AGENDA
ITEM
1 AGENDA STAFF REPORT
HER
CALEXICO
DATE: June 14, 2022
TO: Mayor and City Council
APPROVED BY:
PREPARED BY: Sandra L osca, trim Finance Director St
SUBJECT: Proposed Annual Budget for Fiscal Year July 1, 2022 to June 30, 2023 =================================================
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Recommendation:
This report introduces the 2022-23 Proposed Annual Budget. Budget hearings with individual program departments will be scheduled over the next two weeks to provide additional detail on program budget requests and provide opportunity for City Council questions and comments. After receiving City Council feedback, the final budget resolution for City Council consideration is scheduled for June 28, 2022.
Background:
Budget Objectives and Strategic Plan
The 2022-23 budget takes positive steps to implement the City's Strategic Plan adopted by the City Council on September 15, 2021. The City continues to strengthen is financial position through this budget by building reserves, addressing long-term operating obligations, investing in facilities and infrastructure, and rebuilding services to the community. As stated in the Strategic Plan, this budget prioritizes Calexico's fiscal responsibility to ensure its sustainability into the future.
City-wide Budget
The 2021-22 Citywide budget proposes annual expenditures of $162 million. This includes General Fund operating expenditures of $18 million, enterprise and other operations of $20 million, debt service of $6 million, and a capital improvement program of $117 million.
AGENDA
General
2021-22 2022-23 Fund Enterprise/
11% Other ITEM
Projected Budget Operations
Debt 13%
General Fund $ 18,071,849 $ 18,745,815 Service
Enterprise/ Other Operations 17,777,405 20,450,458 4%
Debt Service 6,417,788 6,506,912 Capital
Capital Program 8,088,339 117,041,421 Program
72%
$ 50,355,382 $ 162,744,606
Discussion & Analysis:
Budget Resolution and Reserve Policies
The proposed 2022-23 budget resolution recommends that the City Council maintain and increase its operating reserve policies for its key operating funds. These reserve policies collectively move the City toward best practices established for local governments and add stability to ongoing City operations.
The General Fund reserve policy is proposed to increase to meet the minimum guidelines recommended by the Government Finance Officers Association. These guidelines recommend a reserve of two months of operations (16% of annual expenditures). The propose budget phases in this recommendation over the next five years by implementing an existing Measure H committee reserve policy (September 2011, Resolution #2011-99) which provides for the set-aside of 10% of annual Measure H revenues towards an emergency fund balance reserve. By implementing the existing Measure H policy, and maintaining a balanced General Fund expenditure spending plan within projected General Fund revenues for the next five years, the combined General Fund and Measure H fund balance reserves would make annual progress and achieve the targeted 60-day reserve by June 2027.
The proposed budget resolution also recommends continuing the existing reserve policies of 8% of annual operating expenditures (one month) for the Internal Service self-insurance funds and $3 million operating reserve policies for the both the Water and Wastewater operating funds.
General and Measure H Funds
Our discussion of the City's General Fund starts with the proposed Measure H Fund budget along with its support for the General Fund.
Measure H Fund
Measure H is a local sales and use tax approved by the voters in June 2010. The passage of the tax established a Measure H Oversight Advisory Committee to make recommendations on the use of the funds to the City Council. During the City's recent period of fiscal distress, since 2015, and during the Covid period, the General Fund has relied upon Measure H funds to sustain General Fund operations.
The 2022-23 Measure H budget reintroduces Measure H Committee recommendations to the City Council and initiates a new discretionary program account for Committee consideration. The proposed 2022-23 Measure H fund budget implements these three objectives:
1. Over the next 6 years, the budget implements the Committee's reserve policy (adopted September 2011, Resolution # 2011-99) to set aside 10% of annual revenues to fund an emergency reserve.
This policy had been adopted after the 2010 earthquake at the recommendation of State Office of Emergency Services. The proposed budget phases in this recommendation and achieves an annual 10% contribution in the 6th year with a $1.8 million target accumulated reserve. Together with the General Fund, the combined General/Measure H reserve after 5 years would achieve a target reserve of 60 days of General Fund operations and meet the industry best practice recommended by the Government Finance Officers Association (GFOA).
2. The budget maintains the current level of General Fund support with a 2% annual growth factor. This is recommended to sustain current General Fund operations without a disruption to current staffing and operations.
3. The proposed budget initiates a new program for discretionary consideration by the Measure H committee. After hearing a presentation by Recreation staff, the committee has proposed $100,000 per year in new funding for Recreation Programs.
The Measure H Committee met on June 8, 2022 and after discussion voted to recommend the proposed Measure H budget to the City Council.
General Fund
The General Fund is the primary operating fund of the City. Unrestricted property tax, sales tax, and other revenues pay for Police, Fire, Development, Library, Recreation, a portion of Public Works, and City Administration. The proposed General Fund budget for 2022-23 is balanced within current revenues and sustains current services.
General Fund's Fund Balance Projection
The City has worked through a period of fiscal distress and combined with Measure H maintains a 45 day operating reserve through June 2023.
In several of the following charts, the General Fund and Measure H Funds are combined to provide the best comparison with the City's audited financial statements. Government Accounting Standards require the consolidation of unrestricted funds into the audited General Fund presentation. Although the Measure H Committee provides oversight and advisory recommendations to the City Council, and although as a matter of City policy Measure H funds are tracked and budgeted separately from the General Fund, the City's auditors have determined that Measure H activity will be consolidated with the General Fund for the annual audited financial statements.
General Fund Operating Reserve Trend
(Includes Measure H)
$7,000,000
$5,000,000
$3,000,000
1, 1020
-$5,000,000
Revenue/Expenditure Tends along with impact of new Department Program Requests The proposed 2022-23 budget balances expenditures within available revenues which is necessary to preserve the City's newly rebuilt fund balance reserve. However, Departments have identified an additional $3.6 million in annual program expenditures, including staffing, to respond to service level improvement requests from the City Council and from the Community. Each City program request is important and the art of building a budget is to balance competing program needs with the desire for new or different services. The proposed budget presents a template tor department expenditures tor the consideration or adjustment by the City Council to best meet community needs while sustaining the City's fiscal position. The proposed budget implements a few but defers most new expenditure requests until sustainable revenues are available to support additional services. The following chart demonstrates the fiscal impact of the new budget along with the fiscal impact if all new department program requests were implemented.
General Fund Revenue/Expenditure Trend
(Includes Measure H)
$25,000,000
$23,000,000
- Revenues
$21,000,000
$19,000,000
— Expenditures
$17,000,000
$16,000,000 -- Department
Requests
$13,000,000
2011-2012 2012-2013 2017-2018 2018-2019 2019-2020 2021-22 (Projected) 2020-21 2021-22 (Budget) General Fund Staffing
The following chart shows the General Fund authorized staffing trend since 2015. Included in the 2022- 23 department program requests are 28 new General Fund staff positions for that would increase staffing levels above the 2015 level that caused $4 million/year in annual losses at that time. With one exception, new General Fund position requests in the 2022-23 are deferred and unfunded. One net new position is recommended for the Planning and Building Services department to prioritize revenue development to support future rebuilding of the City's service levels.
General Fund Authorized Staffing Trend
140
130
120
110
20 100
33 90 34
30 31 26 25 26
80 26
70|
30 60 30
28 28 28 28 28
50 40
30 52
20 46 42 42 41 41 41 43 43
10 2015 2016 2017 2018 2019 2020 2021 2022 2023
• Police • Fire • Other Programs • Administration • Additional Requests (Unfunded) Long-term Operating Obligations
The City has accumulated long-term debt for employee benefits and other operating costs that were earned/incurred in prior fiscal years. While some of these debts have been paid down, the remaining obligations for pension and retiree medical benefits face growing annual cash flow requirements that constrain the City's ability to sustain existing service levels and "crowd out" the ability to add new staffing As reflected in the most recently available actuarial reports, these long-term liabilities exceed $72 million with a General Fund share estimated at $55 million. These obligations have contributed to the State Auditor's classification of Calexico as a City with high financial risk. $32,953,000 Unfunded Pension liability (June 2020)
39,404,000 Unfunded Retiree Medical liability (June 2021) $72,357,000 City-wide Total
$55,000,000 Estimated General Fund Portion
Long-term Operating Debt - Annual Payments
(All Funds)
6,000,000
5,000,000
• Retiree Medical
4,000,000 Unfunded Liability
Retiree Medical
Benefit Payments
3,000,000 • CaPERS Unfunded
Liability
2,000,000 • JPIA Retrospective
Charges
• Wastewater Advance
1,000,000
2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 To address these obligations, and to reduce long-term risk to the City, the proposed budget allocation for retiree medical payments begins amortization of the unfunded liability through a model similar to the CaPERS pension model. The proposed budget resolution directs the City Manager to establish a Section 115 Trust with the objectives of smoothing the growth of annual retiree medical costs; investing funds for long-term growth with investment income to buy-down the City's cost of benefits; and to amortize the liability over a 30-year period.
The City has updated its 5-year General Fund financial projection in the General Fund section of the budget book to include these growing long-term operating debt costs and other capital requirements.
However, revenues with 2% annual growth are less than the projected cost of existing staffing/ services because of growing CaPERS pension and retiree medical cash flow requirements. As these growing cash flow requirements mature, new annual revenues/development of $900,000 to $1.3 million per year may be necessary to sustain existing staffing/services. It is for this reason that the proposed budget only cautiously includes a commitment to new staffing and services.
General Fund Revenues
General Fund revenues are substantially derived from property and sales taxes. When combined with Measure H, they comprise 70% of the City's unrestricted revenues. The City's General Fund revenues have returned and grown from the pre-Covid period and have increased by over $2 million and 13% over the last three-year period. The City's current budget limitations are not due to stagnant or declining revenues.
General Fund Revenues
Measure H
Transfer
6%
Program
Revenues Property Tax
18% 34%
2021-22 2022-23
Property Tax 6,176,935 $ 6,300,474
Other General
Sales Tax 4,875,000 5,030,000 Revenues
Other General Revenues 2,852,462 2,857,975 15%
Program Revenues 3,144,951 3,457,366
Measure H Transfer 1,073,000 1,100,000 Sales Tax
27%
18,122,348 18,745.815
General Fund Expenditures
General Fund expenditures are substantially used to pay for employee salaries, benefits, CaPERS pension funding, and retiree medical payments (combined, 77%) while the remainder is for operating expenditures including materials, maintenance, contracts, insurance, and office costs. The proposed budget allocates 63% of expenditures to public safety.
General Fund Expenditures
Retiree Medical 5%
5%
CaPERS - 12%
•Police
Unfunded
Lability
11% 33%
# Community Development
6% • Public Works
Operating Costs • Community Services
23% Salaries and 7% Housing
Benefits
61% • Admin/Non-Department
6% • Retiree Medical
30%
2021-22 2022-23
Police 5,755,588 6,117,214
Fire 5,020,963 5,711,999
Planning & Building 812,405 1,103,640
2021-22 2022-23 Public Works 1,037,477 1,251,638
Salaries and Benefits $ 10,991,829 $ 11,524,371 Community Services 1,058,788 1,194,209 Operating, Capital, and Leases 4,514,343 4,224,896 Housing 150,295 149,900 CaPERS - Unfunded Liability 1,811,531 2,098,541 Admin/Non-Department 3,482,187 2,319,207 Retiree Medical 754,146 898,007 Retiree Medical 754,146 898,007 $ 18,071,849 $ 18,745,815 $ 18,071,849 $ 18,745,815
2022-23 Program Requests: One-time Capital Items Recommended for Funding The 2022-23 program budget requests submitted by departments included several one-time capital expenditures that could not fit within projected 2022-23 revenues but could be funded from newly projected 2021-22 General Fund surplus funds. Current year 2021-22 General Fund revenue projections have been updated for trends through June 1, 2022. In particular, Sales Tax results for the quarter ending March 31, 2022 have been released by the State in May and continue a positive trend from prior projections. All General Fund 2022 revenue line projections have been updated with assistance from program departments. Together with funds unappropriated at the time of the 3r° Quarter budget report to City Council (May 18, 2022), a cumulative $600,000 of 2021-22 of revenue surplus is recommended for reinvestment into one-time capital equipment and facilities program requests to relieve pressure on the 2022-23 annual budget. This level of one-time spending is within the operating margin for the 2021- 22 fiscal year and is not projected to erode fund balance at June 2022. The following list of one-time capital spending is proposed for City Council consideration:
One-time General Fund Program Capital Requests Proposed for funding from 2021-22 General Fund Surplus Community Center Lighting 32,000
Library Roof (Addition to 2022 $15,000 balance carried in Fund 411; Total $33,000) 17,000 Park Lights Replacement 12,000
Park Improvements (Irrgation System, Lighting, Fence) 20,000 Public Works - Medium Truck 30,000
Fleet - Service Truck 45,000
Fleet - Machinery 5,000
Facilities - Service Truck 30,000
Facilities - Medium Truck 45,000
Planning/Building Replacement Vehicles (2) 40,000
Fire Radios 105,000
Fire Hose 9,000
390,000
Police Vehicles (February 2022 acquisition) 210,000
500,000
2022-23 Department Request: Unfunded/Deferred at this time The proposed budget allocates new funds to each department to sustain current employee MOU and other operating contractual requirements. Some level of increased spending is proposed for each program department. However, current revenues support only a portion of program requests. After funding a portion of one-time items from the 2021-22 surplus, a balance of $3.2 million in new program requests remains unfunded, as detailed in the General Fund program pages of the Proposed Budget.
These items are deferred for future consideration. The primary unfunded request is for new staff.
Unfunded General Fund Program Operating Requests for 2022-23 Salary and Benefits (27.5 Positions across all departments) $ 2,749,339 Operating Costs 220,382
Capital Costs (Deferred to 2023-25 fiscal years)
Community Center Entrance Doors 150,000
Community Center Parking Lot 40,000
Cultural Arts Center Entrance Doors 50,000
$ 3,209,721
General Fund Recap
The proposed budget balances program expenditures within available revenues. After the scheduled budget hearings, as City Council considers or adjusts its program priorities, an important fiscal objective will be to remain "balanced." Any net expenditure changes could be considered in the context of revenue updates in the Finance Department's next quarterly budget update scheduled for October 2022.
Operating Grant Funds
The City administers a series of funds that operate with revenues that are restricted for specific programs, including State grants for the Library, Gas Tax, and Public Safety programs; Solid Waste fees, PBID, and other one-time grants and donations. The City's FEMA and ARPA (American Rescue Plan Act) Covid Relief grants are also administered in this section of the budget.
The 2022-23 budget proposes an update to the City Council's allocation of ARPA funds adopted on March 16, 2022 and previously updated on May 18, 2022. The proposed update reallocates $1 million to fund additional improvements to the State grant-funded Heber Park capital project. The proposed update reallocates funds to the Heber Park project from the Downtown project, with the Downtown project allocation decreasing from $3 million to $2 million.
Housing Funds
The City administers revolving housing loan programs that have generated program income available for future reinvestment by the City. Three of these programs (CDBG, HOME, and CalHOME) are controlled by the State of California's Department of Housing and Community Development (HCD) and will become available for future use when the City is compliant with Federal and State guidelines. The Housing Successor holds housing loans and cash balances transferred to the City in 2011 at the time of Statewide Redevelopment dissolution. This program is under local control and has funds available for programing as projects are identified.
Water/Wastewater Enterprise Funds
The 2022-23 Water/Wastewater budgets operate from customer user fees. This budget includes the last of the 5-year annual rate increases approved by City Council in 2018. Revenues are first pledged to the 2020 Water/Wastewater bonds issued to fund water/wastewater treatment plant improvements and other capital projects. The balance of fees pay for operations and ongoing capital requirements.
The operating budget proposes to reclassify and add a net four positions in these combined funds to best meet State of California operating requirements. With proposed staffing and operating budget updates, both programs retain the net revenue/debt service coverage ratios required through the City's pledge to bond holders. The proposed budget maintains the existing $3 million operating reserve for each program.
However, the annual operating fund surpluses that are used to transfer/fund annual capital replacements have declined over time and will be recommended to be addressed in the upcoming new 5-year rate program. Funds have been included in the 2022-23 budget to update the revenue requirements for the Water/Wastewater system and to provide customer rate options for City Council consideration during the coming fiscal year.
Airport Enterprise Fund
The City's Airport operates from customer service charges and fuel sales. Operations were challenged in the Covid period and fund reserves are minimal. Federal Covid relief grants have helped keep the fund positive over the past two years. The 2022-23 budget proposes filling two-part time Fuel Line employees by reclassing funds from the temporary help budget. The 2022-23 budget also includes $4 million in Federal Grants for taxi-way improvements. This round of Federal grant funding is 100%, without a need for local matching grant funds.
Community Facilities District Funds
The City administers three Community Facilities Districts. On June 1, 2022, the City Council adopted the annual property levy for these districts. The Bravo Rodiles district provides maintenance services and is also contributing significantly to the capital improvements at Cordoba Park. The Hearthstone and Grand Plaza districts are bonded districts. Bonds were issued to fund infrastructure improvements at the time of development. Because of delayed development, the Hearthstone district is in arrears in its bond payments. This can be addressed when new activity is initiated on the undeveloped land parcels. The Grand Plaza bond payments are partially dependent upon sales tax generated at the site. Covid-related slow-down of sales tax cash flow caused a temporary draw on the bond reserve. This has now been restored and the District is again functioning as designed Internal Service Funds
The City operates five self-insurance programs through its Internal Service Funds, including Active Employee and Retire Medical, Workers Compensation, Unemployment, and General Liability. Each of these programs is projected to achieve their target 8% (one month) ending reserve balances in the 2022- 23 budget year.
Medical insurance rates are projected by the City's insurance broker to increase by 8.9% over the prior year. These costs are charged to program departments on a per-employee basis. The average cost for an employee's family medical coverage ranges from approximately $25,000 to $31,000 per year, depending upon bargaining group.
The excess insurance policy premiums for both the Workers Compensation and General Liability programs have increased significantly over the past two years. The Workers Compensation program has absorbed this increase within the existing/prior year benefit rate charge to program departments. The Unemployment rate charged to the program departments is also unchanged from prior years. The General Liability program charge, however, has increased to cover the projected claim losses and excess insurance policy costs.
The 2022-23 budget implements an important next step in addressing the City's accumulated $39 million obligation (measured as of June 2021) for retiree medical benefits (OPEB). Through 2020, the City had been on a cash "pay-as-go" basis for paying retiree medical benefits as incurred. For the past two fiscal years, the City's budget has included initial pre-funding of this OPEB obligation. An actuarial funding analysis has now been obtained to price the cost to move into a funding model similar to the CaPERS pension model which would amortize the unfunded liability as a level percentage of payroll over the next 30 years. The annual City-wide pre-funding contribution increases from $135,000 in the 2021-22 budget to $243,000 in the 2022-23 budget. The next administrative step is to establish a Section 115 trust, similar to the current CaPERS pension trust, which protects these funds for the benefit of the City's retirees and allows for prudent long-term investments with projected investment earnings available to buy down the City's cost of benefits.
Capital Program
The proposed 2022-23 capital program invests $117 million into the community through over 50 capital projects. The 5-year capital program totals $160 million. Funding is from water/wastewater bonds, customer fees, grants, and development fees. These projects support City Council objectives of maintaining and improving the key infrastructure and facilities of the City. A chart follows with the most significant 2022-23 projects.
Street/Transportation Water Treatment and Distribution
Second Street Bridge Widening $ 3,841,192 New Clarifier and Filter System 6,000,000 Street Overlay 4,636,000 Raw Water Reservoir Improvements 1,151,000 Scaroni Road Improvements 1,275,613 Water Pipeline Replacement 2,086,000 Cole Blvd. Improvements 2,073,683 Water Distribution Expansion 3,500,000 East Area Facilities Plan 2,238,855 Other 2,005,000
Paving Alleyway Project 1,748,371 14,742,000
Airport Taxiway Rehabilitation 4,212,565 Wastewater Collection and Treatm Cole Blvd. Between ML King and Bower 1,651,000 Lift Station No. 9 and 11 Rehab. 6,427,217 Second Street (All American Canal) 3,686,000 Emergency Generator Replacement 1,025,000 Other 1,994,700 Compactor, Bar Screen, Grit Chamber 1,190,000 27,357,980 Sewer Manhole/Collection System 2,330,000
General Government Lift Station No. 1 Replacement 1,700,000 Park Improvements/Cordova Park 1,080,000 Wastewater Plant Expansion/Upgrade 15,854,785 Heber Park Expansion 6,701,000 Other 1,441,000
New River - Calexico REACH 28,000,000 29,968,002
ARPA 7,296,487
Other 1,895,952
44,973,439 $ 117,041,421
We lock forward to discussing this budget proposal with the City Council and receiving feedback on City Council priorities during the upcoming budget hearings.
Coordinated With:
All City Departments.
Attachments:
1. Fiscal Year 2022-23 Proposed Annual Budget.