DATE:
March 4, 2025
TO:
LaTanya Bellow, City Manager
FROM:
Lilybell Nakamura, Acting Finance Director
Brian Moura, Regional Government Services (Finance Consultant) SUBJECT:
Resolution Of The City Council Of The City Of Emeryville Amending The 2024-25 General Fund Budget, Amending City Financial Policies, Transferring Funds And Assigning Funds
RECOMMENDATION
Staff recommends that the City Council review and discuss this 2024-25 General Fund Mid-Year Budget Update, recommendations from the Budget Advisory Committee and Budget and Governance Committee and take action on this item.
BACKGROUND
The City of Emeryville has a 2-Year Budget process that includes City’s Operating Budget which covers day-to-day City operations. The 2-Year Budget is updated midway through the 2-year period. It is made up of General Fund and Non-General Fund revenues.
On June 6, 2023, the City Council approved the 2 Year City Budget covering the 2023-24 fiscal year (ending June 30, 2024) and the 2024-25 fiscal year (that will end on June 30, 2025). The General Fund portion of each of these budgets included a projected deficit where expenditures exceeded revenues.
On November 19, 2024, the City Council discussed the 2024-25 General Fund Budget, proposed budget strategies and budget amendments recommended by the Council Budget and Governance Committee. This was an information-only agenda item which is now returned to the City Council for further discussion and action at tonight’s Council’s meeting. The recommendations in this report have been reviewed by the Budget Advisory Committee and Budget and Governance Committee last month.
DISCUSSION
City Budget Principles
The City of Emeryville adopted a set of 6 budget principles in the 1993-94 fiscal year. The first of these, shown in Attachment 1 states:
“Current-year expenditures should be supported by current-year revenues. One-time revenues should not be used for ongoing costs but should instead be used for necessary one-time expenditures or to strengthen fund reserves.” Current Fund Balance Policies
The City also has policies in place that cover the purpose and fund balance targets for the Economic Uncertainty Reserve (Fund 275), the Disaster Reserve (Fund 277) and the Unassigned General Fund Balance (Fund 101). These are shown on pages 225 and 226 in the current 2023-25 City Budget. See Attachment 2.
These policies indicate that the City shall maintain a target reserve of 50% in the Economic Uncertainty Reserve as well as a target reserve of $5 Million in the Disaster Reserve. Funds in the Economic Uncertainty Reserve can be used when revenues fall 5% or more below the budgeted estimate. That is the case in the current 2024-25 fiscal year.
In contrast, there is no target reserve amount for the Unassigned General Fund in these policies. The Government Finance Officers Association (GFOA) recommends a minimum target reserve in the General Fund of 16.7% (2 months’ worth of expenditures) and many cities have a higher reserve policy in the range of 20% to 30% for the General Fund Unassigned Balance.
General Fund Structural Deficit
During the discussion of placing Measure “O” (Real Property Tax Measure) on the November 2022 General Election ballot (July 2022) and in the Budget Message in the current 2023-25 City Budget (July 2023), the practice of adopting City budgets where the General Fund expenditures exceed revenues each year and the need to end this practice were highlighted:
Placing Measure “O” (Real Property Transfer Tax) on the Ballot "The City is projecting a structural deficit in fiscal year 2022-23, as it has in the past two fiscal years. Addressing these required the use of one-time funds and deferral of capital projects to bridge the gap between revenues and expenditures." 2023-25 Budget Message
"The projected deficits are planned to be addressed using Ending General Fund Balance, but they are not sustainable and either new revenue will be needed, or expenditures will need to be reduced." 5 Year General Fund Forecast
This problem is also illustrated in the 5 Year General Fund and Reserves forecast:
The forecast shows that the Economic Uncertainty Reserve (Fund 275) and the Disasters Reserve (Fund 277) remain above the 50% target. It is also worth noting that the 50% target is calculated differently in the budget – either as a percentage of the Economic Uncertainty Reserve only or as a percentage of this reserve plus the Disasters Reserve (as shown above). This financial policy should be clarified.
In comparison, the General Fund (Fund 101) is projected to have a multi-million-dollar Annual Net Deficit of $2.7 Million to $6.4 Million over the next 5 years. Resulting in the Unassigned General Fund Balance going from a starting balance of $15.2 Million at the start of 2023-24 to a negative fund balance of $9 Million by the 2027-28 fiscal year.
As earlier budget messages noted, the City needs to work to eliminate these multi-million-dollar annual General Fund deficits. In the short term, this can be done by reallocating ongoing Residual Property Tax Revenues to the General Fund, using some of the one-time funds in the Economic Uncertainty Reserve and in the Capital Projects Fund along with reducing expenses. 2023-24 General Fund Budget
As noted above, the current 2023-25 City Budget includes a projected General Fund deficit. In the 2023-24 General Fund Budget, this included expenses exceeding revenues by $1,319,098 plus transfers to other funds of $3,925,000 for a deficit of $5,244,098.
At the end of the 2023-24 fiscal year, the General Fund budget deficit increased by $1.9 Million. This was due to an IRS Settlement of $2.1 Million that was offset by salary savings and vacancies. The deficit was covered by the General Fund balance. 2024-25 General Fund Budget
The 2024-25 General Fund budget projected a deficit of $2.7 Million. Reviewing revenues and expenditures through December, the Finance Department is now projecting that this year’s General Fund deficit will be almost $8.7 Million – an increase of $6 Million over the 2023-25 Budget and $200,000 more than the estimated deficit in last October.
The primary factors in this increased deficit are significant declines in Fees & Charges ($4 Million), Real Property Transfer Tax ($1.5 Million) and Sales Tax revenues ($1.4 Million). The revenue declines were offset by increases in Utility Users Tax, Transient Occupancy (Hotel) Tax and Franchises.
There were also increases in Expenditures that has been offset by savings due to vacant positions and decreases in departmental spending. (See Attachment 3 and Attachment 4).
The budget analysis also notes the City’s future Social Security Settlement of $3.3 Million which may occur in the current 2024-25 fiscal year or a future time.
Residual Property Tax Revenue
The City of Emeryville receives Residual Property Tax revenues that increase over time as the obligations of the former Emeryville Redevelopment Agency are retired. In the current 2024-25 fiscal year, these funds are budgeted at $6.4 million.
Rather than receive all these property tax funds in the General Fund, the City Council adopted a policy in 2019 to distribute 50% of these revenues as follows:
If the General Fund allocation of the Residual Property Tax revenues were increased from 50% to 100%, this would bring an additional $3.2 million to the General Fund. Plus, additional ongoing revenues in future years.
ANALYSIS & RECOMMENDATIONS
October Review by Budget and Governance Committee
Last October, the Budget and Governance Committee discussed options and budget strategies proposed by the Finance Department to address the gap in the 2024-25 General Fund budget.
They recommended a 5-point proposal to the City Council to address the $8.5 Million projected shortfall in the General Fund at that time and the $3.3 Million one-time Social Security payment that was presented to the City Council at their meeting of November 19, 2024:
Increase the General Fund allocation of Residual Property Tax Revenue from 50% to 100%, which would bring an additional $3.2 Million to the General Fund in the current year.
Evaluate vacant positions and contracts for services with projected savings of $1 Million.
Evaluate a 2.5% reduction in the budget of non-essential operating expenses with projected savings of $1.5 Million.
Transfer an amount from the Economic Uncertainty Reserve to pay the Social Security settlement (estimated at $3.3 Million) and replenish the Economic Uncertainty Reserve within three fiscal years.
Use $3 Million from the Unassigned Fund Balance to bridge the 2024-25 fiscal year budget shortfall. If the Social Security settlement is more than $3 Million, the balance of the needed funds to eliminate the budget shortfall would come from the unassigned fund balance.
Recommended Strategy to Balance the 2024-25 General Fund Budget The recommended options consider the Budget and Governance Committee 5-point proposal and the increase in the General Fund budget gap from $8.5 Million (in October) to $8.7 Million (at Mid-Year). Together with the status of the General Fund Unassigned Balance and changes to the Economic Uncertainty Reserve, Disaster Reserve and General Fund Unassigned Balance policies. The elements of the proposal are:
Increase the General Fund allocation of Residual Property Tax from 50% to 100% bringing an additional $3.2 Million into the General Fund in the current fiscal year. This change will also bring additional funds into the General Fund in future years. (BGC Strategy 1) Reduce the $3 Million projected increase in expenditures during the current fiscal year by $2 Million by reducing department expenses and keeping several vacant positions unfilled, underfilled or using contract services. (BGC Strategies 2 and 3) Use funds from the Economic Uncertainty Reserve to pay the Social Security settlement estimated at $3.3 Million. (BGC # 3) Transfer $5 Million from the Economic Uncertainty Reserve (Fund 275) to the General Fund (Fund 101) to offset the 2024-25 General Fund projected deficit. This will also offset any further revenue decreases and expense increases during the balance of the 2024.25 fiscal year. And it will bring the General Fund Unassigned Balance to 15% for this fund balance. (New recommendation that replaces BGC Strategy 5) Transfer $2 Million from the General Capital Improvement Fund (Fund 475) to the General Fund (Fund 101) to bring the General Fund Unassigned Balance to 20%. (New recommendation) Combine the Economic Uncertainty Reserve (Fund 275) and Disaster Reserve (Fund 277) into the Economic Uncertainty Reserve. Clarify that the 50% Target for this combined fund is a goal and that the current policy allowing the City Manager to spend up to $5 Million from this combined fund remains. (New recommendation).
Amend the Fund Balance Policy of the Unassigned General Fund (Fund 101) so that it has a target balance of 20% of annual expenditures rather than no target balance. Consistent with the GFOA policy and best practices in local government finance. (New recommendation) Assign $3.3 Million from the Economic Uncertainty Reserve (Fund 275) to pay the Social Security Settlement when it occurs. (New BGC recommendation).
The result of these recommended strategies would be:
Residual Property Tax Revenues – Transferring 100% of Residual Property Tax Revenues to the General Fund will cover $3.2 Million of the $8.7 Million projected shortfall with ongoing revenues. Addressing over 35% of the gap.
General Fund Unassigned Balance – General Fund Unassigned Balance (Fund 101) would be increased from $10 Million to $11.5 Million. Bringing it up to 20% of projected expenditures as recommended in proposal # 6.
Social Security Settlement – At a future date, the Economic Uncertainty Reserve (Fund 275) would decrease by $3.3 Million to cover the one-time Social Security Settlement amount.
Increase Economic Uncertainty Reserve – This reserve fund would increase from $24.4 Million to $29.8 Million and would have increased flexibility to address both Economic Downturns and responses to Disasters.
Capital Improvement Fund – The Capital Improvement Fund unassigned balance (Fund 475) would decrease from $20 Million to $18 Million.
Economic Uncertainty Reserve – The newly combined Economic Uncertainty Reserve (Fund 275) would decrease from $29.8 Million to $24.8 Million during the 2024-25 fiscal year. Reducing the level of this combined reserve fund from 56% to 47%.
General Fund Unassigned Balance Target – Would establish a 20% target for the General Fund Unassigned Balance. Consistent with best practices.
Assign Social Security Settlement Funds– Assignment of $3.3 Million in the Economic Uncertainty Reserve (Fund 275) will reserve these funds for the future payment. It will also reduce the amount of unassigned funds in the Economic Uncertainty Reserve.
ADDITIONAL BUDGET STRATEGIES
During the discussion of the General Fund Budget gap last year, several additional budget strategies were discussed. Work on these strategies is continuing by the City Staff.
Revenue Analysis & Audits
Part of managing the City’s General Fund Revenues is to conduct regular analysis and audits of these sources. Work in this area includes:
Sales Tax Analysis and Audits (Avenu)
Utility User’s Tax Analysis and Audits (Avenu)
Business License Tax Analysis and Audits (HdL)
Exploring Property Tax & Property Transfer Tax Analysis & Audits Cost Allocation Plan & Master Fee Study
The City’s largest source of General Fund revenues are fees and charges. It is also worth noting that the City Budget includes over 40 funds. Both facts highlight the need for the City to consider an updated Cost Allocation Plan and Master Fee Study.
It would enable the City to review current fees charged for services and areas where new fees would be appropriate. The study would also review the level of services provided by the General Fund to other funds and recover some of these costs in the future.
The cost of this project would be $65,000 to $80,000. Additional cost recovery and fee revenues identified in this project would more than cover this cost.
Grant Opportunities & Assistance
In the last two years, many cities have retained expert assistance to increase their ability to obtain grant funding from regional and state sources. This project would involve requesting proposals from firms that assist cities in researching, preparing grant applications and managing grants.
The cost of these services is approximately $65,000 per year. Obtaining one or more new grants of $100,000 or above would cover the cost of these services.
Local Revenue Measures in Alameda County
Emeryville is not alone in facing budget challenges. Last November’s General Election ballots in California included over 500 revenue measures from School District, City, County and Special Districts. “There were over 700 local revenue measures on ballots in California's November 5, 2024, General Election. Including 539 local tax and bond measures. Well over half of these measures (293) were school tax or bond measures. One third (180) were proposed by or for cities. 410 of the 539 tax and bond measures passed for a passage rate of 76%. This is the largest number of local tax and bond measures proposed and passed in California history." -- Michael Coleman, Fiscal Advisor, League of California Cities (Cal Cities) Seven cities and in some cases residents in Alameda County proposed 15 revenue measures in the November 2024 election: The proposed measures would raise $392,000 to $47.4 Million annually. 11 of the 15 revenue measures were passed by the voters (See Attachment 5).
Revenue Measure Options in Emeryville (November 2026 Election) The City of Emeryville could place one or more revenue measures on the next General Election ballot which would be in November 2026. The cost to place a measure on the ballot, together with outreach and polling costs would be approximately $150,000.
If a revenue measure were approved by the voters in November 2026, revenue from the measure would be available to the City in 2027. These should be viewed as future options to explore. Potential revenue measures that the City has discussed include:
Parcel Tax or Community Facilities District: $3.5 Million/year Local ¼ Cent Transactions & Use (Sales) Tax: $2.1 Million/year Transient Occupancy (Hotel) Tax (12% to 14%): $900,000/year Business License Tax (Categories, Rates, Maximum): TBD
Utility Users Tax: Video ($350,000/year) & Water (TBD)
Vacant Homes, Vacant Commercial Buildings, Vacant Parcels Tax: TBD The process and timing to explore these measures would include analysis of several of the revenue types. This would include modernizing ordinances (existing taxes), exploring rates and caps and developing revenue estimates for consideration. The cost to develop these options could be $40,000 to $50,000 per tax type.
This information would then be presented in the Fall of this year. With polling and outreach work to follow prior to bringing the potential revenue measures back to the City Council for placement on the ballot in June 2026.
Budget Advisory Committee Review & Recommendations
On February 13, 2025, the Budget Advisory Committee reviewed this report and provided their recommendations on the proposed Mid-Year Budget actions. The committee supported the recommendations outlined in the report. (The recommendation for a 20% General Fund Unassigned Balance was added after the presentation to the Budget and Advisory Committee). The committee also asked that the recommendation on moving 100% of the Residual Property Tax Revenue to the General Fund be shown as the first of the recommended budget balancing strategies.
The committee also expressed concern about the practice of using vacant positions during each year to help balance the General Fund budget. They feel that this reduces the City’s ability to deliver services to the community. While it may be necessary in the short-term considering the current General Fund deficit, the committee feels that the City should move away from this practice in the future.
The committee passed a motion that includes longer term budget recommendations for consideration as the next 2-year budget is developed. These recommendations are:
Consider a more conservative approach to estimating revenues in future budgets. Especially when they involve revenues that tend to vary from year to year (such as Development Fees and Real Property Transfer Taxes).
Receive General Fund revenues into the General Fund rather than using formulas to automatically transfer funds that would go to the General Fund annually to other funds.
Consider delaying transfers from the General Fund to other funds from the start of a fiscal year to mid-year. This would enable the City Council to have the mid-year revenue and expense results available before making these decisions.
Update the City’s Cost Allocation Plan and Master Fee Schedule. This will ensure that other funds which use General Fund support are compensating the General Fund for these services. It will also update the City’s Fees for Services. (The committee observed that due to the length of time the last study of this type was done, the City’s fees may not be recovering the full cost of services as intended).
Provide more detailed information to the City Council and the Community on Sales Tax Revenues.
Budget and Governance Committee Review & Recommendations On March 4, 2025, the Budget and Governance Committee (Vice Mayor Kaur and Council Member Welch) reviewed this report and provided recommendations to the City Council for their consideration.
Vice Mayor Kaur asked that information on the Unassigned General Fund Balance and Reserve Fund Balance of other area cities be researched and provided during the budget process. She also expressed support for ending the practice of using vacant positions to balance the General Fund budget in the future once the General Fund Budget balancing is completed.
Council Member Welch asked for more details about the potential revenue measures in the report and when more detailed information will be available.
Emeryville has one business that is at the maximum payment for the City’s Business License Tax. If the voters were to approve raising or eliminating the Business License Tax maximum payment at the next General Election it would result in additional revenue from that business. (The cap is currently $450,997,990 with an annual increase based on the Consumer Price Index). It was also noted that the current Business License Tax has 41 categories (rather than 4 to 6 found in more recent Business License Tax ordinances) and the current rates are likely lower than those of other local cities. If the City Council has an interest in exploring this option, a detailed study providing options for new business categories, tax rates and the maximum tax would be needed.
Research into the Utility Users Tax update indicates that adding Video (Cable TV and Streaming services) could generate $350,000 per year in new revenue. Adding Water service to the tax is being researched as to its revenue potential. That information should be available in the next week or so.
In November, a Vacant Home Tax (which could also include Vacant Commercial Buildings and Vacant Parcels) was suggested by a member of the City Council. The committee felt that this type of tax might be subject to varying levels of revenue from year to year as well as needing a review of which areas it would cover and whether the proceeds would be in the General Fund or earmarked for other purposes (housing, economic development, etc.). The committee recommended that this revenue option be given a lower priority by the City Council than others listed in the report.
The committee voted to recommend that the City Council adopt the 7 budget balancing options in the report from Staff and the Finance Consultant. The committee also recommended an 8th option which would assign $3.3 Million in the Economic Uncertainties Fund (Fund 275) for the future Social Security Settlement payment. This would earmark the settlement amount. Staff and the Finance Consultant have added this new recommendation from the Budget and Governance Committee to their list of recommended actions by the City Council.
NEXT STEPS
The Finance Department staff is working with City departments and the City Manager on the 2025-27 Proposed 2-Year Budget. This will include an updated 5 Year Revenue and Expenditure projection.
Staff also plans to bring a detailed Mid-Year Budget Report and proposed budget adjustments for all funds to the City Council at their meeting on March 18, 2025.
Approved and Forwarded to the
City Council of the City of Emeryville:
LaTanya Bellow, City Manager
Attachments
Attachment 1 – City of Emeryville Budget Principles
Attachment 2 – Current Policies for General Fund & Reserve Fund Balances Attachment 3 – 2024-25 Fiscal Year Revenue Estimates
Attachment 4 – 2024-25 Fiscal Year Expenditure Estimates Attachment 5 – Local Revenue Measures in Alameda County Attachment 6 – Emeryville 3rd Quarter 2024 Sales Tax Update Resolution Amending the 2024-25 General Fund Budget, Amending City Financial Policies, Transferring Funds and Assigning Funds 2024-25 Fiscal Year Budget Update & Proposed Budget Amendments City Council Meeting | March 4, 2025
MEMORANDUM