STAFF REPORT
DATE: December 5, 2023
TO: Justin Hess, City Manager
FROM: Jennifer Becker, Financial Services Director
BY: Leana Mkrtchyan, Deputy Financial Services Director Susan Langford, Revenue Manager
Joy Escalante, Budget Manager
Nathan Lightell, Senior Administrative Analyst
SUBJECT: Review of the General Fund’s Financial Status as of September 30, 2023
RECOMMENDATION:
Note and file.
BACKGROUND:
The purpose of this report is to provide the City Council and the public with a comprehensive review of the City’s financial status following the end of the first quarter of the Fiscal Year (FY) 2023-24 and to look at the impact of recent economic trends on the City’s General Fund five-year forecast.
DISCUSSION:
General Fund Year-End Reconciliation – Fiscal Year (FY) 2022-23 This report will first provide a summary of the General Fund’s FY 2022-23 year-end results.
As of the date of this report, staff is estimating the June 30, 2023, General Fund spendable fund balance to be $44.3 million. This is $14.8 million higher than the balance projected during the FY 2023-24 budget process. The difference is due to higher-than-expected fiscal year-end budget savings, the receipt of several one- time revenues, and the stronger-than- anticipated recurring revenues in several revenue categories. After contributing $4.3 million to reserves as dictated by the City Council’s Financial Policies , the adjusted beginning General Fund spendable balance as of July 1, 2023, is estimated at $39.9 million. It should be noted that all year -end numbers are not considered final until the City receives an unmodified or “clean” audit opinion letter from our auditors, Lance, Soll, & Lunghard ( LSL).
The City is in the process of completing its year-end audit and will return to the City Council in January to present the FY 2022-23 Annual Comprehensive Financial Report (ACFR).
FINANCIAL
SERVICES
Fiscal Year 2023-24 General Fund Revenues
The majority of General Fund revenue is received during the second half of the fiscal year.
For the first quarter of the current fiscal year, the General Fund received $2 4 million in recurring revenue, which represents 1 0.5% of the estimated revenues, compared to $2 3.7 million this time last year. This represents an increase of $400,000, or 1.7%, growth over last year’s revenues for the same period. Table 1 summarizes General Fund recurring revenues by category, including actual results for the year ended June 30, 2023, the adopted forecast for FY 2023-24, forecast revisions, and actual receipts of recurring revenues for the first quarter of this fiscal year.
As noted in Table 1, revisions to the revenue forecast are proposed for P roperty Tax, Interest/Use of Money, Transient Occupancy Tax (TOT), and Transient Parking Tax (TPT).
The City ended FY 2022-23 with General Fund revenues of $18 million over the revised budget, largely attributable to inflation and the assessed value growth in property taxes.
Interest earnings significantly outperformed projections due to the high interest rate environment, along with an increased General Fund cash balance. Higher prices for various consumer goods increased sales tax revenues by 5.4% while property taxes increased by
9.7% for FY 2022-23. TOT and TPT revenues increased over prior year projections by 16% and 16.6%, respectively, due to continued growth in travel and tourism. As discussed below, the revised projections recommended by staff are supported by the continuing growth of these revenues.
Table 1 - General Fund Recurring Revenues as of September 30, 2023
Sales Tax: Consumer spending has remained steady despite inflation exceeding Federal Reserve targets and the rising interest rates on loans and credit cards. Aside from inventory shortages on new and used vehicles, auto dealers experienced positive NO.
1 Sales Tax 61, 697,887$ 60,002,899$ 60,002,899$ 4,681,337$ 7.8% 2 Property Tax 69,425,311 65,817,908 4,000,000 69,817,908 433,410 0.6% 3 Utility Users Tax 18,645,937 17,997,000 17,997,000 4,290,150 23.8% 4 Services Charges - Intra City 13,380,003 14,621,839 14,621,839 3,618,366 24.7% 5 Service Charges 22,729,064 22,740,816 22,740,816 4,854,405 21.3% 6 In Lieu of Tax 9,077,939 9,512,850 9,512,850 2,240,224 23.5% 7 Interest/Use of Money 4,004,406 3,248,614 1,000,000 4,248,614 46,741 1.1% 8 Parking/Traffic/Other Fines 1,198,285 2,401,000 2,401,000 306,004 12.7% 9 Transient Occupancy Tax 12,208,382 10,759,000 1,500,000 12,259,000 1,246,471 10.2% 10 Building Permits/License Fees 5,129,260 5,995,478 5,995,478 1,970,472 32.9% 11 Transient Parking Tax 4,302,522 3,772,980 500,000 4,272,980 178 0.0% 12 Business Taxes 2,316,840 2,464,190 2,464,190 78,738 3.2% 13 Franchises 1,538,954 1,442,000 1,442,000 0.0% 14 Intergovernmental Revenues 1,823,976 1,067,051 1,067,051 250,104 23.4% TOTAL RECURRING REVENUE 227,478,766$ 221,843,625$ 7,000,000$ 228,843,625$ 24,016,599$ 10.5%
RECURRING REVENUE
CATEGORY
ACTUAL
RECURRING
FY 2022-23
ADOPTED
RECURRING
FY 2023-24
CHANGE
FROM
ADOPTED
REVISED
RECURRING
FY 2023-24
ACTUAL
RECURRING
FY 2023-24
% OF
REVISED
REC'D
growth as a result of elevated pricing from increased demand. Restaurants and hotels continue to remain strong with patrons enjoying the experience of eating out. Despite declining fuel prices, f uel and service station revenue experienced positive growth, attributable to the increased consumption of jet fuel at the Hollywood Burbank Airport.
FY 2022-23 ended the year 5.6% higher than forecasted. Looking ahead, economists project that households will face tight er budgets and rising debt, and various industries will grapple with challenges like labor costs, inventory issues, and competition.
Additionally for Burbank, t he full impact of the labor disputes for the Writers Guild of America and the SAG-AFTRA will negatively impact several sales tax categories in the third and fourt h quarters of 2023. Overall, sales tax is expected to remain flat or dip slightly for FY 2023-24. Therefore, staff is not recommending any changes to the forecast at this time.
Property Tax: A total tax of 1% is levied on the Assessed Value (AV) of property as determined by the Los Angeles (LA) County Assessor. The City of Burbank receives approximately 18.5% of the 1% levy on AV. Compared to FY 202 2-23, the AV for the entire C ity increased by a remarkable $2.8 billion or 9.7%. General Fund related AV increased by 8.9%. Reassessments from new developments in the City, a change of ownership transaction for a large entertainment company, and an increase in unsecured property which includes aircraft at the Hollywood Burbank Airport were the top contributors to the AV increase . Despite rising interest rates and inflation, the median sales price of a detached single-family residential home in Burbank for the third quarter (July through September) of 2023 was $1.3 million, an increase of 9.9% from the same quarter of the previous year. FY 202 2-23 revenues for property taxes were $7.7 million higher than the revised projection. Staff is proposing an increase to the FY 2023 -24 property tax forecast to account for the increase in citywide AV.
Interest/Use of Money: Interest earnings on the cash held by the Treasurer’s office surpassed the revised forecasted amount in FY 2022- 23, due to high interest rates and a larger-than-anticipated General Fund balance. In anticipation of this trend continuing, staff is proposing an adjustment of $1 million for FY 2023-24 to increase over last year’s projected revenues.
Transient Occupancy Tax (TOT): According to the U nited States Travel Association, despite ending 2022 still 29% below 2019 levels, transient and group business travel have made considerable progress in 2023. Burbank’s hotel occupancy rate from January through September 2023 is 75.7% compared to 74.5% over the same period in 2022. In addition to the modest increase in occupancy, the Average Daily Rate (ADR) collected by Burbank hotels in FY 2022- 23 averaged $178 compared to $135 the prior year, reflecting an increased demand for hotel stays as well as the impact of inflation. Although occupancy rates have not quite reached pre-Pandemic levels, TOT revenues ended FY 2022-23 well above revised projections, and Burbank’s hotels continue to experience a steady rise in both occupancy and ADR. To align with the prior year’s performance and expected returns this year, staff is proposing an adjustment to T OT, increasing the FY 2023-24 forecast by $1 million. Chart 1 shows Burbank’s hotel occupancy rates from FY 2020-21 through September 2023.
Chart 1 – Burbank Hotel Occupancy Rates
Transient Parking Tax (TPT): With the majority of the parking tax revenue derived from parking lots at or directly servicing the Hollywood Burbank Airport, the City’s TPT revenue is dependent on travel demand. As with hotel occupancy, airport activity has experienced an increase in revenues with the rise in tourism and the return of business travel.
Passenger counts at the a irport from January through June of 202 3 increased by 2.8% over the same period in 2022. Since TPT remits quarterly, there are no receipts to report at this time, but staff is proposing an adjustment of $500,000 to TPT revenues, to true up to the prior year’s performance and expected FY 2023-24 returns. Chart 2 compares the airport passenger counts for FY 2020-21, FY 2021-22, FY 2022-23, and FY 2023-24 to date.
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
FY 20-21 FY 21-22 FY 22-23 FY 22-23
Chart 2 – Hollywood Burbank Airport Passenger Counts
Fiscal Year 2023-24 General Fund Expenditures
Table 2 provides budget to actual results by department for the General Fund at the end of the first quarter. As of September 30, 2023 , General Fund expenditures were at $6 7.6 million, representing 25.9% of the budgeted appropriations. Expenditures at the end of the first quarter slightly exceeded the general expectation of 25%, primarily due to large expenditures within the Non-Departmental category. These include the $3 million payment made to CalPERS in July as part of the City Council’s two -year pension funding plan and the annual $4.7 million General Fund Infrastructure Funding Commitment to the Municipal Infrastructure Fund 534. Additio nally, $3.5 million in one-time General Fund contributions and $2 million in the American Rescue Plan Act (ARPA) funding w ere transferred to the Information Technology Fund 537 for the implementation of 20 major citywide technology projects approved by the City Council during the budget adoption process . Lastly, Fire Department expenditures are also trending above expectation at 29 %, due pri marily to reimbursable strike team participation and leave payouts.
-
100,000
200,000
300,000
400,000
500,000
600,000
JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
FY 20-21 FY 21-22 FY 22-23 FY 23-24
Table 2 - General Fund Expenditures as of September 30, 2023
EXPENDITURE APPROPRIATIONS EXPENDITURES PERCENT
NO. CATEGORY FY 2023-24 as of 9/30/2023 EXPENDED
1 City Attorney 5,137,183 1,131,941 22.0%
2 City Clerk 2,357,630 317,971 13.5%
3 City Council 1,032,461 246,012 23.8%
4 City Manager 3,325,800 662,148 19.9%
5 City Treasurer 974,803 210,151 21.6%
6 Community Development 23,530,686 3,335,270 14.2%
7 Financial Services 6,517,938 1,495,560 22.9%
8 Fire 50,239,034 14,623,683 29.1%
9 Library Services 9,976,062 2,355,117 23.6%
10 Management Services 7,845,604 1,611,177 20.5%
11 Non-Departmental 25,728,242 12,809,559 49.8%
12 Parks and Recreation 34,564,821 8,031,137 23.2%
13 Police 69,858,198 16,394,641 23.5%
14 Public Works 20,328,566 4,376,498 21.5%
TOTALS 261,417,028 67,600,865 25.9%
*Appropriations include all carryovers as well as any additional General Fund budget amendments approved by the City Council since the adoption of the FY 2023-24 Budget. The original General Fund adopted budget totals $232,531,072.
General Fund Financial Forecast
The purpose of the financial forecast is to provide insight into the potential long-term financial trends for the General Fund. This perspective will allow the City Council to make informed financial decisions today, while fully understanding the future financial impacts of these decisions.
Based on the actual ending balance for FY 202 2-23, revised FY 2023-24 revenue projections, and FY 2023-24 adopted appropriations, the General Fund five- year forecast for the current year projects a recurring budget balance of approximately $11.1 million in the current fiscal year ( see detail within the FY 202 3-24 Financial Forecast in Attachment 2 ) However, based on current assumptions, that balance is expected to de crease to a deficit of $236 thousand in FY 2027-28. Staff expects that General Fund recurring revenues will grow by an average of 4.8 % over the next f ive years while General Fund expenses will increase by an average of 5.6%. Expenditure growth projections are fueled by anticipated increases in labor costs, rising pension payments due to CalPERS investment fluctuations, and general price increases due to inflation.
Projected Revenues
Forecasted revenues are driven by the parameters included in Attachment 2. Mortgage rate increases have slowed down the residential housing market; however, existing home values remain strong, and the incorporation of new developments into the City’s tax roll will result in steady increases in property values. Sales tax revenue is projected to have minimal
increases for the next few of years, as inflation is projected to subside, and the prices of commodities such as fuel return to reasonable levels. Currently, the average revenue growth over the next five years for the City’s largest revenue sources includes projected increases in sales tax by 2.2% and property tax by 6.1%. Revenue projections included in the forecast are based on staff’s best estimates and may be subject to fluctu ations resulting from economic cycles and legislation. Staff will continue to monitor projected revenues throughout the year and provide the City Council with updates as new information becomes available.
Memorandum of Understanding (MOU) Projected Costs
Salaries and benefits currently comprise approximately 74% of the General Fund recurring budget. As such, the MOU negotiation process for the various bargaining groups plays a significant role in determining the City’s financial position. All the City’s bargaining groups have current MOUs for FY 2 023-24. Alignin g with the City Council’s Financial Policies related to employee compensation, the General Fund forecast includes assumptions for salary and benefit growth over the next five years based on projected market rates for all employee groups. Market rates are determined through salary and benefits surveys which compare the City’s job classifications to those of similar organizations throughout the region.
The City of Burbank calculates the average salary paid for c omparable positions to determine whether employee salaries are at market value. The City’s Financial Policies also maintain that the City and employees evenly share 50% of the normal cost of the CalPERS pension benefits and this has been in effect in accordance with the provisions of each MOU.
Public Employees Retirement System (CalPERS) Costs
Managing costs associated with pensions continues to be a challenge for CalPERS cities throughout California, and Burbank is no exception. In recent years, the City has taken measures toward mitigating pension cost increases including:
Sending Additional Discretionary Payments (ADPs) to CalPERS over the City’s required contributions to decrease the City’s unfunded liability Establishing a Section 115 Trust to offset future pension volatility Increasing employee contributions toward their pension rates Implementing the changes directed by the Public Employees’ Pension Reform Act (PEPRA) adopted by the State of California in 2012
In July 2023, the City received the CalPERS actuarial reports for the FY 2024-25 budget.
Based on the most recent reports, Burbank currently has an Unfunded Actuarial Liability (UAL) of just under $433 million across the City’s three pension plans, an increase of $185 million from the previous year due to CalPERS invest ment losses (6.1%) in FY 2021- 22.
Subsequently, the funded status for the City’s three plans was updated to 76.5% for Miscellaneous, 69.8% for Police, and 75.4% for Fire. This equates to an overall decrease in the funded status of all three plans from an average of 84.1% to an average of 73.9%. Table 3 shows the actual CalPERS employer rates and UAL contributions for the three employee classifications for the previous fiscal year (FY 2022- 23), the adopted fiscal year (FY 2023- 24), and the projected employer rates and contributions for the following two fiscal years (FY 2024-25 and FY 2025-26).
Table 3 – City of Burbank Pension Costs FY 2022-23 – FY 2025-26
Classification
Actual
FY 2022-23
Actual
FY 2023-24*
Actual
FY 2024-25
Projected
FY 2025-26
Police 3% @ 50 Rate 22.05% 24.01% 23.20% 22.60%
Police Liability Payment $8,152,664 $7,175,729 $7,997,927 $8,697,000 Fire 3% @ 55 Rate 17.71% 18.80% 18.42% 18.00%
Fire Liability Payment $5,028,014 $4,465,006 $5,066,096 $5,597,000 Misc 2.5% @ 55 Rate 10.00% 11.11% 10.96% 10.70%
Misc Liability Payment $21,224,820 $18,843,953 $20,417,782 $22,415,000 * Amounts shown are the total employer contribution amounts required for FY 2023-24. The City has completed the prepayment of the additional UAL payment to CalPERS which will result in a net savings of $735,492 citywide.
In FY 2022- 23, CalPERS added Private Debt as an asset class which helped to improve investment gains. In July 2023, CalPERS reported an overall investment return of 5.8% for FY 2022-23. While this is below the 6.8% discount rate, it is a major improvement over the
6.1% loss in FY 2021- 22. The shortfall will result in an increase in employer contribution rates beginning in FY 2025-26. The forecast does not account for the FY 2022-23 CalPERS investment results or any potential losses in FY 2023-24. Resiliency in the stock market has provided an opportunity for implementing new strategies that will help CalPERS in achieving its 6.8% expected rate of return for FY 2023- 24, which will impact the City’s pension costs in FY 2026-27.
In FY 2022- 23, Burbank completed the fourth and final payment of the previous pension funding plan. Over the four-year period from FY 2019-20 to FY 2022-23, the City made $53 million in additional discretionary payments (ADP) to CalPERS as part of the City Council’s multi-year pension funding plan, which resulted in a recurring city pension savings of $6 million ($4.2 million General Fund). In an effort to continue with this successful practice, the City Council adopted a new two-year pension funding plan as part of the FY 2023-24 budget process. In July 2023, the City made the first ADP of $4.5 million to CalPERS to help reduce future pension obligations. In September 2023, CalPERS provided the City with an update of the UAL payment amounts for FY 2024- 25, which accounts for the July payment. The total savings generated were $735,492 citywide ($499,920 General Fund), as shown in Table 4. Additionally, the City Council ’s Pension Funding Commitment Policy requires the City to contribute half of any year-end General Fund balance in excess of 6% of the General Fund’s budgeted recurring appropriations to fund employee pension liabilities. This funding is required if employee pension benefits are less than 90% funded. Correspondingly, $5.8 million was contributed to the Section 115 Trust in FY 2023- 24. The trust has a balance of just over $22 million as of September 30
th, 2023.
Table 4 – Pension Savings from FY 2023-24 ADP
Classification
Original
FY 2024-25
Payment
NEW
FY 2024-25
Payment SAVINGS
Miscellaneous Plan $20,417,782 $19,946,638 $471,144
Police Plan $7,997,927 $7,839,330 $158,597
Fire Plan $5,066,096 $4,960,345 $105,751
Citywide Total $33,481,805 $32,746,313 $735,492
Estimated General Fund Savings: $499,920
ENVIRONMENTAL REVIEW
This activity includes the FY 2023- 24 Adopted Budget and has no potential for resulting in either a direct or a reasonably foreseeable indirect physical change in the environment. As such, it is not a “project” subject to the requirements of the California Environmental Quality Act (CEQA) 14 Cal. Code Regs § 15378.
FISCAL IMPACT
There is no fiscal impact associated with this informational report to Council.
CONCLUSION:
After facing difficulties in the last couple of years due to the COVID-19 Pandemic (Pandemic) and a period of high global inflation rates, Burbank’s economy has shown resilience providing a positive outlook for the City’s finances in the near future. At the end of the first quarter of FY 2023-24, the City’s revenues are performing above expectations, but expenses also continue to rise due to recently adopted labor agreements, rising pension costs , and impacts from inflation. As shown in Chart 3, the General Fund's five-year financial forecast includes a balance of approximately $11 .1 million for both the current fiscal year and $4.9 million in FY 2024-25, placing Burbank’s fiscal health in a strong position moving into the FY 2024-25 budget development process . However, this balance decreases to a $ 236,000 deficit by FY 2027-28 as rising expenses outpace revenue growth. It should be noted that there are several risks associated with our projections, including further prospective changes to CalPERS assumptions, impacts of local development projects, and poten tial for future economic disruptions.
Chart 3 - General Fund Financial Forecast FY 2023-24 through FY 2027-28
The City Council has consistently pursued a conservative approach to fiscal policies , including building up reserves and utilizing one-time funds to make strategic investments to reduce future recurring expenses. Sound financial strategies like strengthening revenues, paying down pension liabilities, and working with labor groups to implem ent pension cost- sharing have proven to be beneficial for Burbank in the long run. In addition to the projected FY 2023-24 year-end General Fund Balance of $28.3 million, Burbank’s formal reserves total approximately $54.4 million . These funds will allow Burbank to make strategic investments to offset future costs and weather any potential economic slowdown over the next several years. Staff will continue to monitor any economic conditions or legislative actions that may impact the City’s financial position and provide updates to the City Council.
ATTACHMENTS:
Attachment 1: General Fund Projected Spendable Fund Balance for June 30, 2024 Attachment 2: General Fund Financial Forecast FY 2023-24 through FY 2027-28
$228.8
$238.4
$247.1
$255.9
$264.7
$217.7
$233.5
$244.7
$255.3
$264.9
$200
$210
$220
$230
$240
$250
$260
$270
2023-24 2024-25 2025-26 2026-27 2027-28
Revenue Expenses
Balance/
(Deficit): $11.1 $4.9 $2.4 $0.6 ($0.2)