EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: February 15, 2022
TO: Honorable Mayor and Members of the City Council
VIA: Jaime M. Fontes, City Manager
BY: Tomohito Oku, Finance Director
SUBJECT: Mid-year Budget Amendment FY21-22
Recommendation
Adopt a Resolution approving:
1. Amendments to the Fiscal Year (FY) 2021-22 Budget
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 2: Enhance Economic Vitality
Priority No. 3: Increase Organizational Effectiveness and Efficiency Priority No. 5: Improve Communication and Enhance Community Engagement Background
The City Council approved the FY 2021-22 Adopted Budget on June 15, 2021. The Adopted Budget (excluding Successor Trust) reflects total revenues of $43M and total expenditures of $41.4M resulting in positive net change in fund balance of $1.6M across all funds.:
Description
General
Fund /
General
Reserves
Restricted
Funds
Capital
Funds
Enterprise
Funds
TOTAL CITY
FUNDS
Total Revenues 28,920 9,802 271 3,996 42,989
Total Expenditures (29,398) (7,828) (377) (3,815) (41,418) Net Sources / (Uses) (478) 1,974 (106) 181 1,571
Net Transfers 478 (699) 221 - -
Change in Fund
Balance - 1,275 115 181 1,571
(In 000's)
FY 21-22 Adopted - Citywide Funds
Since the adoption, we continue to experience COVID-19 negative impacts on the City organization in terms of revenue reductions, community needs and distress, diversion of resources, remote work within aged technology systems, and shifting economic and social trends. The City is also experiencing a high rate of employee turnover creating 16 vacancy FTEs which appears to be impacted by the nationwide phenomena called “Great Resignation”.
The turnover has been providing salary saving to the City but inversely increasing the cost in professional services which were previously approved by Council during previous meetings and included in “Approved/Carry-forward” columns in the following tables. However, salary savings are not included in such columns or “Proposed” reductions in the tables. The City appropriately estimated the potential for severe impacts during FY 2021-22, and mid-year trend information supports the general estimates and approach with noted changes, either positive or negative, in certain tax resources. What remains uncertain is the recovery trajectory of impacted industries - and what a “normal” economic cycle might be. For East Palo Alto, a lack of commercial diversity in revenue resources requires that we remain cautious and aware of the heightened risk (i.e. uncertainty) in assumptions regarding recovery to “normalcy”. We believe our budget assumptions keep us steady for the very near-term under current conditions.
Recent trend information supports maintaining the conservative budget approach adopted by Council and additionally supports a cautionary path forward in expenditure decisions due not only to continued economic impacts of the pandemic, but also, due to the City’s existing revenue challenges broadly stated as:
1) Extended gaps in taxable development projects and uncertainty in timing of development completion due to underlying infrastructure challenges1 and need to analyze and support specific plan update in the Ravenswood Business District. 2) Property tax funding shortfalls related to State legislation regarding school funding and in-lieu vehicle license fees.
3) Recent property tax funding impacts related to Redevelopment Dissolution emerging case law regarding pre-existing agreements of former Redevelopment Agencies.
These challenges are partially offset by fiscal resiliency measures such as significant improvements to the Comprehensive Fee Schedule, new impact fees2, and continuing to address improvements in cost recovery of services performed.
Analysis
General Fund
The General Fund Amended net change in fund balance increased a total of $0.8M; from zero to $0.8 M. The amended/carryforward changes relate to Council amendments previously approved including absorption of PD personnel costs by ARPA fund for $3.4M offset by a reduction of $1.3M transfer-in from the same fund. There were additional capital expenditures of $1.6M mainly related to SFCJPA that were previously approved by the Council. The proposed mid-year changes are discussed below:
Description
FY 21-22
Adopted
Amended/
Carry -
Forward
Proposed
Total General
Fund/Reserves
Total Revenues 28,920 99 (270) 28,749
Total Expenditures (29,398) 886 2,958 (25,555)
Net Sources / (Uses) (478) 985 2,688 3,194
Net Transfers 478 (1,301) (1,558) (2,381)
Change in Fund Balance - (317) 1,130 813
(In 000's)
FY 2021-22 Q2 - General Fund and Reserves
General Fund Revenues
The General Fund amended (after proposed) decreased in revenues equals $0.2M which is mainly attributable to increases in tax revenue including Property tax in-lieu of VLF ($1.0M), TOT ($0.2M), Utility taxes ($0.13M) offset by reductions in sales tax revenues and Passthrough development revenues for $0.2M and $1.4M, respectively. Since Pass-through development revenues have associated costs reductions, there is no significant impact on the reserve. The table below shows comparison by revenue source between FY21 audit, FY22 adopted and FY22 Mid-year amended.
FY 2020-21
AUDIT
FY 2021-221
ADOPTED
FY 2021-22 MID
YEAR
Property Tax $ 14,320,885 $ 13,935,000 $ 14,935,000
Sales Tax $ 5,422,953 $ 5,575,000 $ 5,375,000
Transient Occupancy Tax $ 152,771 $ 550,000 $ 750,000
Business License Tax $ 1,223,696 $ 1,280,000 $ 1,280,000 Other Revenues $ 5,453,463 $ 4,485,000 $ 4,714,040
Subtotal $ 26,573,767 $ 25,825,000 $ 27,054,040
Pass-Through Development $ 1,614,186 $ 3,095,000 $ 1,695,000 Total Revenues $ 28,187,953 $ 28,920,000 $ 28,749,040
Current trends by category are as follows:
Property tax - the shortfall in Property tax in-lieu of vehicle license fee (VLF) was less significant than our estimate approximately for $1.0M. This shortfall is currently projected as a reduction that will continue to occur and grow as more San Mateo County schools become “basic aid” but ultimately will be repaid by the State. Some encouraging news is that the State of California agreed to backfill the FY 2020-21 shortfall. While the State consistently has backfilled smaller shortfalls in the past, there is no legislative mandate to provide for State replacement funding, and there is no certainty regarding the State’s future response as the shortfall continues to grow. In addition, unrelated Court challenges also will result in loss of RPTTF of approximately $500,000 annually with some current impact deferred to next year.
Sales tax - due to uncertainty of sales tax revenues, Finance is providing an estimate of $5.4M which is $0.2M less than the adopted estimate and outside consultant estimates of $5.6M but down only about 10% from pre-COVID levels ($6.0M) in FY18-19. We will continue to monitor monthly payments to affirm $5M range estimate.
Transient Occupancy Tax - current trends indicate a positive budget adjustment of $0.2M with high uncertainty. The collection remains suppressed at approximately 69% below pre-COVID levels, East Palo Alto has extreme concentration risk, the hotel was experiencing high “private equity” turnover and is located in high technology hub where business travel is severely impacted.
Business License Tax - too early to determine final status, notable improvement in gross rental receipts tax as overall tax is only down approximately 19% from normal operating estimates.
Regular business license has cases pending determination, and to date receipts remain notably lower than pre-COVID activity.
Other Revenues - In FY21, we experienced notable improvements in counter activity for permits and charges for services, combined with increased fees under the updated Comprehensive Fee schedule, improved estimates significantly. However, it’s too early to determine final status for FY22 considering possible mean reversion from the previous year’s overachievement.
Pass through Development - these revenues are offset by contractual costs. Given staff disruption due to remote work, it may not be likely the City will complete $3.1M of work effort.
Current trends indicate a reduction of $1.4M in the revenues. However, the net impact on reserves is minimal since reduced revenues will be offset by reduced expenditures. Major projects include University Circle II, Job Train, and RBD Specific Plan update.
General Fund Expenditures
The General Fund Amended decrease in expenditures, excluding transfers, totals $3.8M.
Notable changes in expenditures include PD personnel costs absorbed by ARPA fund for $3.4M; offset by other amendments previously approved by Council. The proposed changes include $1.4M reductions associated to Pass-through development costs mentioned previously in the discussion of General fund revenue above. The proposed reductions do not include amounts for estimated vacancy savings of approximately $1.1M including the PD personnel costs transferred to ARPA fund.
General Fund transfer-out increased $1.6M due to reclassification of amended capital expenditures previously approved for $1.6M including SFCJPA Reach II Flood Project ($1.5M) and restoration of capital reductions ($0.1M). Additionally, General fund transfer-in decreased for $1.3M attributable to cancelation of ARPA fund transfer consequential to the PD personnel costs absorption by ARPA fund totaling a net increase in General fund transfers for $2.9M as noted below:
FY 2021-22
ADOPTED
FY 2021-22
MID YEAR
State Gas Tax $ 64,500 $ 64,500
NPDES $ 156,570 $ 156,570
Successor Housing $ 281,130 $ 281,130
Drainage District $ 100,140 $ 100,140
ARPA $ (1,301,450) $ -
Capital Improvement $ 220,915 $ 1,778,660
Total Transfers $ (478,195) $ 2,381,000
The table below reflects expenditure amendments by department:
DEPARTMENT
FY 2021-22
BASELINE
FY 2021-22
ADOPTED
FY 2021-22
MID-YEAR
AMENDED $ Chg
%
Chg
City Council 192,770 175,250 175,250 - 0.0%
City Attorney 846,435 816,435 816,435 - 0.0%
City Clerk 375,260 299,130 299,130 - 0.0%
City Manager 1,540,455 1,588,285 1,695,585 107,300 7.0% Administrative Services 1,445,490 1,427,985 1,527,775 99,790 6.9% Finance 1,285,745 1,338,035 1,343,035 5,000 0.4%
Community Development 2,967,670 2,609,550 3,221,730 612,180 20.6% CEDE - Pass Through 1,500,000 2,700,000 1,300,000 (1,400,000) -93.3% Public Works 4,040,090 3,951,150 4,038,990 87,840 2.2%
PW - Pass Through 100,000 100,000 100,000 - 0.0%
Police 13,004,670 13,011,410 9,755,350 (3,256,060) -25.0% Non-Departmental
Capital/Technology 1,306,250 579,085 458,380 (120,705) -9.2% Insurance and Settlements 997,250 615,000 615,000 - 0.0% Other Non-Departmental 638,540 1,020,790 1,042,030 21,240 3.3% Overhead Allocation (833,910) (833,910) (833,910) - 0.0% Sub-total 29,406,715 29,398,195 25,554,780 (3,843,415) -13.1% Transfers 815,735 823,255 2,381,000 1,557,745 191.0%
Total Expenditures $ 30,222,450 $ 30,221,450 $ 27,935,780 $ (2,285,670) -7.6% A detail mid-year comparison of current to prior year General Fund budget to actual is presented in Attachment 1. In comparison to the prior year, the General Fund budget, as proposed, appears within the boundaries of recent mid-year trends indicating the budget overall is within a reasonable range given current information inputs and our conservative approach.
Restricted Funds
The Restricted Funds Amended net change in fund balance decreased $0.8M from $1.3M to $0.5M. The amended/carryforward changes relate to Council amendments previously approved including the $3.4M PD personnel costs absorption by ARPA fund from General fund offset by the counterpart reduction in transfer ($1.3M). There are small capital expenditures carried forward from NPDES fund, Lighting fund and Measure W fund totaling about $0.5M as well as encumbrances carried forward from Federal and State grant fund, Measure HH fund and Local grant fund totaling about $0.4M. The proposed mid-year changes include a slight increase in TOT revenues in the CYSFF and Affordable Housing TOT funds by $50K or $25K in each fund. The proposed revenues also includes $240K CalHome grant with associated loan disbursements for the same amount which is included in the proposed expenditures offsetting a $1.7M reduction in proposed expenditures for loan matching via HEART (965 Weeks) previously approved by the Council but delayed in process and will be carried forward to the next year. The following table summarizes the amended changes in restricted funds; Description
FY 21-22
Adopted
Amended/
Carry -
Forward
Proposed
Total
Restricted
Total Revenues 9,802 448 290 10,540
-
Total Expenditures (7,828) (4,320) 1,460 (10,688)
Net Sources / (Uses) 1,974 (3,871) 1,750 (147)
Net Transfers (699) 1,301 - 602
Change in Fund Balance 1,275 (2,570) 1,750 455
(In 000's)
FY 2021-22 Q2 - Restricted Funds
Capital Funds
The Capital Funds Amended net change in fund balance increased $0.2M from $0.1M to $0.3M. The amended/carryforward changes relate to carryforward capital balances for the Bay Road capital project for about $3.6M and additional change orders related to Bay Road project for about $2.3M approved in December 2021 - which is primarily grant-funded with required City matching funds which reflects an increase in grant revenues for $4.8M. The proposed mid-year changes include additional capital transfers from the General Fund for reclassification of amended capital expenditures previously approved for $1.6M including SFCJPA Reach II Flood Project ($1.5M) and restoration of capital reductions ($0.1M) as mentioned previously in General fund expenditure discussion above. The following table summarizes the amended changes in Capital funds:
Description
FY 21-22
Adopted
Amended
/ Carry -
Forward
Proposed
Total
Capital
Total Revenues 271 5,134 - 5,405
Total Expenditures (377) (6,490) - (6,867)
Net Sources / (Uses) (106) (1,356) - (1,462)
Net Transfers 221 - 1,558 1,779
Change in Fund
Balance 115 (1,356) 1,558 317
(In 000's)
FY 2021-22 Q2 - Capital Funds
Enterprise Funds
The Enterprise Funds Amended net change in fund balance decreased $0.6M from $0.2M positive to $0.4M negative. The amended/carryforward changes relate to encumbrances carryforwards for a comprehensive water asset management plan and water infrastructure design, and Council approval for a water service master plan. No further proposed changes.
Description
FY 21-22
Adopted
Amended
/ Carry -
Forward
Proposed
Total
Enterprise
Total Revenues 3,996 - - 3,996
Total Expenditures (3,815) (561) - (4,376)
Net Sources / (Uses) 181 (561) - (380)
Net Transfers - - - -
Change in Fund Balance 181 (561) - (380)
(In 000's)
FY 2021-22 Q2 - Enterprise Funds
Fiscal Impact
Total proposed amended budget is as follows for fiscal year 2021-22:
Description
General
Fund /
General
Reserves
Restricted
Funds
Capital
Funds
Enterprise
Funds
TOTAL
CITY
FUNDS
Total Revenues 28,749 10,540 5,405 3,996 48,690
Total Expenditures (25,555) (10,688) (6,867) (4,376) (47,485) Net Sources / (Uses) 3,194 (147) (1,462) (380) 1,205
Net Transfers (2,381) 602 1,779 - -
Change in Fund
Balance 813 455 317 (380) 1,205
FY 21-22 M id Year Amended - Citywide Funds
(In 000's)
Brief Overview of Risk Environment Framework: COVID-19
Organizational risk is often associated with financial asset controls and reporting; however, within the context of “Enterprise Risk Management” risk is viewed more broadly as both challenges and opportunities regarding organizational ability to meet strategic objectives.
As such, the COVID-19 global pandemic is a sustained event with potential impacts to the City’s strategic objective environment due to remote work protocol, diversion of staff resources for emergency response, and direct impact of high employee absence due to COVID-19 quarantine, illness, or family-care needs.
During discussions about identified resource or technical organizational needs related to a challenge or an opportunity, it is important to know the basis for the request is the application of principles of the risk environment framework, as excerpted from the study session of General Reserves Risk Study held on September 29, 2020:
As the City remains in a sustained COVID-19 environment, we continue to assess the organization and the sustained COVID-19 potential impacts in relation to existing conditions.
Requests for temporary positions, technical studies, new technology, and changing organizational skill requirements emanate from an assessed and perceived need to address the City’s organizational opportunities and challenges.
Environmental
The action being considered by the City Council is exempt from the California Environmental Quality Act (CEQA) because it is not a “project” pursuant to 15378(b)(4) because it is a fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant impact on the environment.
Attachments
1. 2022.02.15 - Resolution Mid Year Budget - VA
2. Attachment 1