title
ACCEPT THE FISCAL YEAR 2020-21 THIRD QUARTER BUDGET UPDATE
recommended action
RECOMMENDATION
It is recommended that the City Council accept by motion this budget status report on the results of the third quarter of Fiscal Year (FY) 2020-21.
body
Summary
Staff's review of the financial results for the nine months ending March 31, 2021, indicates expenditures are tracking close to budgeted estimates with variances of approximately 3%. As presented in the Second Quarter Budget Update, revenues are on track to exceed the budget amounts which assumed the COVID-19 pandemic would result in immediate revenue losses. Through the third quarter, General Fund revenues totaled $160.0 million, and expenses totaled $191.2 million. If current trends continue, overall General Fund expenditures will end the year at approximately $267.1 million, coming in under the Approved Budget by $8.9 million (3%). Revenue collections are currently projected to end the year approximately $30.9 million (14%) higher than budgeted. The net effect of projected revenue and expenditure variances is an $39.9 million increase to the General Fund ending available balance from the Approved budget. The revised total projected available balance is $56.9 million. The updated projection of ending available balance for FY 2020-21 is $7.3 million more than both the Second Quarter Budget Update and the estimate available when Council adopted the FY 2021-22 Annual Budget on June 22, 2021. 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 no new budget amendments needed.
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 2020-21 annual city-wide budget of $787.6 million, including $247.8 million in the City's General Fund, on June 23, 2020. Administrative and Council-approved amendments to the adopted budget increased total General Fund expenditure appropriations to $276.0 million. The Second Quarter Budget Report based on activity through December 31, 2020, projected additional revenues of $25.2 million and expenditure savings $7.4 million, which increased the projected ending fund balance to $49.6 million. The FY 2021-22 Annual Budget released on May 15, 2021, also projected an FY 2020-21 ending balance of $49.6 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, 2021, Third Quarter Projection, and variance amounts. The Approved Budget assumed the General Fund would end the fiscal year with an available balance of $17.0 million. The revised projections indicate revenues will end the year above the budgeted level by $30.9 million, and expenditures will be approximately $8.9 million less than budget for a net increase in the available balance of $39.9 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 $56.9 million is an increase of $7.3 million compared to the Second Quarter Budget Report projection. Most of the change in projected fund balance is the result of higher revenue estimates.
On June 30, 2021, the fund balance is anticipated to fully fund the Priority 1 Working Capital Reserve of $42.7 million in accordance with the Reserve and Fund Balance policy for the General Fund. A portion of the balance is needed to fund one-time items identified in the FY 2021-22 Adopted Budget and other Known Contingency needs. 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 $58.6 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% 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. The General Fund approved expenditure budget is $276.0 million, an increase of $188,000 since the Second Quarter Budget Report, associated with increased expenditures for fire wildland activities. The Approved Budget also reflects a $16.1 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, 2021, were $160.0 million, and projected year-end revenues are $254.6 million. The most significant variances compared to the budget are in sales tax, franchise tax, business licenses, and utility users’ tax. Compared to the Second Quarter Budget Report, projected year-end revenues increased by $5.9 million.
Sales Tax receipts make up nearly 33% of the total annual General Fund revenue. Remittances received from the State in the third quarter represents sales through January 2021, due to the lag time involved in obtaining the tax collected. Year-end sales tax collections are projected to be $91.1 million, exceeding the budget by $17.8 million. While this is a significant increase from budget, the updated year-end projection is only $661,000 more than sales tax receipts in FY 2019-20. Positive audit results, the shifting of taxes from the county pool directly to the City, and stimulus spending may result in higher sales tax revenues by year-end. Time is needed to determine if revenue bumps are one-time or will be on-going. The pandemic has resulted in a shift in consumer spending to more taxable goods and less services and on local recreational pursuits rather than distant travel. Consumer spending is unlikely to continue at this rate as travel options reopen and stimulus dollars run out.
Property Taxes are 28% 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 54.7% of the budget as of March 31, 2021, with San Joaquin County remitting approximately half of the annual property tax revenues in January 2021. FY 2020-21 property tax revenues are expected to be $64.4 million by year end, a 5.3% increase compared to prior year revenues. Property tax revenue growth is attributable to increasing home values and new construction. As shown in Attachment B, the anticipated variance is 2.8% of the $62.6 million budget.
The City collects Utility Users Tax (UUT) revenues for four utility categories: Water, Electric and Gas, Cable TV, and Telecommunications. UUT is 14% 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 78% of the budgeted amount through the third quarter. Overall, the FY 2020-21 projections for the Utility Users Tax category are 8% more than budget estimates and 2.8% greater than prior year revenues. Electricity and gas are the primary areas generating additional revenues of 10.9% over the $21.3 million budget. Revenue projections in the other categories are consistent with the Second Quarter Budget Report. 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 with UUT. Total franchise revenues are exceeding budget by $3.0 million almost entirely due to activity in the Waste Hauler category. Waste Haulers are expected to exceed budget by 29.2% in part due to updated franchise agreements that took effect on January 1, 2020. PG&E receipts are received annually in April and were up 6.5% compared to budget. Cable/Video revenues are projected to be $2.2 million.
Business License Taxes make up 4% of General Fund revenues. The updated year-end projection of $13.6 million is approximately $600,000 more than the prior fiscal year, not yet showing an impact from the COVID-19 pandemic. Actual receipts in this category were at 69.3% through the third quarter, with more than half of the business licenses renewals occurring in the last four months of the year. Second-quarter projections assumed revenues would be $11.2 million, but revenues continue to come in at or above estimates. As of the third quarter, over $1 million had been received from cannabis-related businesses. Cannabis-related receipts are fluctuating significantly from year to year as new companies join the industry and pay business license taxes based on estimated gross receipts.
Other Taxes combined are under 1% 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 just below the budgeted amount of $2.6 million, a $240,000 reduction from FY 2019-20 revenues. Document Transfer tax revenues are projected to be $1.2 million, an increase of $248,000 compared to prior year.
The Interest line item includes proceeds from investments as well as interest on cash holdings. Interest rates have not been as impacted as anticipated at the start of the pandemic. The revenue projection of $3.4 million is approximately $700,000 million more than the prior fiscal year.
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 be within $32,000 of the $16.2 million budget. Revenue from Other Agencies is projected to be higher than budget by $510,000 (15.3%) with additional receipts from Wildland fire reimbursements and the 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 Fines and Forfeitures compared to the budget. The decline is due in part to a temporary halt in the collection of these fines by the State Franchise Tax Board.
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 4% of General Fund revenues. These reimbursements are projected to be $128,000 or 1.4% less than the budget of $9.2 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. Projected expenditures decreased by $1.3 million compared to the Second Quarter Budget Report projection. The significant variances from budget are explained in detail in the following sections of the report.
The chart below summarizes the spending levels of all departments and programs as a percent of their respective budget.
As shown above, most operating budgets are running close to or below the 75% expenditure level anticipated at the end of the third quarter. The higher spending rate in Program Support of 85.2 percent is the result of a one-time $16.1 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, Office of Violence Prevention, Administrative Services, and Human Resources. All departments are under budget in the travel and training category this year due to limited availability of training opportunities.
As shown below, the FY 2020-21 Adopted Budget included a total of $6.5 million in budgeted salary savings. Through the third quarter of the fiscal year, actual General Fund savings from vacancies increased slightly to 7.6% (compared to 7.2% in the second quarter). Total salary expenditures were approximately $4.9 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 55 percent of the General Fund budget. During the third quarter, 8 new officers were hired while 15 departed (four retired, eight resigned or were released during probation, and three left to join other agencies), resulting in 455 of the 485 authorized sworn positions being filled at the end of March 2021. Police Department expenses were at 72 percent of budget as of March 31, 2021. The year-end projection shows the department under budget by $4.6 million (3.3 percent) with approximately $3.9 million from unfilled budgeted positions.
The Fire Department accounts for 19 percent of the General Fund. The Fire Department was at 69 percent of budget as of March 31, 2021, and expects to be under budget by $1.1 million (2.3 percent) by year-end.
The Economic Development Department budget includes approximately $2 million for economic incentive programs. Although these funds have not yet been expended, the City is obligated to provide these incentives once the projects are underway. With the economic incentive funding committed at year-end, the Economic Development Department will spend $4.8 million, leaving $89,000 in savings from vacant positions and reduced training and travel costs.
In the Program Support for Other Funds category, the only anticipated budget variance is in the grant match category. Only one grant required matching funds from the General Fund in FY 2020-21, leaving a projected unspent balance of $90,000. 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 are projected to end the year under budget, except for the Other Administration category. Other Administration, while showing an overage, includes budgeted vacancy savings for smaller departments that once spread will leave the category within budget. City Auditor expenses are projected to be under budget based on reduced costs compared to budget for the new external audit contract approved in April. Administrative Services and Human Resources experienced higher-than-expected vacancy levels. The Election category will end the year under budget by $176,000 based on the County fee for the November 2020 election. The COVID Program budget was for community partner contracts that carried forward from FY 2019-20 and were subsequently eligible for CARES Act funding.
Budgeted Contingency dollars were used to pay off a lease agreement in the Waterfront Office Towers, reducing the total budget to $1.4 million.
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. Year-end projections for all funds were included in the FY 2021-22 Annual Budget released May 15, 2021. No other significant variances from the projections contained in the FY 2021-22 Annual Budget were noted.
FINANCIAL SUMMARY
This report provides an analysis of the FY 2020-21 General Fund third-quarter results update. The review indicates that revenues are on track to exceed budget projections, while expenditures are likely to be less than budgeted targets.
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 2020-21 Third Quarter Budget Update - General Fund
Attachment B - FY 2020-21 Third Quarter Revenues - General Fund