MEMORANDUM
DATE: May 2, 2023
TO: Paul Buddenhagen, City Manager
FROM: Lawrence Chiu, Finance Director
SUBJECT: Discussion of Preliminary Budget for Fiscal Years 2024 and 2025
RECOMMENDATION
Staff recommends that the City Council review and comment on the proposed preliminary Fiscal Years (FYs) 2024 and 2025 budget.
BACKGROUND
The City of Emeryville is slowly transitioning out of the COVID-19 pandemic which negatively impacted the City’s revenues for the last three years. The budget forecast for the proposed FYs 2024 and 2025 takes a cautious approach and includes conservative revenue projections based on assumptions that COVID-19 will continue to be a drag on some sectors of the economy, and that economic conditions will slow down in FY 2024 due to a high interest rate environment, with a return to moderate revenue growth thereafter.
The City’s General Fund primary revenue sources (sales tax, business license tax, card room tax and transient occupancy tax) are sensitive to changes and may fluctuate depending on the overall economy. The City must continue to exercise fiscal prudence in managing its budget, maintaining financial stability, and maximizing limited resources to sustain essential services to our community.
The proposed FYs 2024 and 2025 budget represents the thoughtful work of the Budget & Governance and the Budget Advisory Committees, as well as staff throughout City Departments who prepared careful projections on the revenue and expenditure budgets that maintain services while respecting resource constraints. The proposed FYs 2024 and 2025 budget represents the two-year budgeting cycle, rather than the one-year budget the City adopted during the pandemic. This proposed budget continues to focus on sustaining operations and long-range financial planning as the economy recovers and a new normal operating cycle evolves.
The five-year Capital Improvement Plan (CIP) for FYs 2024-2028 is developed in conjunction with the operating budget and reflects changing priorities and funding availability. The CIP is a multi-year planning document that identifies the construction of new facilities and infrastructure, and for expansion, rehabilitation, or replacement of existing City-owned assets.
The following table summarizes the projected FY 2023 General Fund year end results and the proposed FYs 2024 and 2025 General Fund Budget. The figures below include assumptions on revenue and expenditure growth and do not reflect additional amounts related to negotiations for the City’s three bargaining units. Once those figures are finalized, they will be included in the proposed budget presented to the City Council. The projections include the use of the General Fund ending fund balance of $1.5 million and $2.7 million to balance FYs 2024 and 2025 proposed budget respectively.
The economy is starting to rebound gradually compared to the pre-pandemic growth pace. However, Emeryville continues to experience increasing inflationary pressure and cost of living increases (Consumer Price Index 5.3% in February 2023) similar to other cities in the San Francisco Bay Area. In addition, the City will 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.
Revenue Projections
As the world slowly recovers from the COVID-19 pandemic, the City’s revenues are projected to grow conservatively in FY 2024 and then moderately in the next few years through FY 2028. Any changes in the economy of the San Francisco Bay Area and consumer confidence may impact the City’s revenues.
Sales and Use Tax
The Sales and Use Tax received by the City is dependent upon consumer confidence and the local economy. As illustrated in the chart below, FY 2020 saw a 17% reduction due to COVID-19. As the local economy slowly recovers from the pandemic, we are assuming a conservate growth of 1.5% in FY 2024 and then a moderate growth of 3.5% in the next few years.
Business License Tax
The Business License Taxes collected reflect the health of the business community in Emeryville. As shown in the chart below, FY 2020 saw a reduction of 7% in business license revenue followed by a 9% reduction in FY 2021. With the recovery under way, we are assuming a growth factor of 2% in the next few years.
Card Room Tax
As illustrated in the chart below, the revenue collected through the Card Room Tax declined significantly by 30% in FY 2020, and 76% in FY 2021 due to closure of the Card Room during COVID-19. With the lifting of restrictions in Alameda County, the Card Room Tax has rebounded in FY 2022. We are assuming a moderate growth factor of 4% in the next few years.
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 negatively impacted revenue source for the City. The City’s TOT revenues saw a 31% decline in FY 2020, followed by a 62% reduction in FY 2021 compared to prior years. While travel is picking up, revenues in FY 2023 are projected to be 40% below the TOT in FY 2019. Based upon consultation with an outside consultant, this is an area projected to recover slowly. Therefore, only conservative growth of 1.8% is projected for future years, as shown in the graph below.
Expenditure Strategies
At the beginning of the budget process, Department Heads were asked to maintain costs as close to the FY 2023 level as possible, to minimize the budget shortfall we face. In addition to those cost containment approaches, the following strategies were implemented in the proposed budget:
Reviewing vacant positions in the proposed budget before filling; Using $1.5 million and $2.7 million from the General Fund ending fund balance to balance the FYs 2024 and 2025 budget shortfall; and Maintaining the current allocation for the Residual Property Tax Reserve and Use Policy, as follows:
Allocation per Policy
Allocation effective 2020
Allocation effective FY 2023
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%
TOTAL
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 were asked to reduce costs 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.
The proposed five-year CIP for FYs 2024-2028 appropriates funding for capital projects, such as Measure B and BB sales tax revenue and state gas tax funds. The CIP budget is focused on completing major projects that are either underway or have not yet commenced but are already funded. Projects have also been streamlined and consolidated to facilitate implementation. The capital appropriations will be included in the proposed operating budget for Council consideration in June.
In March 2020, Measure F (Fund 267), the ¼ cent local sales and use tax was approved by Emeryville voters. In FYs 2024 and 2025, Measure F funds totaling $1.5 million and $1.6 million respectively will be utilized to fund:
one Code Enforcement Officer position;
one Engineer position in the Public Works Department; and the operations of Emeryville Child Development Center.
Reserve Requirement
The proposed budget relies on the use of a portion of the General Fund ending fund balance. Accordingly, the Economic Uncertainty Reserve requirement established by the Council remains intact, meeting 50% of the of the budgeted expenditures policy.
FISCAL IMPACT
The proposed budget for FYs 2024 and 2025 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. In addition, the proposed budget includes the use of General Fund ending fund balance of $1.5 million and $2.7 million to balance the FYs 2024 and 2025 budget respectively.
ADVISORY BODY REVIEW
The Budget & Governance Committee and Budget Advisory Committee reviewed the Preliminary Budget for FYs 2024 and 2025 on April 25th and 27th respectively and any feedback will be provided at the City Council meeting on May 2, 2023.
CONCLUSION
The preliminary FYs 2024 and 2025 budget takes into consideration the fiscal impacts of the pandemic, while continuing to move the City forward as it recovers and regains its momentum. Staff requests that Council provide comments on the preliminary FYs 2024 and 2025 budget. A final budget will be submitted to the City Council in June for approval.
PREPARED BY: Lawrence Chiu, Finance Director
APPROVED AND FORWARDED TO THE
CITY COUNCIL:
Paul Buddenhagen, City Manager
ATTACHMENTS
Attachment A - Preliminary FYs 2024 and 2025 Budget
Preliminary Budget FYs 2024 and 2025
City Council Meeting | May 2, 2023
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City of Emeryville
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