EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: June 20, 2023
TO: Honorable Mayor and Members of the City Council
VIA: Melvin E. Gaines, City Manager
BY: Tomohito Oku, Finance Director
SUBJECT: FY2023-24 Budget Adoption
Recommendation
Adopt a Resolution adopting the Fiscal Year 2023-24 Budget Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
· Promote Housing, Economic and Workforce Development
· Implement the Comprehensive Transportation and Mobility Plan · Promote Health & Public Safety
· Ensure Our Financial and Organizational Health
· Improve the City's Water Infrastructure
· Develop and Implement a Comprehensive Facilities Master Plan · Enhance Community Services and Parks for Resident
Background
On May 25, 2023 and June 1, 2023, the City Council hosted the two scheduled Fiscal Year (FY) 2023-2024 Budget Study Sessions, followed by a continued budget session for additional Council deliberation and questions on June 12, 2023. Staff presented the following areas of the budget during those sessions:
· Fiscal Year 2023-24 Budget
overview;
· Department and division budgets; and
· Deliberations with detail division
budget information.
At the conclusion of the last meeting, the City Council provided directions and recommendations to staff to complete the development of FY 2023-2024 Budget.
Staff has incorporated those items in the budget and will itemize and explain each item in the following analysis section.
Analysis
Changes from Last Proposed Budget
On June 12, 2023, the City Council provided direction and recommendations to the proposed budget. These changes are reflected as items number 1 and 2 in the following table. Staff also identified reductions to the Planning Division budget, which are reflected as items number 3 and in the table. Considering each of these modifications, the projected budget surplus has increased from $223,309 to $267,309.
No. Modified items Department/Division Fiscal imapct Funding Source Budget Surplus (Deficit) $ 223,309 General Fund
1 Implementation of Rent Registry Housing and Economic Devlopment (Rent Stabilization Unit) (150,000) General Fund (Measure L) 2 Reduction of City's Sponsoring Event Budget Community Services and Recreation 5,000 General Fund 3 Reduction of General Plan Updates Budget Planning 162,000 General Fund 4 Reduction of Transcription Services Planning 27,000 General Fund Total changes $ 44,000 General Fund
Updated Budget Surplus (Deficit) 267,309 General Fund
Each item above is described as follows:
Implementation of Rent Registry (No.1)
During discussion with respect to additional resources available as a result of the passage of Measure L, the Council directed staff to allocate funds ($150,000) for implementation of a rent registry which allows the City’s rent stabilization program to collect data on rent-controlled apartments, monitor changes in tenancy and rents, and track compliance with the City’s rent control ordinance. Staff will return to the Council to request additional appropriations if the costs of implementing a rent registry exceed $150,000. Staff will also provide updates on Measure L revenue projections during the mid-year budget update and discuss use of any additional available funds.
Reduction of City’s Sponsoring Event (No.2)
During the deliberation process, the Council noted an inadvertent continuing sponsorship contribution that had been intended to be a one-time disbursement, not a continuing financial obligation. As a result, the budget for this specific event is being removed in the amount of $5,000.
Reduction of General Plan Updates (No.3)
On May 16, 2023, the City Council approved two crucial projects; namely, the multijurisdictional Safety Element project and the Environmental Justice Element project, in compliance with State Law. This decision was made shortly after the initial budget meeting held in April. In order to finance both General Plan elements, a total of $359,196 was allocated from the General Fund Planning budget, with half of the cost covered by the current fiscal year budget and the remaining half to be included in the proposed FY23-24 budget. However, it was discovered that the item was over-budgeted by $162,000. As a result, the budget has been adjusted accordingly.
Reduction of Transcription Services (No.4)
During the deliberation process, the City Council raised concerns about the Transcription Services budget line item in the Planning Division budget. As a result, staff reviewed the necessity of these services and ultimately made the decision to eliminate it from the budget.
In addition to the items above, the Council has expressed a desire to manage costs associated with public safety, including managing the number of full-time equivalents (FTEs). In light of fiscal pressures, the Council has suggested studying public safety staffing. Staff will return with a proposal to examine public safety and other City staffing during FY 2023-24 through a comprehensive organizational staffing analysis.
FY 2023-24 Citywide Budget
The FY 2023-24 Citywide Budget (excluding Trust & Agency) demonstrates total revenues of $52.4M, representing a modest increase of $1.6M (3.2%) compared to the previous year's adopted budget. Similarly, total expenditure amounted to $49.3M, indicating an increase of $0.5M (1.0%) from the respective prior year budget. These changes contribute to a positive net change in the fund balance of $3.2M across all City funds.
Description General
Fund
Restricted
Funds
Capital
Funds
Enterprise
Funds
TOTAL
CITY
FUNDS
Successor
Trust Fund
Total Revenues 34,743 9,330 2,469 5,880 52,421 3,576
Total Expenditures (33,336) (11,290) (561) (4,079) (49,266) (3,640) Net Sources / (Uses) 1,407 (1,960) 1,907 1,801 3,156 (64) Net Transfers (1,139) 1,139 - - - -
Change in Fund Balance 267 (820) 1,907 1,801 3,156 (64) FY 23-24 Proposed - Citywide Funds (In 000's)
FY 2023-24 General Fund Budget
The projected FY 2023-24 General Fund Budget anticipates revenues of $34.7M, which will be offset by expenditures of $34.5M. This consists of $33.3M allocated towards operating expenditures and $1.1M for transfers to support other fund operating deficits and comply with statutory requirements. It is important to note that this balance condition does not alleviate the significant strain and pressure on the General Fund. Staff is aiming to prepare for volatility that would require close monitoring and potential adjustments. The table below provides a breakdown of the fund changes in detail.
Revenues Expenditures In Out
10 General Fund $ 33,002,578 $ (29,460,905) $ - $ - $ (3,604,364) $ (62,691) 11 IT Replacement Fund $ - $ (1,226,742) $ - $ 1,226,742 $ - $ - 12 Equipment & Vehicles $ - $ (328,500) $ - $ 328,500 $ - $ - 13 Self Insurance $ - $ (909,684) $ - $ 909,684 $ - $ - 16 Community Benefit Fund $ - $ - $ - $ - $ - $ -
17 Com Dev Pass Thru $ 1,540,000 $ (1,410,000) $ - $ - $ - $ 130,000 99 Emergency Fund $ 200,000 $ - $ - $ - $ - $ 200,000
$ - $ - $ - $ (2,464,926) $ 2,464,926 $ -
$ 34,742,578 $ (33,335,831) $ - $ - $ (1,139,438) $ 267,309
ELIMINATING ENTRY
General Fund
FY 2023-24 General Fund Budget Summary
Fund Description
Operating Capital
Improvement
Plan
Operating Transfers
Net Change
Fund Balance
The initial proposed budget projected an $820K deficit in the General Fund. Following City council budget hearings and further staff discussions, the budget proposed today projects a $267K surplus. The city is balancing the budget through reduction efforts in operating expenditures across various departments, taking a conservative approach to personnel changes and deferred General Fund capital contributions. We reiterate below, the significant and critical resource challenges impacting the General Fund:
General Fund Structural Deficit
The City has been facing a structural budget deficit in the past few years where resources for the upcoming budget are insufficient to cover the costs of currently proposed services. The Baseline Budget for FY23-24 recognized a budget deficit in the amount of $820K in the General Fund. This is due mainly to increased personnel costs as a result of the negotiated labor contracts and increased required contributions to the pension plans. Revenue projections in the fiscal year 2023-2024 will remain highly uncertain and include the following risk factors:
Revenue Type
Projected Negative
Impact
Impact Status
Property Tax in Lieu
$1.5M shortfall is
projected
Property tax funding shortfalls related to state legislation regarding school funding and in-lieu vehicle license fees. In January 2023, the State DOF notified the County Controller that funds for the backfill request are not included in the Governor’s proposed FY 23-24 budget.
Transient Occupancy Tax
10% below from Prepandemic figure
TOT revenues has recoverred and is projected to recover significantly from the pandemic. However, FY23-24
revenues are projected at 90% level from the prepandemic figure.
Sales Taxes Less than 1% growth
is projected
Slow growth revenues due to continuing current economic environment, including high inflation and slowdown in the housing market
Extended time gap in new development Unknown
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
We further note the budget does not reflect unfunded capital projects scheduled in FY23-24 amounted to approximately $4.4M. The Council will need to appropriate funds from the General Fund Reserve or other sources (potentially grants) to fund these projects. Staff will request funding for each project before beginning projects.
FY 2023-24 Special Revenue Funds Budget
Budgeted operating revenues and expenditures total $9.3M and $10.0M, respectively; increased by net operating transfers- in of $1.1M and offset by capital expenditures of $1.3M. Capital funding consists of SB1-funded and County Measure A and Measure W projects for qualified street and sidewalk improvements.
Revenues Expenditures In Out
213 Police Grants $ 163,520 $ (176,229) $ - $ - $ - $ (12,709) 215 Misc Federal and State Grants $ 495,611 $ (184,850) $ - $ - $ - $ 310,761 230 Local Grants $ 728,000 $ (720,000) $ - $ - $ - $ 8,000 231 CYSFF TOT $ 289,400 $ (322,997) $ - $ - $ - $ (33,597) 232 Measure C $ 2,880 $ - $ - $ - $ - $ 2,880
Community Programs $ 1,679,411 $ (1,404,076) $ - $ - $ - $ 275,335 201 State Gas Tax $ 1,496,600 $ (1,112,893) $ (550,000) $ 64,500 $ - $ (101,793) 202 Measure A $ 720,400 $ (3,459) $ (550,000) $ - $ - $ 166,941 203 NPDES $ 248,300 $ (769,544) $ - $ 531,244 $ - $ 10,000 206 Park In Lieu $ 4,800 $ - $ - $ - $ - $ 4,800
221 Lighting District $ 862,700 $ (193,249) $ - $ - $ - $ 669,451 222 Drainage District $ 163,040 $ (309,324) $ - $ 146,284 $ - $ - 234 County Measure W $ 308,000 $ (1,689) $ (220,000) $ - $ - $ 86,311 Infrastructure Programs $ 3,803,840 $ (2,390,159) $ (1,320,000) $ 742,028 $ - $ 835,710 204 Rent Stabilization $ 614,860 $ (800,529) $ - $ - $ - $ (185,669) 207 Housing In Lieu $ 1,134,000 $ (2,872,920) $ - $ - $ - $ (1,738,920) 209 Housing Assistance Program $ 4,800 $ (6,346) $ - $ - $ - $ (1,546) 218 Affordable Housing TOT $ 313,400 $ (28,917) $ - $ - $ - $ 284,483 219 Measure HH $ 1,747,400 $ (848,121) $ - $ - $ - $ 899,279 220 Lo-Mod Housing Successor $ 32,000 $ (1,618,476) $ - $ 397,410 $ - $ (1,189,066) 233 Silicon Valley Community $ - $ 0 $ - $ - $ - $ -
Affordable Housing Programs $ 3,846,460 $ (6,175,308) $ - $ 397,410 $ - $ (1,931,439) Total Special Revenue Funds $ 9,329,711 $ (9,969,543) $ (1,320,000) $ 1,139,438 $ - $ (820,394) Net Change
Fund Balance
FY 2023-24 Special Revenue Funds Budget Summary
Fund Description
Operating Capital
Improvement
Plan
Operating Transfers
To enhance clarity and ease of understanding, Special Revenue Funds are organized into the following subcategories:
Community Program-related: Total revenues of $1.6M are offset by total expenditures of $1.4M. This category has changed significantly due to ARPA funding. In the past two years, the City received and spent ARPA funds for approximately $3.5M each year addressing the revenue losses from Covid-19 pandemic. ARPA funds will have been spent completely by the end of the current fiscal year and, therefore, this proposed budget does not include such expenditures and revenues.
Infrastructure-related: Operating revenues of $3.8M plus transfers in of $0.7M are offset by total expenditures of $3.7M, including restricted transportation capital spending of $1.3M. Notably, the General Fund is partially supporting NPDES and Drainage District funds for a total of $678K. This is increased from previous years due mainly to increases in responses to NPDES compliance requirements and Maintenance Division expenditures related to the drainage system. Costs also include increased staff and program costs related to the Environmental Programs activity. Staff acknowledge that long-term capital, program and maintenance costs must be analyzed in order to support the basis for potential assessment or other district funding for the underlying infrastructure.
Affordable Housing-related: Total revenues of $3.8M and transfers in ($0.4M) are offset by total expenditures of $6.2M, including CalHome loan disbursements ($1.0M), Mid-Peninsula Gap funding ($0.7M), Pilot Measure HH Workforce Development Program ($0.6M), and Homelessness program ($0.4M subject to Council approval).
FY 2023-24 Capital Funds Budget
Budgeted revenues and expenditures total $2.5M and $0.6M respectively.
Revenues Expenditures In Out
301 Capital Improvement Fund $ 610,400 $ (394,766) $ - $ - $ - $ 215,634 303 Capital Grant $ - $ - $ - $ - $ - $ -
305 Parks & Trails $ 441,779 $ - $ - $ - $ - $ 441,779
306 Public Facilities $ 774,906 $ - $ - $ - $ - $ 774,906 307 Transportation $ 278,251 $ (83,333) $ - $ - $ - $ 194,918 308 RBD-I Storm D $ 360,352 $ (83,333) $ - $ - $ - $ 277,019 309 RBD-O Storm D $ 3,200 $ - $ - $ - $ - $ 3,200
Capital Funds $ 2,468,888 $ (561,433) $ - $ - $ - $ 1,907,456 Description
Operating Capital
Improvement
Plan
Operating Transfers
Net Change
Fund Balance
FY 2023-24 Capital Funds Budget Summary
Fund
Notable trends include restoration of impact fee revenues from the deferred development issues related to the East Palo Alto Sanitary District (EPASD) which staff expect the revenues to start coming in FY 2023-24. However, staff anticipate a chance of downward adjustments to the revenue projections as status of the governance issues related to EPASD continues to evolve.
Several years ago, the City embarked on an assertive capital infrastructure plan to provide adequate matching funds for grant funding sources. To date, the City has committed grants and internal monies required to fund major projects such as SFCJPA Safer Bay, SFCJPA Reach II, University Avenue Interchange, Addison Avenue, etc.
As noted previously, near-term revenue growth has been a challenge, and the City now faces more intense challenges in the ability to meet increasing operational cost demands, provide maintenance of large infrastructure projects, and co-fund such projects on a “pay as you go basis”.
Despite major progress toward mitigating several infrastructure risks, several significant, critical capital-related regulatory issues remain, primarily related to water distribution and storage; and storm water and storm water facilities. Given the age and condition of many of the City’s major infrastructure systems, the City will need to continue to address critical funding challenges through aggressive pursuit of grant funding, as well as careful and targeted use of existing reserves.
FY 2023-24 Enterprise Funds
Budgeted revenues and expenditures total $5.9M and $4.1M, respectively.
Revenues Expenditures In Out
510 Water Service Fund $ 524,720 $ (393,116) $ - $ - $ - $ 131,604 511 Water Capital Fund $ 1,264,000 $ (325,000) $ - $ - $ - $ 939,000 512 Water Meter Fund $ 22,400 $ (10,000) $ - $ - $ - $ 12,400 513 Water Capacity Fee Fund $ 785,863 $ (83,333) $ - $ - $ - $ 702,530 Water Enterprise $ 2,596,983 $ (811,449) $ - $ - $ - $ 1,785,534 520 Garbage Service Fund $ 3,283,200 $ (3,267,255) $ - $ - $ - $ 15,945 Total Enterprise $ 5,880,183 $ (4,078,704) $ - $ - $ - $ 1,801,479 FY 2023-24 Enterprise Funds Budget Summary
Fund Description
Operating Capital
Improvement
Plan
Operating Transfers
Net Change
Fund Balance
The net change in fund balance totals a surplus of $1.8M with the following major trends:
· The Water Enterprise Fund consists of lease revenue and capital surcharges paid or passed to the City from Veolia. Water Enterprise charges collected from customers provide a primary source of revenue for major capital improvements to the water system infrastructure. It’s important to note that the Council adopted a resolution suspending the water meter replacement surcharge and, instead, increasing the water capital surcharges which will increase approximately $0.4M in aggregated revenues. Also, some of approved water capital projects such as Water Meter Replacement project and University Water Main project are fully funded and will be carried forward during the mid-year budget review.
· The Solid Waste (garbage) Enterprise Fund consists of residential solid waste services collected through the County property tax rolls and passed to Recology. Recology direct-bills the multi-family housing and commercial accounts. The fund also accounts for local solid waste service improvement programs.
Update on Ten-Year adopted CIP and Two-Year adopted CIP A Capital Improvement Plan (“CIP”) serves as a City's road map for preserving, maintaining, and developing any City-owned public infrastructure or assets.
Generally, a CIP provides a five- to ten-year plan for all individual capital projects, equipment purchases, and major studies and includes construction, scheduling, and financing for each project. A comprehensive CIP clearly delineates the objectives of capital programs and its relationships to a City’s long-range development plans.
On September 15, 2020 the City Council adopted the Ten-year CIP. Since the adoption of the CIP in 2020, a number of new projects have been added to the CIP based on City Council priorities, grant funding, and staff recommendations. These projects are reflected in the Two-year CIP update that was approved by the City Council on June 7, 2022.
The City will continue to implement its capital priorities over the next fiscal year. The Two-Year CIP, as well as the Ten-Year adopted CIP is located on the City website through the following link:
<https://www.cityofepa.org/publicworks/page/capital-improvement-program> The information presented below supplements and updates the Ten-Year CIP adopted in 2020 as well as the Two-year CIP update adopted in 2022. The tables below present updates on the Two-year Capital Improvement Plan (CIP) report and the Ten-year CIP report. The first table contains a list of unfunded projects, while the second table lists the funded projects.
CIP ID Project FY 23-24
FY24-25 or
after Funding status
FA-02 Community Development Building/Tate Improvements $ 120,000 $ - Unfunded FA-05 Police department Facility (RV SAFE PARKING) $ - $ 15,000,000 Unfunded FA-16 New Public Library* $ 1,100,000 $ 30,000,000 Unfunded PK-04 PK-04 MLK JR Park Expansion $ - $ 21,000,000 Unfunded PK-10 PK-10 Bell Street Park Improvements $ 1,000,000 $ 14,500,000 Unfunded SD-06B O’Connor Pump Station Phase II $ - $ 7,770,000 Unfunded SD-08 SD-08 Trash Capture Device Installation $ 250,000 $ - Unfunded SP-02B SFCJPA Reach 2 Contribution (3/3) $ 1,500,000 $ - Unfunded ST-28 East Bayshore Improvements $ - $ 200,000 Unfunded ST-32 PD Site Improvements $ 400,000 $ - Unfunded
WD-06 Fire Hydrant Replacement Program $ - $ 60,000 Unfunded WD-07 Water Valve Replacement Program $ - $ 160,000 Unfunded $ 4,370,000 $ 88,690,000 Unfunded
*Partially funded - see the funded project table below
Subtotal Unfunded
CIP ID Project FY 23-24
FY24-25 or
after Funding status
FA-15 Cummings loft Improvements $ 550,000 $ - Funded
FA-16 New Public Library $ 1,900,000 $ - Funded
PK-18 Railspur Trail Improvements $ 942,000 $ - Funded
ST-07* Annual Street Resurfacing $ 550,000 $ 550,000 Funded ST-11* Annual Sidewalk Repair - High Risk Tripping Hazards $ 250,000 $ 250,000 Funded ST-15* Annual Signage & Striping Improvements $ 50,000 $ 50,000 Funded ST-25 Bus Stop Shelter Improvements $ 1,000,000 $ - Funded ST-28 East Bayshore Improvements $ 400,000 $ - Funded
Multiple University/Weeks Street Water Line $ 7,656,000 $ - Funded WS-01A WS-01A Emergency Water Connections – Palo Alto $ 450,000 $ - Funded WS-03A New Storage Tank - East of Hwy 101 $ - $ 5,000,000 Funded WD-05 Water Meter Replacement Program $ 300,000 $ 300,000 Funded P-2 16-Inch Water Transmission and Fourth SFPUC Turnout $ - $ 1,600,000 Funded $ 14,048,000 $ 7,750,000 Funded
*Reflected in the Proposed Budget
Subtotal Funded
Staff will return to Council for consideration of funding sources and contractual approvals for these projects. It's worth noting that the unfunded projects for FY23-24, which amount to a total of $4.37 million, are not reflected in the Proposed Budget and will highly likely require General Fund contributions to their respective CIP funds if they are approved by the Council.
Personnel Changes
The table below provides a list of proposed classification changes.
Title Division Note
Net
FTE
Funding
Source
Estimated
Cost
Modification:
HR Tech / HR Tech I/II HR Converting HR Tech to HR Tech I/II n/a GF 14,592 Sr. MA / Accountant Senior Finance Converting Sr. MA to Accountant Seniorn/a GF $ (42,923) Code Enforcement Officer/Code
Enforcement - Building Inspector
Hybrid Building
Converting one of Code
Enforcement Officer positions to
Code Enforcement/Building
Inspector Hybrid position n/a GF 17,070
Sub-total modification $ (11,261)
Limited terms:
Assistant to City Manager CMO
Extending 1 yr limited position for
another year n/a GF 241,974
Management Analyst I/II - 1 yr term PD 1 year limited position n/a GF 195,602 $426,315
$ (11,261)
Estimated Funding Request
Estimated ongoing costs
To address the budget shortfall identified in the preliminary budget, staff worked to minimize the need for additional position requests. The proposed budget includes a temporary increase in personnel costs of $426K for limited-term positions, but there is no ongoing increase in requests. In fact, the budget assumes a slight reduction in costs resulting from these changes.
The proposed solution involves modifications to targeted positions in Human Resources (HR), Finance and Building, and extensions of existing limited-term positions in Police and the City Manager's Office.
The City has transferred existing personnel-related Finance functions to HR which requires additional capacity in HR. The Police Department and City Manager’s Office both are requesting continuance of existing limited period positions for an additional year. The costs associated with these modifications are included in the Proposed Budget. This staffing approach is proposed as a conservative method to provide municipal services given projected revenue shortfalls. The work volume that staff is undertaking, and the existing work backlog, suggests additional staffing is needed; however, adding regular staff positions during challenging economic times is not ideal. As mentioned above, staff will return to the Council with a proposal to conduct a comprehensive organizational staffing analysis.
Fiscal Impact
Establish the City’s revenue budget at $52,421,360 and appropriation budget at $49,265,511 including Capital Improvement Program budget, and the permanent staffing at 120.20 full time equivalents (FTEs). The City has a total city-wide budget surplus of $3,325,991. However, the City recognizes deficits in certain General Fund operations and other restricted funds (Exhibit B of Resolution) which requires the use of available reserve balances totaling $3,325,991.
Public Notice
Notice of this agenda item by publishing a notice of the hearing dates in “San Mateo County Times” and, also, posting the City Council agenda on the City’s official bulletin board outside City Hall and making the agenda and report available at the City’s.
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. Resolution
2. FY 23-24 Proposed Budget