 years. The City's current reserves enable the General Fund to weather the current recession and two more in FY 2027 and FY 2034.
The major changes made since the FY 2019-20 year-end L-RFP were:
1. Revenue projections for FY 2020-21 and FY 2021-22, including Property Taxes and Sales Taxes, were updated.
o When the COVID revenue model was initially added to the L-RFP, estimated loss in revenue from the recession was $50 million. Current models estimate this impact to be around $23 million over multiple years.
2. Pension projections were first updated using the latest CalPERS valuation reports based on July 30, 2019. The CalPERS assumed rate for investment return is significant to the City's fiscal health and the CalPERS board is likely to consider reducing its long-term return on investment assumption. Given these trends, the L-RFP now projects that the CalPERS investment return assumption will be reduced from 7.0% to 6.0% over a 20-year phase-in period. It also assumes earnings of less than 7.0% for the next three years. Any further reductions in the investment returns or a quicker phase-in period are likely to result in negative General Fund balances.
3. The model assumes the City’s Pension Trust earns interest at 4% annually.
All of the above changes flow through the model and can impact other areas such as interest earnings and debt paid based on a share of General Fund revenues. The model continues to forecast that Measure M transaction tax revenues will end in March 2033. This is the primary driver behind the lower fund balance in the last years of the model. The General Fund continues to spend down the fund balance in fourteen of the 20 fiscal years. There will be additional updates to the L-RFP as the FY 2021-22 Budget is developed.
The look of the General Fund Balance chart was also updated in the last few months. Chart components are described below.
• Light Blue Bars - The lighter blue bars include available funds and the Working Capital reserve used to manage cash flow.
• Dark Blue Bars - The darker blue bars represent the remainder of funds not available for ongoing operating expenses, which are part of the reserves outlined in the City's reserve policy. These funds are set aside for:
o protection against economic uncertainties and downturns,
o catastrophic events,
o future costs such as infrastructure repair and maintenance, replacement of the City's antiquated financial system, and pensions.
• Yellow Bars - The yellow bars represent the City’s Pension Trust. Funds in the trust can only used for retirement expenses.
• Top Red Line - The top red line is the Working Capital reserve goal (equal to 2 months of operating expenses) outlined in the City's reserve policy.
• Bottom Red Line - The red bottom line is a warning level that indicates operating reductions may be required to maintain services. The warning level is when the available fund balance falls below 5% of operating expenses.
Figure 3 shows the ending available General Fund balance by fiscal year for a range of 20 years.
Figure 3
Other City Funds
In addition to the detailed review of the General Fund expenditures and revenues described above, staff reviewed all City funds as part of the preparation of this report. Attachment C summarizes the FY 2020-21 Second Quarter results for other major City funds. Year-to-date activity 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 revenues by $881,892. This is a result of quarterly billings processed after the close of each quarter. All expenses incurred will be fully paid by year-end.
The Entertainment Venue Fund activity is monitored closely as all venues were closed to the public for most of the fiscal year. Due to the closures, no revenue has been earned, however a reduced level of expense continues monthly caused by the need to ensure safety and functional capabilities (mechanical and system maintenance) of the facilities. The General Fund budgeted contribution to the facilities’ funding is expected to be enough to cover the shuttered operations in FY 2020-21.
Some City funds in need of budget amendments were identified during staff's review of Second Quarter results. The funds and corrective actions are described below. All other funds were under the authorized budget appropriation.
1. The Municipal Utilities Department (MUD) identified the need for a budget amendment within the Water utility fund:
The purpose of the 14-Mile Slough Reservoir Site Fencing, Project No. UH07033, was to replace site security fencing with a project budget of $347,791. The 14-Mile Slough Reservoir is a potable water reservoir tank site and pump station. The original site security fence was deficient and needed replacement. Construction work for the project was completed on February 23, 2021. While construction was underway, there were unforeseen dry utility conflicts which required additional coordination with utility companies and additional inspection oversight. This led to additional staff charges in the amount of $16,000.
MUD is requesting to transfer unused funds from Abandonment of Wells 9 & 11, Project No. UH18004 to cover the additional staff cost in the 14-Mile Slough Reservoir Site Fencing project. Project UH18004 is complete and has a balance of $137,126.
2. The Public Works Department identified the need for additional budget appropriation:
The request for transfer of funds is for the purpose of funding the review/assessment of a street circulation plan and other project documents by San Joaquin Regional Rail Commission’s Stockton Diamond Grade Separation project which is requiring permanent street closures in the downtown Stockton area. The closures are necessary to accommodate the construction of a grade separation structure for Union Pacific and BNSF railroads. Project review is critical in identifying a feasible roadway network downtown as a result of the street closures for a grade separation. The goal is to provide appropriate recommendations for street facilities within the intent and purpose of the Public Facility Fees Program (Streets).
It is recommended that funding be appropriated from the Street Improvement PFF (310-312) fund balance to the Stockton Diamond Grade Separation, Project Number WT21028, in the amount of $70,000.
FINANCIAL SUMMARY
This report provides an analysis of the FY 2020-21 General Fund Second Quarter results. The review indicates revenues will exceed original estimates by $25.2 million (11.3%), and expenses are on track to achieve savings greater than the budget by $7.4 million. Staff will continue to monitor trends and potential budget variances and will return to the Council with future recommendations where appropriate.
Staff also reviewed other City funds and recommends the following budget amendments:
1. Reduce the General Fund transfer to the Golf Fund (650) by $275,000 and increase the General Fund transfer to the Recreation Fund (100-125) by $275,000.
2. Transfer unused funds of $16,000 from Abandonment of Wells 9 & 11, Project No. UH18004 to cover the additional staff cost in the 14-Mile Slough Reservoir Site Fencing, Project No. UH07033 within the Water Utility Fund (600).
3. Appropriate funds from the Street Improvement PFF (310-312) fund balance to the Stockton Diamond Grade Separation, Project No. WT21028, in the amount of $70,000.
Attachment A - FY 2020-21 Second Quarter Budget Update General Fund
Attachment B - FY 2020-21 Second Quarter Revenues General Fund
Attachment C - FY 2020-21 Second Quarter Report for Other Major Funds