EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: February 21, 2023
TO: Honorable Mayor and Members of the City Council
VIA: Melvin Gaines, City Manager
BY: Tomohito Oku, Finance Director
Bo-Kyoung Kim, Financial Services Manager
SUBJECT: Mid-year Budget Amendment FY22-23
Recommendation
Adopt a Resolution approving Amendments to the Fiscal Year (FY) 2022-23 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 2022-23 Adopted Budget on June 7, 2022. The Adopted Budget (excluding Successor Trust) reflects total revenues of $50.8M and total expenditures of
$48.8M resulting in positive net change in fund balance of $2.0M across all funds.
Description
General
Fund /
General
Reserves
Restricted
Funds
Capital
Funds
Enterprise
Funds
TOTAL CITY
FUNDS
Total Revenues 29,449 13,548 3,008 4,807 50,812
Total Expenditures (28,452) (11,238) (966) (8,110) (48,766) Net Sources / (Uses) 997 2,310 2,042 (3,303) 2,046
Net Transfers (997) 297 700 - (0)
Change in Fund
Balance 0 2,607 2,742 (3,303) 2,046
(In 000's)
FY 22-23 Adopted - Citywide Funds
The Mid-year Budget Amendment report provides an assessment of the City’s budget condition in the current fiscal year as compared to the adopted budget based on the actual performance during the first six months of the fiscal year 2022-23 ensuring that ongoing operating revenues will be sufficient to cover operating expenses.
The Mid-year Budget Amendment update includes adjustments that have resulted from past council meeting agenda items since the adoption of the budget.
Additionally, it contains adjustments related to encumbrances and capital expenditures carried forward from the prior fiscal year that were previously approved by the City Council, but not included in the adopted budget. The update also proposes and recommends adjustments to certain revenue and expenditure categories, as well as transfers based on staff analysis of current economic trends, program and capital project needs, and alignment with Council strategic priorities.
However, these adjustments are subject to Council approval through the attached resolution.
Analysis
General Fund
The General Fund Amended net change in fund balance decreased a total of $1.7M; from zero to negative $1.7 M. The net amended/carryforward change (negative $4.2M) relates to Council amendments previously approved ($2.0M) and encumbrances carried forward from the previous year ($2.2M). The proposed and recommended adjustments are mainly coming from changes in revenue projection based on the actual performance from the first half of the fiscal year and the recent economic trends which will be discussed in the General Fund Revenues section below. The proposed and recommended adjustments also include transfers to the Water Fund ($2.0M) for the priority water infrastructure projects related to the 965 Weeks affordable housing project and to CIP Fund for City Hall renovation ($350K).
The table below summarizes the General Fund budget amendments from the adoption to the Mid-year.
Description
FY 22-23
Adopted
Amended/
Carry -
Forward
Proposed
Total General
Fund/Reserves
Total Revenues 29,449 618 4,440 34,506
Total Expenditures (28,452) (4,938) 350 (33,040)
Net Sources / (Uses) 997 (4,321) 4,790 1,467
Net Transfers (997) 149 (2,391) (3,239)
Change in Fund Balance 0 (4,172) 2,399 (1,773)
(In 000's)
FY 2022-23 Q2 - General Fund and Reserves
General Fund Revenues
The General Fund revenue budget will increase approximately for $5.1M which is mainly due to changes in projection of tax revenues including Property tax ($3.2M), Transient Occupancy Tax (TOT) ($0.5M), and Business License tax ($0.4M) and Pass-through development revenues ($0.6M) since Pass-through development revenues have associated costs reductions, there is no significant impact on the fund balance. The table below shows comparison by revenue source between FY22 audit, FY23 adopted and FY23 Mid-year amended.
FY 2021-22
AUDIT
FY 2022-23
ADOPTED
FY 2022-23 MID
YEAR
Property Tax $ 15,843,008 $ 15,725,421 $ 18,885,421
Sales Tax $ 5,738,443 $ 5,845,000 $ 5,845,000
Transient Occupancy Tax $ 1,158,314 $ 1,100,000 $ 1,600,000 Business License Tax $ 1,269,802 $ 1,348,250 $ 1,698,250 Other Revenues $ 3,948,354 $ 5,150,099 $ 5,580,163
Subtotal $ 27,957,921 $ 29,168,770 $ 33,608,834
Pass-Through Development $ 1,553,261 $ 280,000 $ 897,653 Total Revenues $ 29,511,182 $ 29,448,770 $ 34,506,487
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 initial estimate approximately for $2.4M which increases our projection and is included in the proposed adjustments. 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 has been repaid by the State. 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, a change in the Recognized Obligation Payment Schedule (ROPS) in the current fiscal year raised the projection of the Redevelopment Property Tax Trust Fund (RPTTF) revenue approximately for $0.8M.
Sales tax - the sales tax revenues had increased for 5.8% in the fiscal year 2021-22 compared to the previous fiscal year and according to Avenue’s analysis, they are projected to have the similar growth ratio in the current fiscal year. Staff will continue to monitor monthly payments to affirm $5.8M range estimate from the adopted budget.
Transient Occupancy Tax - current trends indicate a positive budget adjustment of $0.5M.
The collection remains suppressed at approximately 30% below pre-COVID levels. Due to the change in business meeting culture, the recovery is expected to be slow and limited.
Business License Tax - as a result of the initial review and analysis of the Business License Discovery and Compliance program, the HdL Companies estimated $0.4M of additional tax revenues from the findings.
Other Revenues - due to the series of federal rate hikes in the past eleven months followed by high inflation, the projected earnings in the Local Agency Investment Fund (LAIF) and San Mateo County Pool have been positively adjusted resulting in an increase in the interest revenues for about $0.4M.
Pass through Development - these revenues are offset by contractual costs. Given the staff and consultants activities, staff recommends a proposed change in the revenue projection for $0.6M. However, the net impact on reserves is minimal since increased revenues will be offset by increased expenditures.
General Fund Expenditures
The General Fund Amended increase in expenditures, excluding transfers, totals $4.6M.
Notable changes in expenditures include increases in personnel costs as a result of the labor union negotiations, new contracts and contract amendments via Council meetings, and the encumbrances and capital projects carried forward from the previous year. Those increases were previously approved by the City Council. The proposed adjustment includes only a reduction in capital outlay for $350K related to City Hall renovation project which is, in turn, reclassified to a transfer to the CIP Fund for the same amount.
The table below reflects expenditure amendments by department:
DEPARTMENT
FY 2022-23
BASELINE
FY 2022-23
ADOPTED
FY 2022-23
MID-YEAR
AMENDED $ Chg
%
Chg
City Council 169,028 169,028 169,028 - 0.0%
City Attorney 827,827 827,827 878,456 50,629 6.1%
City Clerk 405,324 405,324 412,524 7,200 1.8%
City Manager 1,714,057 1,606,767 2,284,818 678,051 42.2% Administrative Services 1,779,730 2,879,851 3,173,145 293,294 10.2% Finance 1,371,771 268,126 274,938 6,812 2.5%
Community Development 3,015,796 3,119,396 3,629,230 509,834 16.3% CEDE - Pass Through 244,545 - 816,048 816,048 #DIV/0!
Public Works 4,377,249 4,358,249 5,269,745 911,496 20.9% PW - Pass Through - 10,000 10,000 - 0.0%
Police 13,973,827 13,383,969 14,320,612 936,643 7.0%
Non-Departmental
Capital/Technology - 350,000 101,878 (248,122) -70.9%
Insurance and Settlements 897,168 897,168 897,168 - 0.0% Other Non-Departmental 1,037,575 1,037,575 1,664,039 626,464 60.4% Overhead Allocation (861,730) (861,730) (861,730) - 0.0% Sub-total 28,952,167 28,451,550 33,039,899 4,588,349 16.1% Transfers 1,118,364 1,818,360 4,209,360 2,391,000 131.5% Total Expenditures $ 30,070,531 $ 30,269,910 $ 37,249,259 $ 6,979,349 23.1% A detail mid-year comparison of current to prior year General Fund budget to actual is presented in Attachment 2. 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 $7.4M from $2.6M to negative $4.8M. The amended/carryforward changes relate to Council amendments previously approved including the $2.2M Annual Street Resurfacing (ASR) project carried forward from the prior year and Measure HH Pilot Workforce Development Program for $0.8M offset by the Measure M reimbursement revenue related to the ASR project ($0.7M). The proposed mid-year changes in the revenues include the $8M state earmark grant for 965 Weeks affordable housing project offset by a downward adjustment in the affordable housing commercial impact fee for $2.5M.
The proposed revenues also include a $0.6M increase in the interest revenues due to the federal rate hikes and a positive adjustment in the restricted TOT revenues for $124K. The proposed change in the expenditure relates to a loan disbursement for the 965 Weeks project passing through from the $8M state earmark. The following table summarizes the amended changes in restricted funds.
Description
FY 22-23
Adopted
Amended/
Carry -
Forward
Proposed
Total
Restricted
Total Revenues 13,548 656 5,996 20,200
Total Expenditures (11,238) (3,939) (6,500) (21,677)
Net Sources / (Uses) 2,310 (3,283) (504) (1,477)
Net Transfers 297 (149) (3,500) (3,352)
Change in Fund Balance 2,607 (3,432) (4,004) (4,829)
(In 000's)
FY 2022-23 Q2 - Restricted Funds
Capital Funds
The Capital Funds Amended net change in fund balance increased $2.6M from $2.7M to $5.3M. The amended/carryforward changes relate to carryforward capital balances for the major capital projects including Pavement Management Plan ($0.8M), University/Michigan improvement ($0.4M) and Addison Ave improvement ($2.3M) which are all primarily grant-funded projects reflecting both grant revenues and capital expenditures for the same amount except for the local match portion. An additional $3.4M increase is also included in the amended/carryforward revenues which is a deferred federal grant reimbursement related to Bay Rd project expenditures incurred in the previous year. The following table summarizes the amended changes in Capital funds.
Description
FY 22-23
Adopted
Amended
/ Carry -
Forward
Proposed
Total
Capital
Total Revenues 3,008 6,444 30 9,482
Total Expenditures (966) (3,568) - (4,534)
Net Sources / (Uses) 2,042 2,876 30 4,948
Net Transfers 700 - (350) 350
Change in Fund
Balance 2,742 2,876 (320) 5,298
(In 000's)
FY 2022-23 Q2 - Capital Funds
Enterprise Funds
The Enterprise Funds Amended net change in fund balance decreased $0.6M from $3.3M negative to $1.8M positive. The amended/carryforward changes relate to a design contract amendment previously approved by the Council for priority water improvement projects and two other water infrastructure projects that are vital to advance the 965 Weeks project. The proposed changes are mainly due to an upward change in water impact fee projection.
Description
FY 22-23
Adopted
Amended
/ Carry -
Forward
Proposed
Total
Enterprise
Total Revenues 4,807 - 398 5,205
Total Expenditures (8,110) (1,534) - (9,644)
Net Sources / (Uses) (3,303) (1,534) 398 (4,439)
Net Transfers - - 6,241 6,241
Change in Fund Balance (3,303) (1,534) 6,639 1,802
(In 000's)
FY 2022-23 Q2 - Enterprise Funds
.
Transfers
The amended/carryforward change relates to a community survey and engagement contract previously approved by the Council and funded through ARPA fund. The proposed transfers are based on a funding strategy approved by the Council for the two water improvement projects related to the 965 Weeks project ($6.2M) and a reclassification from the General Fund capital budget to a transfer to the CIP fund for City Hall ($350K). The following table summarizes the amended changes in transfers.
FY 2022-23
ADOPTED
Amended/
CarryforwardProposed
FY 20223-23
MID YEAR
State Gas Tax $ 64,500 $ - $ - $ 64,500
NPDES $ 303,870 $ - $ - $ 303,870
Successor Housing $ 462,720 $ - $ (1,000,000) $ (537,280) Drainage District $ 287,270 $ - $ - $ 287,270
ARPA $ (821,140) $(149,000) $ - $ (970,140)
Housing in Lieu $ - $ - $ (1,500,000) $ (1,500,000)
Measure HH $ - $ - $ (1,000,000) $ (1,000,000)
Water $ - $ - $ 6,241,000 $ 6,241,000
Capital Improvement $ 700,000 $ - $ (350,000) $ 350,000 General $ (997,220) $ 149,000 $ (2,391,000) $ (3,239,220) Total $ - $ - $ - $ -
Upcoming projects and programs
The following projects and programs were not included in this Mid-year amendments and will potentially impact the General Fund reserve. Staff will return and present to the Council with more detailed information as part of the FY 2023-2024 budget process.
No. Future Project and Program Department/
Division
Estimated
Amount
Funding Source
1 SFCJPA Reach II Contribution PW/CIP $ 1,500,000 General fund 2 Acquisition funding for the Library
Property
City Manager 1,200,000 General fund
3 Comprehensive building plans for Martin
Luther King Jr. Park Redesign
Community
Service
1,100,000 General fund
4 CEQA and design for Bell Street Park Community
Service
1,000,000 General fund
Total $ 4,800,000
Fiscal Impact
Total proposed amended budget is as follows for fiscal year 2022-23:
Description
General
Fund /
General
Reserves
Restricted
Funds
Capital
Funds
Enterprise
Funds
TOTAL
CITY
FUNDS
Total Revenues 34,506 20,200 9,482 5,205 69,393
Total Expenditures (33,040) (21,677) (4,534) (9,644) (68,895) Net Sources / (Uses) 1,467 (1,477) 4,948 (4,439) 499
Net Transfers (3,239) (3,352) 350 6,241 -
Change in Fund
Balance (1,773) (4,829) 5,298 1,802 499
FY 22-23 Mid Year Amended - Citywide Funds
(In 000's)
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. Resolution FY22-23 Mid Year Budget
2. Mid Year Budget Summary