CITY COUNCIL STAFF REPORT
Meeting: October 15, 2024
Subject
Unassign funds from the Committed Sales Tax Repayment Reserve Recommended Action
Approve an amendment to the City’s Committed, Unassigned Fund Balance, and Use of One Time Funds Policy to uncommit $74.5 million dollars from the Sales Tax Repayment Reserve, resulting in those funds becoming unassigned fund balance Reasons for recommendation
The City has reached a settlement with California Department of Tax and Fee Administration (CDTFA) on previously disputed sales and use tax revenues.
Background
CDTFA is responsible for administering the distribution of sales and use tax in California. Businesses in California must register for a sales tax permit, collect taxes from customers, and report their sales taxes accurately and timely. These taxes, along with information about their allocation to jurisdictions, are then forwarded to the CDTFA, which distributes them to the appropriate jurisdictions. Additionally, the CDTFA conducts audits on businesses to ensure compliance with tax laws and regulations.
In October 2023, to prepare for a potential adverse CDTFA decision and the uncertain outcome of the anticipated legal challenge, City staff recommended, and City Council approved the establishment of a committed General Fund Sales Tax Repayment Reserve. Committed fund balance, as described on page 167 of the FY 2024-25 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 that imposed the constraint originally.” The City Council approved the creation of Sales Tax Repayment Committed Reserve at $56.5 million for the period covering April 2021 through June 30, 2023. In May 2024, City Council approved increasing the reserve to $74.5 million to account for the estimated disputed sales tax to be received through June 30, 2024. In June, the City Council approved changes to the Committed, Unassigned, and Use of One-Time Fund Balance allowing the Sales Tax Repayment Reserve to grow up to $77.6 million, accounting for estimated interest earnings. However, the Council did not take formal action to officially increase the Sales Tax Repayment Reserve at that time or at the start of the current fiscal year. As a result, staff is requesting the $74.5 million, approved by Council as part of the FY2023-24 Third Quarter Financial Report, be uncommitted.
On October 2, the City reached a settlement with CDTFA, rendering the maintenance of the Sales Tax Repayment Reserve unnecessary. Staff recommends that City Council uncommit the funds in Sales Tax Repayment Reserve and transfer the funds to the unassigned fund balance. Unassigned fund balance is defined in page 167 of the FY 2024-25 Final budget as “the residual classification for the General Fund and includes all amounts not contained in other classifications. Unassigned amounts are technically available for any purpose”, and the General Fund is the only fund that would have an unassigned fund balance, as other fund types (e.g., Special Revenue, Debt Service, Capital Projects, Enterprise, and Internal Service) are either restricted, committed, or assigned.” Sustainability Impact
No Sustainability Impact.
Fiscal Impact
Uncommitting the funds does not appropriate the dollars for spending. Council must take formal action as part of the budget process to appropriate the funds for use.
Staff will bring a proposed spending plan for these one-time dollars to Council for review and approval as part of the FY 2024-25 First Quarter Financial Report in November.
Uncommitted dollars will become unassigned fund balance. Total estimated Fund Balance in the General Fund will remain unchanged from the FY 2024-25 Final Budget at $150.8 million.
California Environmental Quality Act Not applicable
Not Applicable.
Prepared by: Jonathan Orozco, Finance Manager
Reviewed by: Kristina Alfaro, Director of Administrative Services Christopher Jensen, City Attorney
Tina Kapoor, Interim Assistant City Manager
Approved for Submission by: Pamela Wu, City Manager
Attachments:
A - Redlined Policy
B - Clean Policy