City council Staff Report
Meeting: May 21, 2024
Subject
City Manager’s Third Quarter Financial Report for Fiscal Year 2023-24 Recommended Action
Receive the City Manager’s Third Quarter Financial Report for Fiscal Year 2023-24; and Adopt Resolution No. 24-XXX and Budget Modification 2324-340 decreasing appropriations by $464,980 and increasing revenues by $20,010,094 Executive Summary
The Third Quarter Financial Report for Fiscal Year (FY) 2023-24 outlines the City’s financial status as of March 31, 2024.
As of the third quarter of FY 2023-24, revenue was $4.6 million, or 6% lower than last year, primarily attributed to drops in sales tax, transient occupancy tax, intergovernmental revenue, and transfers, while expenditures were $3.6 million, or 5% lower than last year, primarily due to decreases in transfers and salaries and benefits.
Key recommendations from the report include the following:
Increase revenues by $19.4 million to account for Sales Tax revenue adjustments.
Increase the Sales Tax Repayment Reserve to $74.5 million.
Increase revenues by $327,762 and appropriations by $250,000 to account for supplemental law enforcement services.
Increase appropriations by $200,000 to account for increased legal costs.
Decrease appropriations by $1.2 million to defund various projects.
Transfer $300,000 from the Storm Drain Improvement Fund (Fund 210) to the Capital Reserve (Fund 429) to partially fund the Calabazas Creek emergency storm drain repair project.
Reasons for Recommendation
Background
On June 6, 2023, the City Council adopted the FY 2023-24 Adopted Budget, a $121.8 million spending plan funded by $110.2 million in revenue and $11.6 million in fund balance.
As described in the City Manager’s First Quarter Financial Report, the budget was revised to account for encumbrances and budget carryovers. As part of the FY 2022-23 year-end close, additional funds were carried forward to FY 2023-24, amounting to $17.1 million in encumbrances and $64.0 million in budget carryovers. The largest encumbrances were for capital projects ($3.8 million), while the largest carryovers were also for capital projects ($31.0 million) and The Rise ($19.1 million). Please refer to Attachment C for details on the carryovers.
Furthermore, the FY 2023-24 Amended Budget includes Council-approved budget adjustments from July 1 to March 31, 2024, totaling $5.2 million. It included $0.5 million in first-quarter adjustments, $0.2 million for a community resilience grant for EV chargers, and $4.4 million for capital projects and transfers.
The amended budget at the end of the third quarter is $208.1 million, funded with $152.8 million in revenue and $55.3 million in fund balance.
Third Quarter Financial Report Summary of Budget Adjustments by Fund As shown in the following chart, the amended budget is the adopted budget, plus encumbrances, budget carryovers, and Council-approved budget adjustments. The reflection of encumbrances and budget carryovers in the amended budget is a standard practice in municipal budgeting and aligns with the amounts in previous years, which have been approximately $80 million. Encumbrances and budget carryovers are appropriations approved in prior years that have not yet been spent and are still required for ongoing projects or obligations.
Please refer to Attachment C for detailed descriptions of the budget adjustments.
Discussion
The Third Quarter Financial Report, reported as of March 31, 2024, is a critical tool for the City to evaluate its current revenue outlook and make necessary adjustments to the budget in response to changing spending priorities. It provides an overview of the City's budget status, including its revenue outlook, expenditure patterns, and other key financial metrics. Additionally, the report helps the City ensure that it stays on track toward achieving its goals and objectives by providing valuable insights into the City's financial performance. By using this information to make informed decisions and take appropriate actions, the City can maintain its fiscal sustainability.
There are minimal requests for funding in the third quarter report. In addition, staff is also recommending defunding projects that have either been canceled or completed under budget and increasing sales tax revenue to better align year-end actuals with the budget. The City will continue to closely monitor revenue and expenditure trends in the coming months. This ongoing analysis is critical to ensuring that the City's budget remains responsive to the needs of its constituents and is aligned with the City's goals and objectives. By proactively managing its budget, the City can remain fiscally responsible and provide essential services and programs to its community.
General Fund
The chart below shows amended budget, third quarter, and year-end revenues and expenditures. 4-Year Comparison of Revenues, Expenditures, and Changes to Fund Balance ($ in millions)
The General Fund's historical financial data indicates that amended expenditures have often exceeded amended revenues, leading to a decrease in fund balance. However, when we look at actual revenues and expenditures, we have historically seen an increase to fund balance.
By continuing to monitor and manage its financial resources effectively, the City can ensure that it maintains an appropriate fund balance in the General Fund.
Revenue
General Fund revenue is $4.6 million, or 6%, lower than the same time last year due to changes in the City’s revenue sources as shown in the following table.
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Revenues General Fund
Sales Tax revenue is $22.7 million, representing a 16% decrease from the previous year. This decline was primarily due to the timing of payments from the California Department of Tax and Fee Administration (CDTFA), which are received two months in arrears. To provide some context, sales tax revenues for FY 2022-23 correspond to July 2022 to March 2023, while revenues for FY 2023-24 correspond to July 2023 to February 2024.
For FY 2023-24, the City budgeted $11.4 million in sales tax revenue, a significant reduction from prior years as the CDTFA audit of a taxpayer was projected to result in a $30 million loss in sales tax revenue. In October, the City received a letter from the CDTFA confirming the loss in sales tax; the CDTFA determined that the sales tax reported by the taxpayer was significantly overstated to the City, requiring the sales tax to be reallocated to other jurisdictions beginning April 2021 and continuing onwards. However, the taxpayer continues to allocate the sales tax to Cupertino, resulting in the City continuing to receive the sales tax revenue in dispute. Due to the uncertainty surrounding these revenues, the disputed sales tax revenue will be set aside in a designated Sales Tax Repayment Reserve.
Property Tax revenue increased by $0.6 million, or 3%, compared to last year. In 2023-24, the City’s property tax roll grew $1.411 billion, or 4.57%, year-over-year, compared to 6.65% for the county. The bulk of the increase was due to increases in residential properties by $1.3 billion, or 6.8%. This category makes up 62.4% of the net taxable value. Unsecured property tax increased by $76 million, or 7.1%. This category makes up 3.5% of the net taxable value. Lastly, commercial property values decreased by $91.5 million, or 1%. This category makes up 28.3% of the net taxable value.
As of June 2023, statewide home sales volume has declined for the last 9 months, due to high interest rates and low inventory. There were 19.7% fewer home sales in June than in June 2022; 46.5% fewer than at the peak in 2021. The state median home price in June was $838,260. This is 2.4% below the median a year ago, a smaller annual decline than in recent months. 2022 sale prices impacted values on the 2023/24 tax rolls. Value changes from 2023 sales through June are trending up each month but are below 2022 levels. The median sale price of Cupertino detached single-family homes from January through August 2023 was $2,900,000, a decrease of -$32,500 (-1.1%) from 2022's median sale price.
The City’s property tax base remains strong and HdL, the City’s property tax consultant, is currently projecting property taxes over the next five years as shown in the table below.
Transient Occupancy Tax (TOT) revenue decreased by $0.8 million, or 18%, compared to the previous year due to decreased travel, and is still lower than pre-pandemic levels. The average daily rates and occupancy rates for hotels are now closer to pre-pandemic levels, as shown in the table below.
Average Daily Rates and Occupancy Rates by Month
Hotels in Cupertino
Although TOT revenues have mostly recovered from the pandemic, the City's TOT revenues may continue to be affected in the long term due to telework and decreased business travel. Headwinds in the tech industry have resulted in layoffs and reduced spending in areas such as travel. Staff will continue to monitor economic regulations and other factors and report back on their impact on TOT revenues as part of the quarterly financial reports.
Utility Tax decreased by approximately $228,000, or 8%, over the previous third quarter period due to the timing of Utility User Tax (UUT) payments recorded.
Franchise Fees increased by approximately $228,000, or 13%. While the Franchise Fees show an increase, this was due to a one-time overpayment for October 2023 that was corrected with an underpayment in January 2024.
Other Taxes increased by approximately $124,000, or 13% primarily due to an increase in the collection of business license taxes and construction taxes.
Licenses and Permits decreased by approximately $7,500, or 0%, which is a nominal change from the prior year.
Use of Money and Property increased by approximately $0.6 million, or 30%, due to increased interest earnings from the City’s investment portfolio.
Intergovernmental Revenue decreased by $0.7 million, or 53%, over the same period last year as all remaining American Rescue Plan Act revenue was recognized in FY 2022-23.
Charges for Services increased by $0.6 million, or 7%, driven mainly by decrease in Cost Allocation expenses.
Fines and Forfeitures increased by $12,000, or 5%, primarily due to increased citations administered over the prior year.
Miscellaneous Revenue increased by approximately $235,000, or 20%, primarily due to the timing of a payment for sheriff services.
Transfers In decreased by $0.8 million, or 87%, due to the one-time transfer-in of funds received in the first quarter of the prior year to General Fund departments for a 10% non-Measure B local match for the I-280/Wolfe Road Interchange Improvements Project.
Other Financing Sources remain budgeted at zero dollars due to the timing of refundable deposit revenues received.
Expenditures
General Fund expenditures are down $3.6 million, or 5%, when compared to the same time last year. The following table shows the differences between General Fund expenditures as of the third quarter in the current fiscal year and the prior fiscal year:
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Expenditures General Fund
Salary and Benefits have decreased by approximately $1 million, or 4%. This decrease in compensation and benefits is primarily due to staff vacancies and the elimination of vacant positions in the FY 2023-24 Adopted Budget.
Materials costs have decreased by approximately $193,000, or 5%, primarily due to a decrease in general supplies offset by Public Works water and electricity costs.
Contract Services have increased by approximately $2.4 million, or 14%, primarily driven by the City’s community shuttle program and a rise in the City’s law enforcement contract with the Santa Clara County Sheriff’s Office.
Cost Allocation decreased by approximately $96,000, or 1%, primarily due to decreased Public Affairs and City Attorney Cost Allocation Plan (CAP) charges.
Capital Outlay costs increased by approximately $420,000, or 2578% mainly due to increased capitalizable facilities costs.
Special Projects increased by approximately $404,000, or 21%, due to fluctuations in one-time expenditures.
Contingencies were higher last year due to a leaf blower postcard printing expense.
Transfers Out decreased by approximately $5.4 million, or 45%, due to a transfer of funds to the Capital Reserve in FY2022-23 and a decrease in the transfer out to I&T Infrastructure in FY 2023-24.
Other Financing Uses decreased by approximately $220,000, or 55%, due to refundable deposit on-call contracts and special contracts in the Community Development Department contracts for environmental reviews and the Main Street Parking Study.
Special Revenue Funds
Revenue
Special Revenue Funds revenue is $1.2 million, or 15%, higher than the same time last year primarily due to an increase in intergovernmental revenue.
Comparison of FY 2022-23 and FY 2023-24
Special Revenue Funds Third Quarter Revenues
Other Taxes decreased by approximately $0.6 million, or 71%, primarily due to decreased park dedication fees received in the prior third quarter period for Alan Row.
Use of Money and Property increased by approximately $47,000, or 10%, due to increased interest earnings from the City’s investment portfolio.
Intergovernmental Revenue increased by approximately $1.3 million, or 53%, due to reimbursement from Measure B funds for 2022 pavement maintenance received during the current year mid-year period.
Charges for services decreased by approximately $52,000, or 5%, primarily due to revenues received in the prior third quarter period for a traffic impact fee related to the Alan Row project, in addition to a larger than average environmental storm drain clean-up reimbursement received last third quarter period.
Fines and forfeitures were relatively unchanged from the prior third year period.
Transfers In increased by approximately $424,000, or 14%, due to increased transfers to the Transportation Fund and capital projects.
Interfund transfers are the movement of cash between one or more funds. As part of the Adopted Budget process, transfers from the General Fund to other City funds serve as operating subsidies to ensure that each fund has a positive fund balance at the end of the fiscal year. Additionally, when Capital Improvement Program (CIP) projects are authorized by City Council, a transfer from the Capital Reserve to the appropriate fund is necessary to record the costs and activities of the project. For more information on the City’s operating and capital transfers, refer to pages 625-627 and 632-633 of the FY 2023- 24 Adopted Budget.
Expenditures
Special Revenue Funds expenditures are $3.1 million, or 31%, lower than the same time last year due primarily to decreases in capital outlays and special projects.
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Expenditures Special Revenue Funds
Salary and Benefits decreased by approximately $0.2 million, or 10%, primarily due to staff vacancies.
Materials decreased by approximately $0.04 million, or 9% primarily due to decreased Transportation expenditures.
Contract Services decreased by approximately $0.03 million, or 6%, primarily due to a decrease in street pavement maintenance.
Cost Allocation remained relatively unchanged compared to this time last year.
Capital Outlays decreased by approximately $1.7 million, or 45%, due to the Orange Avenue Sidewalk Improvements and Memorial Park Pond Repurposing projects in FY2022-23 offset by the Pumpkin/Fiesta Storm Drain project in FY2023-24.
Special Projects decreased by approximately $0.9 million, or 51%, due to a decrease in the Annual Asphalt project offset by an increase in the Annual Sidewalk, Curb, & Gutter project.
Transfers Out decreased by $0.2 million, or 32%, primarily due to a transfer from the Park Dedication Fund to the Capital Improvement Fund for the Memorial Park Specific Plan in FY 2022-23.
Debt Service Funds
Revenue
Debt Service Funds revenue is similar to last year.
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Revenues Debt Service Funds
Expenditures
Debt Service Funds expenditures are similar to last year.
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Expenditures Debt Service Funds
Capital Projects Funds
Revenue
Capital Projects Funds revenue are higher than last year due to increased transfers to fund capital projects.
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Revenues Capital Projects Funds
Expenditures
Capital Projects Funds expenditures increased by $2.7 million, or 69% due to increased transfers to fund capital projects and reduced expenditures for capital projects.
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Expenditures Capital Projects Funds
Enterprise Funds
Revenue
Enterprise Funds revenue decreased by $0.6 million, or 11%, lower than the same time last year due to primarily to decreased transfers in.
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Revenues Enterprise Funds
Use of Money and Property decreased by $27,000, or 5%, due to decreases in field permit rentals and decreased interest earnings from the City’s investment portfolio.
Intergovernmental Revenue decreased by $84,000, or 100% as there was a one-time grant to assist with meeting the requirements of Senate Bill (SB) 1383, the State’s Short-Lived Climate Pollutant Reduction Strategy in FY 2022-23.
Charges for services decreased by $93,000, or 2%, primarily due to decreased revenues from Parks and Recreation programs and classes.
Transfers In decreased by $0.4 million, or 100%, due to decreased transfers from the General Fund.
Expenditures
Overall expenditures remained relatively unchanged from the same time last year.
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Expenditures Enterprise Funds
Salary and Benefits increased by approximately $0.1 million, or 7%, primarily due to negotiated cost-of-living adjustments approved by the City Council in November 2023.
Materials decreased by approximately $55,000, or 18%, primarily due to decreases in general supplies and small tools and equipment.
Contract Services decreased by approximately $0.3 million, or 9%, primarily due to decreases in programs and classes provided by Parks and Recreation.
Cost Allocation increased by approximately $0.1 million, or 19%, primarily due to increased equipment reimbursement and CAP charges.
Capital Outlays increased by $14,000, or 3,997%, due to the sports center restroom floor replacement project.
Special Projects increased by approximately $0.2 million, or 102%, due to projects that differ in scope and timing from year to year.
Other Financing Uses decreased by approximately $0.1 million, or 100%, due to lower depreciation expenses.
Internal Service Funds
Revenue
Internal Service Funds revenue decreased by $2.3 million, or 33%, lower than the same time last year due to decreases in transfers in.
Comparison of FY 2022-23 and FY 2023-24 Third Quarter Revenues Internal Service Funds
Use of Money and Property remained relatively unchanged from the same time last year.
Charges for Services remained relatively unchanged from the same time last year.
Transfers In decreased by $2.0 million, or 59%, due to decreased transfers from the General Fund to the Innovation & Technology and Compensated Absences Fund.
Other Financing Sources decreased by $328,000, or 100%, due to decreased vehicle/equipment replacement and worker’s compensation expenses.
Expenditures
Internal Service Funds expenditures decreased by $0.2 million, or 4%, lower than the same time last year due primarily to decreases in other financing uses.
Comparison of FY 2021-22 and FY 2022-23 Third Quarter Expenditures Internal Service Funds
Salary and Benefits remain relatively unchanged than the same time last year.
Materials increased by $147,000, or 15%, mainly due to increases in Innovation & Technology software expenditures.
Contract Services increased by $85,000, or 8%, largely due to increases in Innovation & Technology software services.
Special Projects increased by $97,000, or 21%, due to projects that differ in scope and timing from year to year.
Transfers Out increased by $76,000 due to transfers from the General Fund for City Work Program – License Plate Readers and Senior Center Access Controls.
Other Financing Uses decreased by $616,000 due to decreased depreciation expenses.
Budget Adjustment Requests
The City's departments regularly evaluate their budget expenditures throughout the fiscal year to ensure they stay within their budget appropriations. In case of any variance, they can request budget adjustments as necessary as part of the quarterly reports.
As of the third quarter, some departments are requesting budget adjustments to ensure that they stay within their budget appropriations by year-end. In addition, staff is also recommending defunding some projects and adjusting sales tax to align the budget with year-end actuals. The recommended adjustments are summarized below.
Recommended Budget Adjustments
Adjust Sales Tax Revenue
The City has planned for a significant decrease in sales tax revenue due to a decision by the California Department of Tax and Fee Administration (CDTFA). This decision outlined both a repayment for previously received sales tax and an ongoing reduction totaling around $30 million. In October 2023, the City received a determination letter from the CDTFA, specifying a potential repayment amount up to April 2023. Utilizing this information, the City's staff estimated likely payments until June 2023, leading the City Council to approve the creation of a $56.5 million sales tax repayment reserve to cover this obligation.
Currently, Sales Tax revenues have surpassed initial forecasts because the taxpayer in question has maintained their reporting practices, and the City continues to receive disputed sales tax revenue. Recent projections from HdL, the City’s sales tax consultant, suggest an expected revenue of $30.8 million in FY 2023-24, significantly higher than the initially budgeted $11.4 million, which accounted for a decrease due to the CDTFA audit.
Given these developments, staff proposes revising the estimate for sales tax revenue upward by $19.4 million. As this additional revenue is in dispute with the CDTFA, it will be allocated to the Sales Tax Repayment Reserve.
Supplemental Law Enforcement Services
Private entities may request standby law enforcement services through the City for special events or crime deterrence. In FY 2023-24, the actual number of requests received by private entities exceeded the original estimate significantly due to increased special events. The one-time increase is approximately $250,000. Expenditures are offset by revenues from the private entities requesting the service, including a 15% administrative fee. All actual expenditures will be recovered.
Increased Legal Costs
Increased estimated legal costs due to higher-than-anticipated litigation costs.
Defunding Projects
The following projects are defunded because they were completed under budget or are proposed to be cancelled due to budget reductions.
Defund - CWP Analyze Potential Revenue Measures
On February 21, 2024, City Council approved staff’s recommendation to forego opinion polling and additional efforts at a November 2024 revenue-generating ballot initiative. As a result, staff is looking to defund the remaining funds.
Defund - CWP Cyber Security Public Education
Partial Defund of Cyber Security Public Education 2023 completed project. Staff successfully carried out the one-time community event on September 16, 2023.
Defund - FY 2022-23 Software Budget Carryover
Defund of an approved FY 2022-23 software carryover. The budget was requested to fund the ERP implementation and hire adjunct staffing needed to assist with migrating data, performing quality checks, and training. Due to budget reductions, this project was not implemented, and I&T is looking to defund as part of Third Quarter.
Defund - FY 2022-23 Training Budget Carryover
Defund of an approved FY 2022-23 training carryover. The budget was requested to fund ERP Evaluation training and webinar workshops. Due to budget reductions, this project was not implemented, and I&T is looking to defund as part of Third Quarter.
Defund - Performance Management App Project
Defund of the Performance Management App project, approved of part of the FY 2021-22 Adopted Budget. Due to budget reductions, this project was not implemented, and I&T is looking to defund as part of Third Quarter.
Defund - Project Dox Project
Partial defund of Project Dox move to SaaS environment. Staff successfully negotiated pricing. I&T is looking to defund the remaining funds as part of Third Quarter.
Defund - ERP Phase III
Defund of Enterprise Resource Planning (ERP) Phase III Implementation due to budget reductions. I&T is looking to defund the project as part of Third Quarter.
Defund - Security Framework and Audit
Partial defund of project. Staff have completed the agreement and are looking to defund the remaining funds as part of Third Quarter.
Defund - Council Voting System and Timer
As part of the FY 2020-21 Adopted Budget, Council approved the Council Voting System and Timer project. The project scope consisted of replacing the current technology to record votes and time oral communications. After funds were approved, the project was on hold until a Software-as-a-Service (SaaS) solution was available, thus the budget was carried over. Due to budget reductions, staff did not implement a solution and are looking to defund the project as part of Third Quarter.
Defund - Public Bike Smart Rack DockTech
Staff did not implement a solution due to budget reductions and are looking to defund the project as part of Third Quarter.
Defund - Facility Battery
Partial defund of project. Staff have procured a Facility Battery and are defunding the remaining funds as part of Third Quarter.
Defund - Support for the Unhoused
The City successfully received a County grant of $50,000 to offset part of the original budget, so the Support for the Unhoused budget will be reduced from $100,000 to $50,000.
Defund - Overpasses and Medians Trench Work
Staff did not implement a solution due to service level reductions and is looking to defund the project as part of Third Quarter.
Defund - City Hall Electrical Preventative Maintenance
The City Hall Electrical Preventative Maintenance project was completed under budget in November 2023. Staff requests to defund the remaining balance of $9,500.
Defund - Shuttle Pilot Program
The Community Shuttle Pilot Program (Via) was completed under budget. Staff requests to defund the remaining balance of $10,574.
Defund - Traffic Engineering Adaptive Traffic Signaling The Traffic Engineering Adaptive Signaling project was completed under budget in August 2023. Staff requests to defund the remaining balance of $5,970.
Defund - Traffic Signal Maintenance Adaptive Signaling
The Traffic Signal Maintenance Adaptive Signaling project (controller software upgrades) was completed under budget in August 2023. Staff requests to defund the remaining balance of $16,042.
Defund - Sustainable Infrastructure Audit
Staff did not implement a solution due to budget reductions and are looking to defund the project as part of Third Quarter.
Defund - 4H Fence
The 4H perimeter fence project was completed under budget in September 2023. Staff requests to defund the remaining balance of $5,400.
Defund - Windscreens
The Sports Center Windscreens project was completed in September 2023. Staff requests to defund the remaining balance of $691.
Transfer from Storm Drain Improvement (210) to Capital Reserve (429) Calabazas Creek emergency storm drain repairs were originally funded by a transfer from the Capital Reserve (Fund 429). After project completion, staff reviewed other available funding sources and concluded that the Storm Drain Improvement Fund (Fund 210) would be an appropriate funding source as this is funded by the Capital Reserve for storm drain projects. Staff is recommending that $300,000 be transferred from Fund 210 to Fund 429. The additional costs of the project $460,000 will be funded by $300,000 from Fund 210 and $160,000 from Fund 429. If approved, Fund 210 is estimated to end the fiscal year with $50,000 in fund balance.
Fund Balance
The General Fund ended FY 2021-22 with total fund balance of $110.2 million. Staff anticipates the General Fund will end FY 2022-23 with $138.8 million in fund balance, an increase of $28.7 million from the prior year due to FY 2022-23 ending with revenues higher than expenditures.
As of third quarter, staff anticipates the General Fund will end FY 2023-24 with $160.7 million in fund balance. It’s important to note that the only portion available for use, according to City policy, is unassigned funds. Committed funds, such as the Sales Tax Repayment Reserve, are set aside for specific purposes determined by City Council resolution. Restricted funds, such as the Section 115 Pension Trust, are allocated for specific purposes stipulated by external resource providers. Assigned funds are reserved for encumbrances. Of the total fund balance, $37.3 million is unassigned and available to be used.
Approximately $10.7 million of unassigned fund balance is attributed to Vallco Town Center plan check and building inspection revenues that were carried over. These revenues will continue to be carried over each year until the services are rendered, and the revenues are recognized.
On October 10, 2023, the City established a committed Sales Tax Repayment Reserve with an initial allocation of $56.5 million. This reserve is designed to address a potential adverse CDTFA decision and the uncertain outcome of the anticipated legal challenge. Committed fund balance, as described on page 165 of the FY 2023-24 Adopted Budget, “includes amounts that can only be used for the specific purposes determined by formal action of the City’s highest level of decision-making authority, the City Council. Commitments may be changed or lifted only by the City taking the same formal action (resolution) that imposed the constraint originally.” The reserve was funded as follows:
$40.5 million from General Fund Unassigned fund balance. $10.0 million from the General Fund Committed Capital Projects Reserve. $6.0 million from the General Fund Committed Economic Uncertainty Reserve.
The initial allocation to the Sales Tax Repayment Reserve was $56.5 million, accounting for disputed sales tax revenue received between April 1, 2021, and June 30, 2023. Anticipating receiving additional disputed sales tax revenue by June 30, 2024, staff proposes increasing the Sales Tax Repayment Reserve to $74.5 million.
General Fund Classification of Fund Balance
To date, the City’s external auditors have not completed their review of the City’s financials. Revenue, expenditure, and fund balance totals listed in this report are preliminary and subject to change after a full review by the City’s auditors. City Staff does not anticipate many, if any, changes to these figures. In the FY 2024-25 Proposed Budget, staff intends to update the Economic Uncertainty Reserve annually to align with the policy of 2 months of expenditures plus 1.5 months of revenues.
Per the City’s Fund Balance Policy, unassigned fund balance over $500,000 is to be used in the following order to replenish committed/restricted fund balances with any remaining balances to be placed in the Capital Reserve:
Economic Uncertainty Reserve
Sales Tax Repayment Reserve
CalPERS Reserve (Section 115 Pension Trust)
Sustainability Reserve
Unassigned
As of third quarter, all priority areas are fully funded.
Staffing
As of March 31, 2024, the FY 2023-24 Amended Budget includes a total of 212 full-time equivalent (FTE) positions.
City Manager Discretionary Fund
In the FY 2023-24 Adopted Budget, City Council approved $50,000 in funding for the City Manager Discretionary Fund. The quarterly financial reports will detail the City Manager’s use of the discretionary fund and may include recommendations to replenish depending on the extent and nature of use. As of March 31, 2024, the City Manager’s Discretionary Fund has not been used.
Carryovers and Budget Adjustments
The quarterly financial reports provide details on carryovers and budget adjustments. Encumbrances are outstanding commitments tied to unfilled purchase orders or contracts, which are rolled over to the following fiscal year until those obligations are fulfilled or terminated. Budget carryovers are unencumbered funds for unfinished projects carried over to the following fiscal year to be spent for the same purpose for which they were approved. Budget adjustments are amendments to the budget that are approved by Council via resolution. The amended budget is the adopted budget, plus encumbrances, budget carryovers, and Council-approved budget adjustments. See Attachment C for details on carryovers and budget adjustments.
Special Projects
The quarterly financial reports provide a status update on special projects including the budget, amount spent, and estimated completion date. Special projects are operational projects, often one-time, that are budgeted in separate accounts for transparency and ease of tracking. If a special project is not completed by the end of a fiscal year, staff may request a carryover to the subsequent fiscal year. See Attachment F for FY 2023-24 special projects as of March 31, 2024.
Grants
The City entered into a contract with California Consulting in February 2019 to identify and apply for State and Federal grants on behalf of the City. The contract originated in Public Works and was transferred to Administrative Services in FY 2022-23. The goals of this pilot program were to centralize the grant function and to maximize grant opportunities. However, as part of a Citywide budget reduction strategy, the contract with California Consulting ended on June 30, 2023. With the elimination of this contract, departments are now responsible for identifying and applying for grants.
Staff provides updates on the status of grants as part of the quarterly financial reports. During FY 2021-22, FY 2022-23, and FY 2023-24, the City applied for 27 competitive grants totaling $36.7 million. To date, the City has been awarded $42.1 million. Furthermore, during FY 2018-19, 2019-20, and 2020-21, the City applied for 11 additional grants totaling $11.2 million. Of these 10 grants, the City has been awarded $9.2 million. Also, during FY 2021-22, FY 2022-23, and FY 2023-24, the City applied for 24 non-competitive grants totaling $3.2 million. These numbers have been revised from prior reporting periods to reflect that the Santa Clara County Home Investment Partnership (HOME) Consortium grants are available each year. Cities in the County can apply for these funds for future Fiscal Years as a part of the County Consortium.
See Attachment G for further details on grants applied, pending, awarded, and not awarded.
Capital Improvement Program
The quarterly financial reports provide a revised estimate and update on Capital Improvement Program (CIP) projects. See Attachment H for further details.
Sustainability Impact
No sustainability impact.
Fiscal Impact
The Third Quarter Financial Report shows the City is positioned as anticipated. City staff recommends a $0.5 million decrease in appropriations, a $20.0 million increase in revenues, and a $20.5 million increase in fund balance. The City will continue to monitor its revenue and expenditure trends closely to ensure it remains on track toward achieving its budgetary goals and objectives.
California Environmental Quality Act
Not applicable.
Prepared by: Thomas Leung, Budget Manager
Reviewed by: Kristina Alfaro, Director of Administrative Services Matt Morley, Assistant City Manager
Approved for Submission by: Pamela Wu, City Manager
Attachments:
A – Fiscal Year 2023-24 Third Quarter Financial Report
B – Draft Resolution
C – Description of Carryovers and Adjustments as of March 31, 2024 D – Description of Budget Transfers as of March 31, 2024 E – FY 2023-24 Third Quarter Recommended Adjustments
F – FY 2023-24 Third Quarter Special Projects Update as of March 31, 2024 G – Competitive and Non-Competitive Citywide Grants Tracking H – FY 2023-24 Third Quarter CIP Project Status
17 Encumbrances are outstanding commitments tied to unfilled purchase orders or contracts, which are rolled over to the following fiscal year until those obligations are fulfilled or terminated. Budget carryovers are unencumbered funds for unfinished projects carried over to the following fiscal year to be spent for the same purpose for which they were approved.
The cost allocation plan (CAP) allocates indirect and overhead costs to the departments that benefit from them. Costs incurred by central service providers (e.g., City Manager's Office, City Attorney's Office, Finance, Human Resources, Facilities, etc.) are charged to the departments that benefit from the services (e.g., Parks & Recreation). The purpose of the CAP is to help the City to determine the true cost of providing services.