Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: FISCAL YEARS 2025/26 & 2026/27 - BUDGET STUDY SESSION #2 - ENTERPRISE FUNDS, CAPITAL PROJECTS AND FUNDS,
UPDATED GENERAL FUND
Date: April 15, 2025
Written by: Angela Courter, Director of Administrative Services Recommendation
Study Session on Enterprise Funds, Capital Projects Funds, and the updated General Fund for Fiscal Years 2025/26 and 2026/27. No action is proposed.
Background
The goal of this study session is to give an overview to the City Council Members and the public as well as address comments or questions about proposed budget details. Each budget workbook shows the historical actual balances for three years (FY 21/22, FY22/23, and FY 23/24), the adopted budget for 2024/25, the estimated budget for 2024/25 and the proposed budgets for 2025/26 and 2026/27. The budget format is consistent with how it was presented in prior fiscal years except for the additional proposed budget year for our first ever biennial budget.
While putting together a City Budget, we must take into consideration the limited resources of any budget, the various levels of uncertainty with different funding sources, and how to best use the funding or City staff to meet the needs of the community. The drafted budget strives to strike a balance between continued delivery of efficient city services to our residents and business owners, continuing development of key capital projects, and continuing to pursue further economic development.
As always, community input is appreciated and necessary to ensure a budget that best meets the needs of the community in the City’s areas of responsibility. For this budget study session, it is the goal to obtain feedback going into the development of our final annual budget for adoption by the Council in June.
Analysis/Discussion
With the guidance provided by the City Council and the community during the strategic planning session held on February 20, 2025, and followed with discussions on prioritizations of projects and alignment with City Goals during our first budget study session on April 1, 2025, staff have updated the projects and related expenditures for the capital plan, related required transfers out of resources, confirmed allocation of staffing levels and increased insurance premiums within the General Fund and the related allocations to the enterprise funds. Fiscal Impact Budgets for Enterprise and Capital Projects are primarily developed by the Director of Public Works and Engineering using approved Rate Studies for the Enterprise Funds as well as our Capital Improvement Plan, consistent with the General Plan and related infrastructure capital and master plans.
Additionally, as directed by the City Council, staff have provided a new proposal for the Mission Statement, as well as some minor edits to Goals and Objectives, which are attached.
Enterprise Funds
The proposed budget includes a combination of conservative revenue projections and conservative operational expenditure projections. Revenue assumptions include consistent consumption with the prior year usage. Any change in consumption would change the expenses and the volumetric portion of the rate revenue.
Significant operational expenditures that are best practice, but are discretionary, include:
• Continued transfer to the Internal Services Funds for Compensated Absences Fund and Vehicle Replacement Fund.
• Full prepayment of the annual regular pension unfunded liability payment to reduce future pension costs. Note that this does not include additional discretionary payments (ADPs) at this time. Future ADPs are subject to funding availability and City Council direction.
Other costs increased in both the water and sewer funds due to the switch to monthly billing, including merchant fees, postage, and printing fees. The budget does not include a contingency for unforeseen repairs. Merchant fees are estimated to be approximately $50k for each of the water and sewer funds.
Water Fund Operations
Revenues
• Fiscal year 2024/25 estimated actuals are approximately 7% higher than the adopted budget and 8% higher than last year’s, FY 2023/24 actuals. • The proposed budgets for fiscal years 2025/25 and 2026/27 are conservatively proposing an increase of approximately $120K or 5% for fiscal year 2025/26 compared to the estimated actuals for 2024/25 and increase by approximately $249K or 9% for fiscal year 2026/27 as compared to the proposed budget for 2025/26. These increases are mainly due to the approved rate change, offset by continued increased conservation. These increases follow the proposed rate changes (not the historical rate changes).
Expenditures
• Fiscal Year 2024/25 are anticipated to decrease by just over $1K or 0% from the adopted budget. This change also represents a $329K or 16% increase over the prior year 2023/24 actuals.
• The proposed budget for fiscal year 2025/26 is conservatively estimated to increase expenditures by approximately $911K or 38%, of which $700,000 pertains to direct transfers out to the Water Capital Fund. Adjusted for this transfer the total expenditures are increasing $210K or 9% primarily driven by increased cost for Aqueduct water usage charges ($143K), Vehicle Replacement Contributions ($112K) plus other increases in Insurance and Bank and Merchant Fees offset by reductions in Special Project Contract Service ($100K).
• For the proposed budget year 2026/27 there is an estimated decrease of approximately $162K or approximately 5% from the proposed budget for fiscal year 2025/26. The budget includes an additional $600K transfer of funds to the Water Capital Fund.
Adjusting both years for transfers, the total increase in expenses is proposed to decrease $63K or 2% primarily due to the reduced Vehicle Replacement Contributions.
Sewer Fund Operations
The proposed budgets for 2025/26 and 2026/27 for the Sewer Operations Fund represent a very strict budget. The primary expense is treatment costs with the Santa Rosa Subregional System (approximately $2.5M), with all City operations, maintenance using approximately $1.3M ($3.8M in total operations). Total revenue is projected to be approximately $3.7M and $4.1M for each respective year with a projected net loss of approximately $133K for 2025/26 and a thin net income of $188K in 2026/27. As a result, the budget projection anticipates approaching the required reserve by the end of Fiscal Year 2025/26 and 2026/27.
This has been anticipated in the most recent rate studies, as provided in the attached presentation, with gradual intervention implemented by the City Council to avoid rate shocks. This fund is closely monitored, and staff intend to continue looking for ways to reduce expenses and re-analyze rates with updated revenues/expenses early in the fiscal year to determine if further corrections are needed. In any case, it is anticipated that it will take several years to completely turn around the sewer operations fund with very limited ability to implement significant capital projects during this time.
Revenues
• Fiscal year 2024/25 estimated actuals are 1% lower than the adopted budget and 2% higher than last year’s, FY 2023/24 actuals.
• The proposed budget for fiscal year 2025/26 is conservatively proposing an increase of approximately $285K or 8% of the estimated actuals for 2024/25. For proposed budget 2026/27 includes estimated increases of $359K or 10% compared to the proposed budget for 2025/26. These increases are mainly due to the proposed rate change, offset by continued increased conservation.
Expenditures
• Fiscal Year 2024/25 are anticipated to increase by just over $14K or less than 1% the adopted budget or increase $224K or 6% over the prior year's actuals. • The proposed budget for fiscal year 2025/26 is conservatively estimated to increase by $34K or 1% from the 2024/25 adopted budget or $20K and 1% from the 2024/25 estimated actuals. The proposed budget for fiscal year 2026/27 is estimated to increase by $47K or 1% from the proposed budget for fiscal year 2025/26.
Enterprise Capital Funds
These funds include decreased revenues due exclusion of new connection fees due to uncertainty of actualization as well as reduced investment earnings. Major capital investments for the Water Capital Fund are estimated at $1,231,300 for the next two proposed budgetary fiscal years include:
• Well 2 Renewal/Remediation
• Water Renewal and Replacement Master Plan
• Distribution System Monitoring
• Well 1A/Well 3 Treatment Renewal and Replacement
• P-3, 4: Cypress Tank New Water Main
• T-1: New Cypress Storage Tank
• BP-1: Cypress Tank Booster Pumps
For the wastewater/sewer system staff are proposing placing critical projects on the budget for both fiscal year 2025/26 and 2026/27 and holding the other projects on a standby list for initiation due to funding constraints. The funded projects include:
• Sewer Renewal and Replacement Master Plan
• Sewer Lift Station Renewal and Replacement
The postponed (B List) projects include:
• Wastewater System Emergency Generator Project
• Sewer Collection System Renewal and Replacement
This dip in funding has been an anticipated impact on the Sewer Fund for the most recent rate studies. This fund is closely monitored, and staff intend to continue looking for ways to reduce expenses and re-analyze rates with updated revenues/expenses early in the fiscal year to determine if further corrections are needed. In any case, it is anticipated that it will take several years to completely turn around the sewer operations fund with very limited ability to implement capital projects during this time.
Capital Projects
Capital Projects are funded with a combination of Special Revenue Funds and General Funds as well as matching grant resources. Currently the budget for fiscal year 2024/25 includes capital projects totaling $6.9M of which $604K in offsetting grant funds are expected. These are presented within the Special Revenues Budget workbook. Other capital projects not expected to include matching grant funds are included in the capital project fund 605.
Total projects are estimated at $6.08M for fiscal year 2024/25 compared to $1.3M for fiscal year 2023/24. Capital projects are subject to timing based on City planning and implementation of the pavement management plan or parks master plan. Significant funding was invested in City streets for fiscal year 2021/22 through 2023/24 due to the availability of borrowed street funding obtained in 2021/22.
For the proposed fiscal year 2025/26, staff have proposed $2.5M in non-grant funded capital projects and an additional $4.5M in grant funded projects. Total contributions from the General Fund are projected at under $3.6M, with matching other funds from Grants at $1.5M and other Special Revenue funds of $1.9M. For both fiscal years 2025/26 and 2026/27, and consistent with the Sewer Capital Fund, staff have placed projects on a planned but postponed, B List. These projects are desired but are of a lower priority and will be incorporated into the budget if funding allows. For fiscal year 2025/26 there are two projects, ADA Transition and Redwood Drive and the Microgrid City Hall Complex with combined estimated costs of $397K.
For the proposed fiscal year 2026/27, staff have proposed $1.3M in non-grant funded capital projects and an additional $1.4M in grant funded projects. Total contributions from the General Fund are projected at under $287K with matching other funds from Grants at $1.0M and other Special Revenue funds of $1.3M. For fiscal year 2026/27 there are three projects listed as B List projects, Veronda-Faletti Ranch Barns, Traffic Signal at William George, and Putnam Park Improvements Phase 2 with combined estimated costs of $6.7M.
Financial Considerations
Overall, the budgets are in line with the best City revenues estimates now, using independent tax forecasting experts who develop estimates based on Cotati’s specific mix of businesses. The proposed budget is conservative in both expenditure and revenue forecasts. The City Council has continued to prioritize supporting robust reserves more than the required reserve of 33% of operating expenditures to protect city enterprise services against economic disruptions.
Therefore, this fiscally conservative approach allows the proposed budget to protect essential operations.
Environmental Issues
Not applicable. The action proposed is not a project as defined by CEQA.