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ACCEPT FISCAL YEAR 2022-23 FIRST 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 unaudited results of the first quarter of Fiscal Year (FY) 2022-23.
2. Approve three budget amendments and associated transfers in the Community Services Department Recreation Fund, the Police Department Animal Services division and a Police Department capital project.
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
City staff reviewed the financial results for the first quarter of Fiscal Year (FY) 2022-23. That review indicates General Fund revenues are within budgeted levels and expenditures are slightly under budget. General Fund revenues totaled $36.9 million in the first quarter, and expenses totaled $60.6 million. Staffing levels in the first quarter were lower than the level anticipated in the budget resulting in expenditure savings. Overall, first quarter expenditures of $60.6 million were at 18% of the budget and are projected to end the year within the total adjusted annual expenditure budget of $333.3 million. First quarter revenue and expenditure activity is consistent with the same period in prior years.
Staff reviewed all other City funds to determine significant budget variances. Budget adjustments are needed in the Recreation Fund, the Other Special Revenue Fund, and Police Department capital project.
DISCUSSION
Background
Regular analysis and reporting of the City’s financial status supports the City Council’s strategic goal of Fiscal Sustainability and is a key component to maintaining a fiscally healthy organization.
Council adopted the FY 2022-23 annual city-wide budget of $898.7 million on June 21, 2022. The adopted General Fund expenditure budget was $282.9 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, 2022, 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, evidenced by first quarter revenues being less than 25% of annual budgeted revenues. The timing of monthly expenses is more evenly distributed. Still, the General Fund includes some budgeted items paid in large lump sums that cause variances when reviewed quarterly. The information below is based on an analysis of the trends in the first few months of available data. Staff continues 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, the City 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.
Below are the details of those approved changes.
Adopted General Fund Expenditure Budget $282.88 million
Encumbrance/Contract Rollover +6.54 million
Capital and Grant Rollover +33.43 million
Approved Carryover +1.63 million
Safety Unit MOUs +8.79 million
Total Revised Expenditure Budget $333.27 million
The first adjustment is the encumbrance and contract 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 2021-22, the General Fund had $6.54 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 2022-23 budget.
Capital and Grant budgets continue on until the associated project is complete. The General Fund is the funding source for $33.43 million in ongoing capital projects, including special projects designated by Council last year and the New City Hall project. The unspent funds from FY 2021-22 have been added back to the General Fund budget in FY 2022-23.
The Approved Carryover of $1.63 million is related to projects and priorities from the prior fiscal year that were not yet encumbered. These continuations were approved by Council in July 2022.
Subsequent to the adoption of the FY 2022-23 budget, the City entered into agreements with four unions representing the Police and Fire sworn employees. The total General Fund cost of these agreements in FY 2022-23 was $8.79 million, including an offset from additional vacancy savings.
The adopted budget plus subsequent Council-approved budget amendments increased the total budget to $333.3 million. In the adopted budget, revenues exceeded expenditures by $2.5 million. With the budget revisions, expenditures now exceed the revenues by $47.9 million, of which $41.5 million is covered by prior year fund balance restrictions. The balance of $6.4 million is due to the approved labor agreements where use of fund balance was needed to reach agreement. The labor agreements terms were shown to be affordable in the long-term using the Long-Range Financial Plan. The projected ending balance with the revised expenditure budget is $41.4 million. The City’s target ending available balance at 16.7% of the adopted budget is $47.2 million. The use of reserves and restricted balances is primarily for one-time items such as capital projects and Council priority projects.
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 in line with the amounts received in the same period in prior years. General Fund revenues of $36.9 million were 13% of budget compared to 10% in the same period of FY 2021-22. As the graph below shows, revenues have ranged from 10% to 15% for the same period in the last four fiscal years.
Most revenue categories are below a 25% pro-rated monthly collection rate because the receipt of funds is seasonal. For example, San Joaquin County remits the majority of property tax revenue to the City in December and May, in line with the December 10 and April 10 due dates for property owners to pay annual taxes. Thus, the City received $238,000 in the first three months of the year of an expected $70.7 million. Early property tax data from San Joaquin County and the City’s property tax consultants indicate FY 2022-23 property tax revenues are likely to be higher than the 5.0% growth assumed in the budget.
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 primarily revenues related to the prior fiscal year and are accrued to the prior year appropriately. Thus, only July 2022 sales tax revenues were posted as of September 30, 2022. The City does not accrue its sales tax revenue quarterly. Statewide, the City’s sales tax consultant is projecting high growth for the first two quarters of FY 2022-23 and low or stagnant growth for the last two quarters. The FY 2022-23 budget for sales tax revenues is $9.6 million less than actual receipts in FY 2021-22. It is expected that FY 2022-23 sales tax revenues will end the year close to or slightly above the prior year receipts.
Receipts from Program Revenues were $3.7 million or 23% of the budget as of September 30, 2022. This category includes Fire District Contracts, Code Enforcement fees, License & Permits, Fines, Sale of Fixed Assets, and other charges for services.
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, 2022, interfund reimbursements were $2.0 million, approximately 22% 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 that most significant General Fund revenues are likely to be slightly above the budget estimates. 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. Actual expenditures of $60.6 million were 18% of the Approved Budget. 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, most departments are below the 25% expenditure level.
Filling and retaining employees in a very competitive market continues to be a challenge. The General Fund, personnel expenditure budget anticipates 9% of Police positions and 8% of all other positions will be vacant throughout the year. In the first quarter, vacancy savings were 17.9% of the salary and benefits budget, with actual costs coming in approximately $6.4 million less than anticipated. The departments experiencing high vacancy rates include Police, Fire, Administrative Services, Economic Development, City Manager’s Office, and Public Works. Employee labor contracts for sworn positions approved in September 2022 increased the General Fund budget by $8.8 million. Retroactive payments for police employees for the July through September period were not paid until the second quarter of the fiscal year. As a result of this timing difference, actual savings are overstated in this analysis of the first quarter results.
Crime Reduction is one of the City Council’s highest priorities, and the Stockton Police Department (SPD) continues to hire sworn officers to meet its Marshall Plan goals. Although the department hired 7 new officers throughout the first quarter, 25 officers left (sixteen for other agencies, two retired, two resigned, and five were released from probation). At the end of the first quarter, 79% of sworn positions were filled, with 381 sworn staff positions out of 485 authorized positions. Hiring for sworn and non-sworn personnel will continue throughout the fiscal year. As there has been a nationwide dilemma for law enforcement retention and recruiting, SPD has been experiencing a consistent decline in the number of applicants and the number of eligible candidates attained from those lists. The SPD Recruiting team has increased the number of in-person recruiting events significantly over the last year but is still experiencing an unceasing decline in the number of applicants. SPD Recruiting is seeking to expand efforts through digital platforms and partnering with outside marketing resources. During this time, SPD has reorganized to redeploy officers back to field operations, adjust the deployment model, and educate the public and civic leaders on service levels.
Overall, the Police Department is within budget at 21% as of September 30, 2022. This amount is about 2% less than the same period last fiscal year. Employee labor contracts for sworn positions approved in September 2022 increased the Police Department budget by $5.7 million. Retroactive payments for July through September were not paid until the second quarter of the fiscal year.
The Fire Department's overall actual expenditures amounted to $13.8 million or 24% of the budget at the end of the first quarter. The percentage spent out of the current budget is approximately 3% more than the same period last year. The first of the 2 firefighter training academies conducted by the department each year started approximately one and half months earlier than past year. Academy expenses on personal protective equipment and payroll of Firefighter trainees and instructors mainly contributed to the higher expenses for this period. Out of the 27 vacant sworn positions at the beginning of the fiscal year, twenty-one firefighters were successfully recruited for the academy that started on August 16, 2022. The department is focusing on increasing Firefighter recruitment efforts and associated training needed to address the continuing attrition of sworn personnel.
Actuals for Economic Development Department are trending lower than budgeted primarily due to the $1.9 million budget commitment to Open Windows Project, LLC. for Downtown Infill Infrastructure support. This obligation makes up approximately 60% of the Economic Development budget and has gone unspent for several years. In February 2023, City Council approved the termination of the agreement with Open Window Project, LLC, approving the de-obligation and reprogramming of these funds. These funds will continue to support the Downtown Infill Infrastructure under Economic Development but will allow more flexibility for spending down.
In the Program Support for Other Funds category, most transfers are completed on a monthly basis. The Capital Improvement line is under budget because the Council Priority projects will be transferred in a later quarter as expended. The Grant Match transfer is only recorded if needed when grants with required matching funds are expended. The Fire Emergency Communications and Radio ISF transfers are related to debt payments that will be one-time payments made in future quarters.
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. Approximately 8% of the budget was expensed as of September 30, 2022, as audit work performed during the first quarter is typically invoiced between October and February of each fiscal year.
Tax Collection 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.
Election expenses budgeted in FY 2022-23 are for the spring primary election that has not yet occurred.
The Other Administration category holds various city-wide 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 offset activity caused total expenditures as of September 30, 2022, to be negative $313,465.
General Legal expenses of $28,015 reflect two months of legal fees for various lawsuits and bankruptcy-related legal advice. Labor negotiations with the City’s non safety units will start in March and continue through the end of FY 2022-23, adding more in monthly expenses for the last half of the year.
Debt Service payments associated with the Assured Guaranty settlement are generally due in the last half of the year, so no funds had been transferred to the Debt Service Fund as of September 30, 2022.
The City did not need to access Contingency funds in the first quarter. The City Council authorized the use of Contingency funds for the Winter Storm Emergency declared in January 2023. As needed, funds may be utilized in the latter half 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 Funds - Technical Corrections
The adopted budget resolution authorizes technical corrections to be processed administratively with a follow-up report to the City Council on any correction over $100,000. The following technical correction was processed in the first quarter of the fiscal year.
1. The Successor Agency is making payments on a loan from the General Capital Fund. Under State dissolution law, 20% of the debt payment needs to be paid to the Low/Moderate Income Housing Fund. At least four budget entries are involved in this transaction using transfer in and out accounts. Two transfer entries were missed and were found during the reconciliation of the new year budget. The first one was a Transfer In from General Capital Fund of $202,469 was entered; however, the Transfer Out to Low/Moderate Income Housing Fund in the amount of $202,469 was not. The second entry was a Transfer Out to the General Capital Fund of $1,012,346 was entered however, the Transfer In from the Successor Agency for the amount of $1,012,346 was not. As the total debt budgets did not change from the amounts authorized by the City Council and the Successor Agency Board, adjustments were completed under the technical correction authority of the adopted budget resolution.
Budget Adjustments
Staff have identified three budget amendments needed.
1. During completion of the FY 2022-23 budget, a technical error prevented $102,064 of baseline budget requests from posting to final budget reports for the Recreation Fund (100-125). Two community centers, one senior center, and the Civic Auditorium were impacted by this issue.
The community centers and senior center FY 2022-23 baseline budget amendments are needed for materials and supplies expense for programming materials, including sports and after-school programs. The Civic Auditorium baseline budget amendment is needed in Building Maintenance expense which will provide required repairs at the Civic Auditorium.
2. The Police Department received Council authorization through Resolution 2022-07-26-1218 for the Police Headquarters Women’s Locker Room Remodel project. In addition, Resolution 2022-12-13-1206 amended a purchase agreement to purchase new lockers for the Stockton Police Department Women’s Locker Room. The Police Department would like to add a quiet room which was not part of the original project scope to the project. This component would be added to promote police officers’ wellness. An additional $200,000 needed for the project will come from Measure A funding that is the result of additional Measure A revenues.
3. The Police Department received donations and fees in the Animal Services division in FY 2021-22. The department needs to appropriate the $54,190 received to be able to spend in FY 2022-23.
FINANCIAL SUMMARY
This report provides an analysis of FY 2022-23 General Fund's first quarter results. Staff review indicates revenues are consistent with budget projections, and the City expenditures are estimated to be slightly below the approved budget. Three budget amendments have been identified.
1. Appropriate $102,064 from the Recreation Fund (100-125) fund balance for materials and supplies at community centers and building maintenance at the Civic Auditorium as follows:
|
Account |
Description |
Budget Request |
|
5021-900-650001-100-125-50-50-000-000- |
Arnold Rue Community Center |
$10,853 |
|
5021-901-650001-100-125-50-50-000-000- |
Seifert Community Center |
$13,014 |
|
5021-904-650001-100-125-50-50-000-000- |
Oak Park Senior Center |
$8,350 |
|
5023-908-630012-100-125-50-50-000-000- |
Civic Auditorium |
$69,847 |
|
Total |
|
$102,064 |
2. Transfer and appropriate $200,000 to the Police Department Women’s Locker Room Remodel Project PO15035 CON-CONCRT (Account 4510-000-800007-300-000-30-45-000-000-) from the General Fund available fund balance as a Mashal Plan expense.
3. Appropriate $54,190 in the Other Special Revenue Fund (260-263), Police Department, Animal Services expenditure accounts from fund balance derived from prior year animal shelter donations and fees.
The identified funding sources have sufficient balance to cover the above increases in budget appropriation.
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 2022-23 First Quarter Budget Update - General Fund