MEMORANDUM
DATE: May 3, 2022
TO: Christine Daniel, City Manager
FROM: Brad Farmer, Finance Director
SUBJECT: Discussion of Preliminary Budget FY 2022-2023 Recommendation
Staff recommends that the City Council review and comment on the proposed preliminary Fiscal Year (FY) 2022-2023 Budget.
Background
The City of Emeryville, along with the rest of the world, is recovering from the prolonged COVID-19 pandemic and related economic shutdown. The City’s primary revenue streams (sales tax, hotel tax, business license tax and cardroom tax) were all negatively affected by the pandemic. Industries recover differently and, therefore, each will take a different amount of time. The City must continue to plan accordingly and make prudent fiscal decisions about how to best use its resources to sustain services for the long term. The proposed Budget for Fiscal Year 2022-2023 represents the thoughtful work of the Budget & Governance and Budget Advisory Committees over the last year, as well as staff throughout City Departments who prepared careful and reasonable expenditure budgets that maintain services while respecting resource constraints.
The proposed Fiscal Year 2022-2023 Budget represents the second single year budget, rather than the normal two-year budget the City has adopted during non-pandemic operating cycles. This Budget continues to focus on sustaining operations, and on major City projects, as outlined in the existing Capital program, as the economy recovers and a new normal operating cycle evolves. A new five-year Capital Plan will be revisited in FY 2023-24 and it is expected that the City will return to a two-year budgeting cycle starting in FY 2023-24.
The following table summarizes the projected FY 2021-22 General Fund year end results and the proposed FY 2022-23 General Fund Budget. The preliminary proposed budget includes cost-of-living adjustments for employees, assumes that several positions previously held vacant are filled and reinstates two positions that had been removed in prior budgets: Assistant City Manager and a Building Inspector.
The economy is starting to rebound gradually compared to the pre-pandemic growth pace. However, Emeryville continues to experience increasing inflationary pressure (CPI 5.2% in February 2022) similar to the greater San Francisco Bay Area. The City will also continue to see increases in the cost of the pension obligations due to the CalPERS Board’s decision to decrease the discount rate applied to future earnings.
For the current fiscal year, the City Council’s goals and priorities focused primarily on completing major projects that were underway at the start of the FY 2021-22 Budget. Below is an update on the Council Goals for FY 2021-22:
Complete South Bayfront Bridge and Horton Landing Park: Completed and opened to the public December 3, 2021 Advance Corporation Yard remediation: Funding approved, and remediation consultant commenced work July 1, 2021; draft remediation plan submitted to the state; pilot testing of remediation efforts started April 2022 Complete 40th Street Redesign: AHSC grant awarded for construction of a portion of the project; retention of design consultant underway Complete Art Center: redesign rejected by Planning Commission; staff directed to pursue original design with developer.
Commence construction of Rail Safety/Quiet Zone: construction contract awarded spring 2022 Develop Revenue Generating Ballot Measures for 2022: fiscal analyses completed and initial community survey conducted fall 2021; community engagement underway spring 2022 Develop a plan to electrify the City’s vehicle fleet: deployed all electric parking enforcement vehicles; purchased new all electric passenger bus for Community Services; purchased new hybrid vehicles for Emeryville Police Department The following proposed Goals and Priorities for FY 2022-2023 were presented to the Budget & Governance Committee at its April 14, 2022, meeting and supported by the Committee. These goals and priorities continue to concentrate on completing existing funded projects:
1. Commence Old Corporation Yard remediation construction.
2. Develop affordable housing: 3600 San Pablo, 4300 San Pablo, and Christie Sites
3. Prioritize bicycle and pedestrian focused projects: 40th Street Redesign, San Pablo Avenue Corridor, Ashby Interchange.
4. Construct Rail Safety/Quiet Zones.
5. Continue advancing Art Center Project.
6. Develop Revenue Generating Ballot Measure for 2022.
7. Electrify the City’s vehicle fleet.
Revenue Impacts
As the world recovers from the crippling economic slowdown due to the global pandemic, the City’s revenues will continue to be negatively affected until consumer confidence returns and the economy fully recovers. Sales and Use, Business Licenses, Cardroom, and Transient Occupancy taxes have been and will continue to be impacted the most.
Sales and Use Tax
The Sales and Use Tax received by the City is dependent upon consumer confidence and the reopening of retail establishments. The pandemic continues to impact the Sales and Use Tax. In FY 2021-22, the tax is projected to be .9% lower than FY 2020-21 with a modest 1.2% increase in FY 2022-23, followed by modest growth over the next few years. We are projecting the FY 2022-23 revenue to be just over $1 million short of the level seen in FY 2018-19.
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Business License Tax
The Business License Taxes collected reflect the health of the business community in Emeryville. As illustrated in the chart below, FY 2019-20 saw a reduction of 7% in business license revenue followed by a 9.1% reduction in FY 2020-21. With the recovery under way, FY 2021-22 has seen a 6.3% growth in Business License Taxes and we are assuming a growth factor of 2% in the next few years.
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Card Room Tax
The revenue received through the Card Room Tax declined by 30% in FY 2019-20, and 76% in FY 2020-21. However, with the lifting of restrictions in Alameda County, the Card Room Tax has rebounded nicely. Assuming the restrictions are not reinstated, a moderate growth is projected for the coming years.
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Transient Occupancy Tax
The revenues from the hotel industry referred to as Transient Occupancy Tax (TOT) have been and continue to be the most significantly impacted revenue source for the City. Even after the restrictions were lifted, both business and personal travel remain low. This has impacted the City and the City’s hotel industry. The City’s TOT revenues saw a 31% reduction for FY 2019-20, followed by a 62% reduction in FY 2020-21 compared to the prior years. While travel is picking up, revenues in FY 2022-23 are projected to be less than 50% of those in FY 2018-19. Based upon consultation with outside consultants, this is an area projected to recover slowly and could be affected greatly by a variant associated with the pandemic. Therefore, only moderate growth is projected for future years, as shown in the graph below.
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Expenditure Strategies
At the beginning of the budget process, Department Heads were asked to maintain costs as close to the FY 2021-22 level as possible, to minimize the shortfall being faced. In addition to those cost containment approaches; the following strategies were implemented in the proposed budget:
Using $1.4 million in American Recovery Act Funds, one-time funds Deferring transfers into the Litigation Fund,
Using $2.3 million of the unallocated General Fund balance and Maintaining the current allocation for the Residual Property Tax Reserve and Use Policy, which was altered for the fiscal year budgets 2019-20 and 2020-2021, as follows:
Allocation per Policy
Allocation effective July 1, 2020
Allocation used for FY 2022-23
General Fund 101
26.0%
25.0%
50.0%
General Capital Improvement Fund 475
50.0%
47.5%
22.5%
Affordable Housing Fund 299
20.0%
20.0%
20.0%
Public Art Fund 243
0.0%
2.5%
2.5%
Economic Development Fund 202
5.0%
5.0%
5.0%
100%
100%
100%
Overview of Funds other than the General Fund
The other funds of the City are more restrictive due to the nature of the revenues associated with them. However, where possible, staff was asked to reduce cost as outlined above to ensure their long-term viability. The other funds were budgeted with the use and restrictions allowable for each fund. All other funds budgets provide for a positive ending balance in accordance with their requirements, except for three funds. The Grant Fund (Fund 254) is budgeted based upon a reimbursement basis and the timing varies based upon the grants. This fund typically has a negative budgeted fund balance. The other two funds with a negative fund balance are Funds 832 & Fund 833 which are debt service funds for the Successor Agency (Fund 282). The Successor Agency will have an overall negative fund balance until the debt is retired as the associated property taxes will be assessed in future years to offset the negative balances.
Regarding the City’s adopted Capital Improvement Program (2019-2024), the proposed budget annually appropriates funding for capital projects, such as Measure B and BB sales tax revenue and state gas tax funds. However, as noted above, no major new capital projects are proposed for FY 2022-23. Rather, the budget is focused on completing major projects that are either underway or have not yet commenced but already funded. The capital appropriations will be included in the proposed operating budget for Council consideration in June.
Concerning Measure F (Fund 267), the ¼ cent local sales and use tax approved by voters in 2020, for FY 2022-23 no expenses have been programmed except administrative costs the City must pay to the State to collect the funds. In FY 2021-22 the ending fund balance is projected to be $1.35 million, and the projected FY 2022-23 revenue is $2.2 million. For the past two years, Measure F funds have been used to support ECDC operations. With the recovery now underway, staff recommends developing a sustainable expenditure plan for use of these funds, consistent with their authorized restricted uses, during FY 2022-23.
Reserve Requirement
The proposed budget does not utilize any of the General Fund Reserve. Instead, it relies on use of a portion of the unassigned General Fund balance. Accordingly, the overall reserve requirements established by Council remain intact, meeting the 50% of the budgeted expenditures policy.
FISCAL IMPACT
The proposed budget for FY 2022-23 will establish the Operating and Capital Budgets for both the City of Emeryville and for the Successor Agency to the Former Redevelopment Agency of the City of Emeryville, as outlined in the “All Funds Budget Summary”. The proposed budget relies on limited use of one-time funds, as described above, and the City’s reserves remain intact.
BUDGET & GOVERNANCE COMMITTEE RECOMENDATION
At its April 14, 2022, meeting, the Committee reviewed the preliminary proposed City Budget for FY 2022-2023 including projected revenues and expenditures, and proposed City Council goals and priority projects. At that time the preliminary expenditure figures did not include cost of living and other compensation adjustments for represented employees. Staff also requested that the Committee consider the addition of an Assistant City Manager (ACM) position in the Budget.
The Committee supported the addition of the ACM position, supported the continuation of the pause on the policy for allocation of commercial transfer tax, supported the proposed Council goals and priority projects and supported discussing a sustainable expenditure plan for Measure F proceeds commencing mid-year 2022-2023. The Committee noted the importance of maintaining its Reserve policies in support of a holistic approach to the City Budget. The Committee approved a motion to recommend the preliminary budget for FY 2022-2023 to the City Council and suggested Council consider allocating the remaining East Bay Bridget Assessment funds to the 40th Street redesign project, which is within the Assessment District area ($76,914).
STAFF COMMUNICATION WITH THE PUBLIC
The Budget Advisory Committee will review the proposed Budget and any feedback from the City Council at its May 12, 2022, meeting.
CONCLUSION
Staff requests that Council provide comments on the preliminary Fiscal Year 2022-2023. A final budget will be brought to the City Council in June for approval.
PREPARED BY: Monica Centeno, Accounting Technician
Brad Farmer, Finance Director
APPROVED AND FORWARDED TO THE
CITY COUNCIL OF THE CITY OF EMERYVILLE:
Christine Daniel, City Manager
ATTACHMENTS
Attachment A – Preliminary FY 2022-23 Budget Summary
Preliminary Budget FY 2022-2023
Emeryville City Council Meeting | May 3, 2022
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