EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: April 18, 2023
TO: Honorable Mayor and Members of the City Council
VIA: Melvin E. Gaines, City Manager
BY: Tomohito Oku, Finance Director
SUBJECT: FY 2023-24 Preliminary Budget and Budget Message Recommendation
Receive staff report and provide direction regarding the FY2023-24 Preliminary Budget.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
· Ensure Our Financial and Organizational Health
Background
City Ordinance Title 3, Chapter 3.08 “Budget Planning and Fiscal Procedures” provides rules and procedures for preparing and administering annual City budgets.
Under Ordinance
3.08.080 “Public Hearing on Budget”, the Council “shall hold public hearings on the annual budget, as submitted, at which all interested persons shall be given an opportunity to be heard, for or against, the revenues estimated or any proposed appropriation therein.” Council approved the 2023-24 Budget Calendar with the following budget hearing dates:
· May 25, 2023 - Budget Study Session #1: Introduction & Overview of Proposed Budget - Department budget presentations
· June 1, 2023 - Budget Study Session #2: Continuation of Proposed Budget Discussions and deliberations
· June 15, 2021 - Budget Hearing & Adoption of FY2023-24 Budget and Gann Limit (the state appropriations limit)
Analysis
Ordinance 3.08.050 requires that the “budget officer, no later than April 30th of each fiscal year, shall submit to the City Council a budget and explanatory budget message”.
Preliminary Budget Message
While California's COVID-19 State of Emergency ended on February 28, 2023, new economic challenges have emerged. On a macro-economic level, the City faces significant economic challenges, including supply chain disruption, wars in Ukraine, high inflation, and contractions in the local labor force, especially in the tech industry. Current economic concerns revolve around the Federal Reserve’s approach to the implementation of monetary policy to lower high inflation and how higher interest rates will impact the national and local economy over the next two years. Aside from these broader economic challenges, the City also has been facing other obstacles such as winter storms with flooding and power outages, housing and homelessness issues as well as difficulties in staff recruitment and retention.
These broader and local challenges can translate into reductions in City revenue as layoffs, real estate market slow-downs and reductions in consumer confidence take hold and ripple through the local economy by its affect on local tax revenues (retail sales and real property taxation). Through these challenges and hardships, we have remained committed to our values of keeping residents safe and providing responsive, respectful and efficient public services.
Balancing the General Fund budget in the fiscal year 2023-24 will remain a challenge due to continued revenue disruption, service cost pressures, and deferred infrastructure challenges. We anticipate a budget process similar to FY 2022-2023 with continued challenges in maintaining current service levels while absorbing anticipated cost increases. In order to continue to provide the City services East Palo Alto residents rely on such as maintaining clean drinking water, public safety and public works services, additional locally controlled revenue options must be identified.
This year, the City looks forward to robust engagement of the East Palo Alto community around our budget process. The City is currently conducting a community survey to assess the needs and priorities of East Palo Alto residents.
Furthermore, we look forward to continuing to engage the community around identified budget priorities and City service needs through the remainder of the year to ensure the entire community has been educated on our budget process and has had an opportunity to weigh-in. City Staff looks forward to updating the community and City Council on the results through this year’s budget process.
The preliminary budget does not assume a recession and significant changes in operation and organization structure but assumes CPI growth in labor union contracts and other professional service and construction contracts. Staff centered the proposed budget on the City’s Council FY 2023-2024 Priorities that are to be approved on April 18, 2023 as follows:
1. Promote Housing, Economic, and Workforce Development
2. Implement the Comprehensive Transportation and Mobility Plan
3. Promote Health and Public Safety
4. Ensure Our Financial and Organizational Health
5. Improve the City’s Water Infrastructure
6. Further Implement the City’s Facilities Master Plan
7. Enhance Community Services and Parks.
Revenue projections in the fiscal year 2023-2024 will remain highly uncertain and include the following negative elements: 1) lingering COVID-19 revenue losses in Transient Occupancy Tax (TOT), 2) slow growth in tax revenues due to continuing current economic environment, including high inflation and slowdown in the housing market, 3) lacking business diversity in tax revenue resources (Sales tax and TOT), 4) property tax funding shortfalls related to state legislation regarding school funding and in-lieu vehicle license fees, 5) extended gaps in taxable development projects and uncertainty in timing of development completion due to underlying infrastructure challenges and the need to analyze and support the specific plan update in the Ravenswood Business District. Although revenue projections include additional revenues from Measure L approved by voters in November 2022 raising approximately $1.2 million, it is highly unlikely that these funds will close the gap needed to continue to maintain services given the increase in costs.
Baseline General Fund expenditures are projected to increase due to the recent market down-turn and other service costs resulting from high inflation. This year’s winter storms have only proven how important it is to address our aging storm drains which are in desperate need of maintenance to reduce flooding and prevent pollution or sewage from entering our local waterways. The increase in storms and flooding we experienced this winter is expected to become more likely in the future, currently the City does not have local funding to be able to address our local storm drain maintenance needs.
The table below shows budget status by fund type. Total citywide preliminary revenues (excluding Successor Agency) of $52.9M are fully offset by $56.4M in expenditures resulting in a citywide budget shortfall in the amount of $3.4 million which is attributed from the deficits from General Fund and Restricted Funds in the amount of $0.8 million and $6.6 million, respectively. The $6.6 million Restricted Fund deficit is due simply to a timing difference between expenditures incurred and revenue recognized across different fiscal years; program revenues typically come in first prior to the related program expenditures in many of City’s special revenue funds. However, the $0.8 million shortfall in General Fund is a structural deficit where resources for the upcoming budget are insufficient to cover the costs of currently proposed services. City Council has several tools to close the budget shortfall in a way that minimizes the impact on the current service level. One option is simply to delay or reduce spending to help close a budget gap. Another option is to use the General Fund reserves to address a budget shortfall. In fact, the City has built up substantial reserves precisely to help support critical services when revenues fall short. Staff will return to the Council with recommendations to solve the budget deficit in the future budget sessions.
Description
General
Fund
Restricted
Funds
Capital
Funds
Enterprise
Funds
TOTAL
CITY
FUNDS
Successor
Trust
Fund
Total Revenues 34,703 9,900 2,469 5,880 52,951 3,576
Total Expenditures (34,088) (17,967) (339) (3,995) (56,389) (3,640) Net Sources / (Uses) 615 (8,067) 2,130 1,885 (3,437) (64) Net Transfers (1,434) 1,434 - - - -
Change in Fund (820) (6,633) 2,130 1,885 (3,437) (64)
FY 23-24 Preliminary - Citywide Funds (In 000's)
General Fund Revenues
The City’s FY 2023-24 revenue forecasts are comparable to the current fiscal year’s projected revenues which have outperformed the initial projection. Excluding developer reimbursement revenues, the FY 23-24 projected General Fund revenues are approximately $0.4M less than those in FY 2022-23.
Preliminary FY 2023-24 General Fund revenue estimates include:
Property Tax Funding: $1.9M estimated decrease in property tax due mainly to the fact that a scheduled backfill ($2.1M) in FY22-23 for the lost property tax in lieu of vehicle license fees (VLF) revenue in FY20-21 whereas no backfill is scheduled in FY23-24; Transient Occupancy Tax (TOT): $0.6M estimated increase in TOT comparing to the FY 2022- 23 projection. TOT is estimated to recover 90% of the pre-Covid figure; Sales Tax: A slow growth in sales tax is estimated due to projected slowdown in consumer spending as intended by the federal reserve’s monetary policy; and Business License Tax: due to the voter approval of Measure L in November 2022, additional $0.9M business license tax revenues are anticipated.
The table below reflects a preliminary General Fund revenue detail:
FY 2021-22
Actual
FY 2022-23
Projected
(Mid-year)
FY 2023-24
Preliminary
Variance
Property Tax 16,217,164 18,885,421 17,028,600 (1,856,821) Sales Tax 5,738,443 5,845,000 6,030,000 185,000
Transient Occupancy Tax 1,158,314 1,600,000 2,200,000 600,000 Business License Tax 1,269,802 1,698,250 2,601,135 902,885 Other Revenues 3,373,885 5,580,163 5,342,843 (237,320)
Subtotal 27,757,608 33,608,834 33,202,578 (406,256)
Pass-Through Development 1,753,573 897,653 1,500,000 602,347 Total Revenues $ 29,511,181 $ 34,506,487 $ 34,702,578 $ 196,091 General Fund Expenditures
Total General Fund expenditures (including net transfers) of $35.5M represent department operating requests for certain strategic projects and normal operating service costs. The preliminary budget reflects all current budgeted staff positions, with no assumptions for held or frozen and new positions, but with assumptions of high inflation due to the economic environment. Given rising wage and benefit costs, inflated insurance and product costs, and inability to defer certain capital replacements - it will be difficult to reduce the negative operating gap as in the previous year.
The preliminary expenditure budget does not reflect: (1) previously approved encumbrances and carry-forward capital expenditures; (2) new positions and modification in classification plan; (3) unfunded Capital Improvement Plan project requests; and (4) major funding of listed Strategic Priorities. These aspects of the City’s budget will be included during Budget Hearings later in May and June.
The table below reflects a preliminary General Fund expenditures by Department:
(d) - (b) (d-b)/b
$
Chg
%
Chg
City Council 109,373 169,028 169,028 171,150 2,122 1.9% City Attorney 821,202 827,827 878,456 1,031,428 203,601 24.8% City Clerk 164,977 405,324 412,524 361,068 (44,256) -26.8% City Manager 1,814,929 1,606,767 2,284,818 2,182,770 576,003 31.7% Administrative Services 1,653,342 1,896,606 1,927,333 1,877,336 (19,270) -1.2% Finance 1,025,876 1,251,371 1,520,750 1,538,546 287,175 28.0% Community Development 2,248,937 3,119,396 3,629,230 4,280,063 1,160,667 51.6% CEDE - Pass Through 1,511,984 - 816,048 1,000,000 1,000,000 66.1% Public Works 3,265,679 4,358,249 5,269,745 5,127,298 769,049 23.5% PW - Pass Through 44,758 10,000 10,000 10,000 - 0.0%
Police 8,109,725 13,383,966 14,320,612 15,424,861 2,040,895 25.2% Non-Departmental
Capital/Technology - 350,000 101,878 - (350,000) #DIV/0! Insurance and Settlements 551,587 897,168 897,168 854,684 (42,484) -7.7% Other Non-Departmental 972,923 1,037,575 1,664,039 1,141,965 104,390 10.7% Overhead Allocation (833,910) (861,730) (861,730) (913,434) (51,704) 6.2% Sub-total 21,461,382 28,451,547 33,039,899 34,087,735 5,636,188 26.3% Transfers 2,381,000 997,224 4,209,360 1,434,438 437,214 18.4% Total Expenditures $ 23,842,382 $ 29,448,771 37,249,259 $ 35,522,173 $ 6,073,402 25.5%
DEPARTMENT
FY 2021-22
ACTUAL
(a)
FY 2022-23
ADOPTED
(b)
FY 2022-23
MID-YEAR
(c)
FY 2023-24
PRELIMINARY
(d)
Outlook and Available Reserve in General Fund
Most economic signs indicated that the City’s financial outlook would continue to have slow growth in the revenues despite the outpacing growth in the expenditures which will create a sizable budget deficit every year for the next five years. As such, staff recommends maintaining the conservative budget approach and remaining cautious in spending decisions.
The table below displays projected available fund balances by classification.
Classification General Fund Capital Funds Housing
Funds
Other
Restricted
Funds
Total
Nonspendable $ 2,968,544 $ - $ - $ - $ 2,968,544
Restricted 27,297 1,823,906 20,573,230 24,531,759 46,956,192 Committed: -
CalPERS funding 3,000,000 - 3,000,000
IT Reserve 2,641,796 - 2,641,796
Vehicle and Equipment Reserve 1,192,731 - 1,192,731
Self-Insurance Reserve 2,048,804 - 2,048,804
Capital Projects - 9,000,000 9,000,000
ARPA Saving 1,630,000 1,630,000
Others 299,770 - 299,770
Encumbrances 5,286,563 8,519,034 250,999 288,507 14,345,103 Contingency Reserve 9,080,973 - 9,080,973
Available Reserve 20,533,051 - 20,533,051
Total Fund Balance $48,709,529 $19,342,940 $20,824,228 $24,820,267 $113,696,963 Governmental Funds - Projected Fund Balance June 30, 2023 Proposed Classification Changes for FY 2023-2024
Staff proposes additions and modifications to targeted positions to address service needs for both the community and the organization - and to address Council strategic priorities related to community services, environmental programs, and improving internal control structure in Human Resources and financial and office administration. Proposing these positions without also restructuring or eliminating positions where service structure needs are changing is a stated risk in terms of the increase in potential future operating deficits. However, staff views that a backlog of work exists to support positioning “over capacity” and urgent needs in those areas. The potential ongoing increase in the costs would be less than 1.5% of the total personnel costs, and staff approaches this recommendation bearing the following facts:
· Needs are aligned with Council strategic priorities
· General Fund accumulated reserves provides risk stability; and · The City has achieved significant amounts of salary saving in the past few years (Approximately $1.7M and $2.8M in FY20-21 and FY21-22, respectively) The table below provides a list of proposed classification changes:
Title Division Note
Net
FTE
Funding
Source
Estimated
Cost
Addition:
HR Analyst I/II HR HR Analyst I/II 1.0 GF 196,000
Sub-total addition 1.0 $ 196,000
Modification:
HR Tech / HR Tech I/II HR Converting HR Tech to HR Tech I/II n/a GF 15,000 Sr. MA / Accountant Senior Finance Converting Sr. MA to Accountant Seniorn/a GF $ (29,000) Env Program PT / Env Program Mngr PW
Converting the Part-time position to
management position 0.55 GF 172,000
Sub-total modification 0.55 $ 143,000
Limited terms:
Assistant to City Manager CMO
Extending 1 yr limited position for
another year N/A GF 242,000
Estimated Funding Request 1.55 $ 581,000
Estimated ongoing costs $ 339,000
Many of the position costs above are based on gross estimates pending HR analysis of job descriptions and comparable salary ranges. The positions will reflect approximately $581K ($339K for ongoing costs) additional expenditures on the General Fund and increase the General Fund “baseline” deficit in FY2023-24 from $0.8M to $1.4M. There are additional new positions requested by departments which are under City Manager’s review and will possibly be added to future requests to Council in the following budget sessions.
Fiscal Impact
There is no fiscal impact on this report.
Public Notice
The public was provided notice by making the agenda and report available on the City’s website and on a bulletin board located at City Hall: 2415 University Avenue, East Palo Alto.
Environmental
The proposed action does not constitute a “project” with the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines sections 15378(b)(4) and (5) in that it is a governmental fiscal, organizational or administrative activity that will not result in direct or indirect changes in the environment.
Attachments
1. FY 2023-24 Preliminary Budget Summary
Attachments
1. FY23-24 Preliminary Budget Summary