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6 DATE: February 26, 2024
TO: Mayor and Members of the City Council President and Members of the Estero Municipal Improvement District (EMID) Board of Directors
VIA: Stefan Chatwin, City/District Manager
FROM: Stefan Chatwin, City/District Manager
Marlene Subhashini, Assistant City Manager
Edmund Suen, Finance Director
DEPARTMENT: City Manager
SUBJECT: POLICY DIRECTION REGARDING PREPARATION OF THE FY 2024-25 ANNUAL BUDGET AND FIVE-YEAR FINANCIAL PLAN
RECOMMENDATION
It is recommended that the City Council/EMID Board (City and EMID are hereinafter referred to as “City”) by Minute Order, provide policy direction relative to the development of the FY 2024-25 Annual Budget and Five- Year Financial Plan.
EXECUTIVE SUMMARY
The health of the City’s General Fund and other funds (including Special Revenue Funds, Capital Improvement Funds, Water and Wastewater Enterprise Funds, and Internal Service Funds) are critical in ensuring reliable service delivery funded through these various resources. As indicated in the Mid-Year Financial Report discussed earlier this evening, an improved revenue outlook for the full fiscal year is expected to reduce the City’s projected General Fund from $6.32 million to $4.54 million. As of June 30, 2023, General Fund Reserves totaled $58.6 million, which is 100% of this year’s adopted expenditures budget, excluding transfers out.
As part of the budget development process, the City Council has had a long-held principle in remaining committed to providing excellent service to the community while maintaining
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6 its ability to address unforeseen operating or capital needs, unfunded pension liabilities, unexpected fiscal hardships (such as local disasters), and economic downturns. Although abated, full recovery from the COVID-19 pandemic has yet to materialize in the City’s hotel Transient Occupancy Tax (TOT). The expiration of annual American Rescue Plan Act (ARPA) relief assistance of $4.05 million over each of the past two years requires the City to identify organic solutions to address its projected multi-year General Fund structural deficits. With this in mind, City staff seek policy direction in several areas as outlined in the Analysis section. Once policy direction is received, City staff will proceed with preparing the FY 2024-25 budget in accordance with the budget schedule shown at the end of the report.
BACKGROUND
The City Council’s policy general direction over the past years can be summarized in two key points:
1. Achieve a General Fund balanced budget (revenues meeting or exceeding expenditures net of transfers) without the use of reserves.
2. Maintain reserves above the City Council’s General Fund reserve policy of 33- 1/3% to 50% (4 to 6 months) of annual operating expenditures; this has been informally established in recent years as 100% reserves.
City staff will prepare an updated Five-Year Financial Plan as part of the FY 2024-25 Preliminary Budget. Based on the current economic conditions and the City’s current priorities, including the rebuild of the Recreation Center, anticipated increase in personnel costs from current labor agreements, the increase in pension costs and liability as a result of CalPERS underperformance over the past 2 fiscal years, personnel and service and supplies exception requests under consideration by the City Manager, consideration of a potential Business License Tax ballot measure in the November 2024 general election, and uncertainty regarding the State’s appetite to provide a permanent fix to Property Tax in Lieu of Vehicle License Fee revenues, the City Council may want to consider policy options to achieve a balanced budget for FY 2024-25 and also minimize/cure the anticipated multi-year structural deficits.
ANALYSIS
This staff report will identify various alternatives and policy options that the City Council may consider for reducing the General Fund deficits or achieving a balanced budget for FY 2024-25 and in the five-year financial forecast. The direction that the City Council provides will determine the level of services provided to this community in the context of maintaining the sustainable financial and economic vibrancy of the City and the community.
Policy Considerations
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6 There are six primary policy considerations that the City Council will want to consider in this budget cycle. While this may not be an exhaustive list, it represents key policy considerations that City staff believes are important in establishing sound fiscal policy for the future of the City’s operations.
1. Service Level Expectations
2. Revenue Models
3. Employee Compensation Policies
4. Long-Term Capital Improvement Project Funding
5. Funding Internal Service Funds
6. Reserve Policy
These various policy considerations are discussed below as a means of starting the conversation subject to City Council and City staff dialogue at the Budget Study Session.
1. Service Level Expectations
Defining the types and levels of services expected each year includes a process of public engagement, understanding current services, identifying the City’s mission, long-term vision, and goals of the community. Based on the goals established by the City Council, the City Manager identifies the resources required to deliver services, how best to organize those resources to achieve the City Council’s vision for the community and presents those recommendations in the Preliminary Budget for City Council review, consideration, and direction. In a service-oriented organization such as a city, it takes staff to provide services. In fact, Foster City’s budgeted personnel costs for FY 2023-24 represent approximately 63.2% of the General Fund annual operating budget (Fire personnel costs are excluded from the calculation as they are personnel of the San Mateo Consolidated Fire Department JPA and counted as contract services in the City’s budget).
As important as it is for a city to invest in its physical capital, it is just as important for a city to ensure it is investing appropriately in its human capital and to determine what is the proper level of staffing and the necessary skill sets required to deliver on the city’s mission.
In the current fiscal year, services are being provided by an authorized 177 full-time City employees (verses 172 employees in the prior year) as well as various part-time and seasonal staff. Over the course of the past and current fiscal year, the City Manager recommended various organizational changes to improve its operations and service delivery. These changes were approved by the City Council with the understanding that there would be an ongoing fiscal impact on the General Fund.
For the FY 2024-25 Budget, the City will continue to evaluate the current level of staffing to meet the City Council’s strategic directives. A detailed line-item budget will be submitted for City Council review at the Budget Study Session on May 13, 2024 and will ultimately be approved concurrently with the adoption of the City budget scheduled for June 17, 2024.
2. Revenue Models
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6 Approximately 85.1% of the City’s General Fund budgeted revenues come from taxes that are set in accordance with state or municipal law that, under the provisions of Proposition 218, require voter approval to be modified. Tax measures, such as the hotel TOT measure in November 2018, and the Business License Tax (BLT) measure in November 2013, were taken to the voters and approved. The City does not currently have a local add-on sales tax. As indicated earlier in this staff report, the City is considering a potential Business License Tax ballot measure for the November 2024 general election. Over the last 20+ years, concepts such as business improvement districts, assessment districts, and other models have not been deemed necessary.
The other 14.9% of General Fund revenues are based upon City Council action, typically in the form of a resolution, and usually after a public hearing.
A brief discussion of the some of the types of City taxes and fees are as follows:
Transient Occupancy Tax (TOT) - A TOT measure was last taken to the voters in November 2018 and was approved. It raised the TOT rate from
9.5% to 12.0% bringing it in line with many jurisdictions in San Mateo County at that time. There are currently eleven agencies whose TOT rate is at or below 12%. Seven agencies have a 14% rate.
Sales Tax – In general, Foster City receives 1% of the 9.375% sales tax assessed in the City. However, cities may seek local voter approval for a local add-on rate. If approved, taxes collected from the add-on rate provide additional revenues to such cities. There are 10 cities in San Mateo County that are at the 9.375% base rate. Two cities have a 1/8% add-on rate, and 8 cities have a 1/2% add-on rate.
Business License Tax (BLT) – In 2022, the City Council considered a potential November 2022 BLT ballot measure, but ultimately decided to postpone that option. Last year, direction was given to the City Manager to analyze the current BLT methodology. Over the course of the next several months, staff and its consultants will present options to the City Council for direction on a potential BLT ballot measure for the November 2024 general election.
Franchise Fees– Fees charged to utility or service providers for the privilege of providing services in the community using the City’s rights of way are known as Franchise Fees. These fees are typically within the purview of the City Council to change, but in some cases are dictated by federal or state law. Examples of these fees that the City currently collects are as follows:
oCable / Video Franchise – Comcast and AT&T UVerse pays the City the federally-allowed maximum franchise fee of 5% of gross revenues.
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6 oGas and Electric Franchise – The existing franchise agreement with PG&E dates back to 1971, which was adopted as an ordinance.
Franchise fees are established by state law in the Public Utilities Code (Section 6231) for which the franchise fee rates are the greater of 2% of gross receipts based on usage of the rights of way for transmission purposes, or 1% of the gross revenues derived within the community. These rates are not changeable through a local franchise agreement. As such, there is no potential for the City to extract greater franchise fees from PG&E.
oSolid Waste Franchise - The City of Foster City has a franchise agreement that includes a 5% franchise fee rate with Recology San Mateo County for collection of solid waste, recyclables, and organic materials. Practically speaking, these franchise fees are passed along to customers in their bills. As such, adjustments to franchise fees would have a direct impact on customers’ bills.
oFees for Services – The City charges fees to the community, but not-to-exceed the cost of the services provided. These fees are approved by the City Council and documented in the City’s Master Fees & Charges Schedule. The Master Fees & Charges schedule is approved annually by the City Council, and individual fees may be amended from time to time during a fiscal year. Such fees include building permits, planning charges, development impact fees, recreation programs, facilities rentals, police reports, fire inspections (Foster City collects fees on behalf of San Mateo Consolidated Fire Department), encroachment permits, and subscription fees for CalOpps, etc. The City Council has the authority to change these fees at its discretion. However, there must be a nexus to the costs of providing those services. Last year, the City completed an update of its cost allocation plan and user fee study in conformity of industry best practices to do such updates every 4-6 years.
Water and Wastewater Rates– A subset of the Fees for Services mentioned above are the rates established for water and wastewater ratepayers in Foster City (and the 94404 portion of San Mateo for water).
The revenues and the costs associated with providing those services are accounted for in Enterprise Funds for which there are strict guidelines in State law that specify that the rates must be directly relevant to the costs provided by those services. Those rates cannot subsidize other non- Enterprise fund uses. The District Board has the authority to establish these rates, which are typically set based upon annual rate studies.
Moreover, the District may establish rate- smoothing models to smooth rate increases over time based on planned/projected long-term costs such as significant capital improvement projects.
oWater Rates – In general, the District currently uses a rate model for water customers that implements two types of charges: a fixed cost is established as a meter charge based on the meter size 5 5
6 provided to a property for the availability of water service to that property; the volumetric charge is established based on the consumption of water.
oWastewater Rates – These rates are implemented based on the customer type: residential customers are charged a fixed cost based on the type of residential unit (single-family vs. multi- family); commercial customers are charged a variable cost based upon the amount of water consumed by their business and the wastewater strength category for the business.
Concession Agreements – The City enters into concession agreements with private companies to provide recreation services using City parks or other amenities. These concession agreements are typically structured on a percentage-of-revenue basis whereby the City receives a “cut” of the revenues generated by the concessionaire. The City Council has the authority to establish concession agreements and their revenue structures by the agreements entered into with those organizations.
3. Sustainable Employee Compensation Models
In May/June 2023, the City completed a classification and compensation study with wage adjustments (based primarily on the market average) made for the Police Officers Association labor unit and management unit effective 6/1/2023. In addition, the City entered into three-year labor agreements with the Foster City Police Officers Association (FCPOA) and the unrepresented management unit with annual wage adjustments based the local CPI-U with a floor and ceiling of 3% and 5% respectively. As a result, these 2 units received a 4.2% COLA increase for FY 2023-24. The AFSCME labor unit reached an agreement with the City in October 2023 for the term of July 1, 2023 to September 8, 2024 and received a 5% COLA increase retroactive 7/1/2023 with the stipulation that further reviews would be conducted for its job classifications. At this time, City staff plans to use a 3% COLA placeholder in the preparation of the FY 2024-25 budget.
4. Long-Term Capital Improvement Project (CIP) Funding
The City has a long-term capital improvement project funding model whereby annual transfers from the City’s General Fund to the City’s Capital Projects Fund are made to ensure that long-term capital improvement and critical infrastructure needs are properly funded.
The City reviews its annual CIP funding needs on an annual basis as part of the Long- Term Capital Improvement Project funding analysis, and will do so again at the March 25, 2024 budget study session. Based on prior direction from the City Council, the long-Term model has a 15-year outlook. The City has had a philosophy of “pay as you go” with respect to its funding of capital improvements.
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6 The City Council created a Capital Asset Acquisition and Replacement Fund (CAAR Fund) for the acquisition of new capital assets and construction/replacement of significant assets. The proceeds from the sale of the North Peninsula Jewish Campus and the sale of the 15-acre site were deposited into this fund. The Fund Balance as of December 31, 2023 is approximately $3.5 million after having spent $7 million for the acquisition of 22 workforce housing apartment units in the Pilgrim Triton Phase C project in August 2022 and transferring $36 million to the City CIP Fund for the rebuild Recreation Center (the remaining $19 million came from General Fund reserves). Per City Resolution No. 2012- 75, a 4/5ths vote of the City Council is required to expend those funds.
Other capital improvement funding options could include the use of debt financing for the replacement of long-term capital assets. In fact, the City/District used debt financing for the Levee Protection Planning and Improvements project (Levee Project) as well as the Wastewater Treatment Plant project (WWTP Project) that is jointly owned by San Mateo and Foster City.
5. Funding Internal Service Funds
Another example of the City’s conservative fiscal approach is the set-aside of funds to ensure that the City’s self-insurance requirements and equipment needs in the areas of vehicle fleet, technology, buildings and other department-specific equipment are fully funded at the time of replacement.
Currently, equipment replacement costs are being funded at an 85% level, assuming that expenditure savings and interest income will make up the difference when replacement is necessary. The City generally sets aside $1 million for self-insurance purposes based on its insurance arrangement through Pooled Liability Assurance Network Joint Powers Authority (PLAN JPA), which utilizes a third-party administrator to provide pooled liability services to member agencies. Lastly, the City has Internal Service Funds for its Longevity Recognition Benefits Fund, post-retirement medical requirements under State law (PEMHCA Fund), and compensated absences (e.g., vacation leave, sick leave) payable to employees upon separation of employment.
The establishment and prior funding of internal service funds have been decisions of prior City Councils. It is entirely within the current City Council’s discretion to determine the appropriate level of funding, if any, for the purposes mentioned above.
6. Reserve Policy
The current City Council policy is that the General Fund shall maintain a minimum 33- 1/3% to 50% of operating expenditures in its reserves (in essence, 4 to 6 months of operating expenditures) for its 5-Year Financial Plan. The City has accumulated well over the policy target levels over the years and utilized surpluses above the 100% level for one-time expenditures, including paying down its CalPERS unfunded accrued liability, enhancing its reserves in its City CIP Fund and Building Maintenance Internal Service Fund, and establishing a Facilities Replacement Fund. As discussed earlier in this report, 5 5
6 the City Council authorized using $19 million of General Fund reserves for the rebuild of the Recreation Center last year. Even after setting aside this amount and aided by unspent budgets over multiple years (due largely to unfilled vacancies in tight labor markets), General Fund reserves have climbed back to the 100% level at $58.6 million.
Reserves have also been established in the Water and Wastewater Operating Funds equal to 25% of annual operating expenses. The City’s Capital Investment (CIP) fund, the Water CIP Fund, and Wastewater CIP Fund have a fixed reserve threshold of $2 million each.
Policy Assumptions and Questions
The six areas identified above require policy direction from the City Council such that the City Manager has the direction necessary to prepare a preliminary budget for City Council consideration. If, in the course of dialogue at this Budget Study Session, there are other policy areas identified that require direction, it would be helpful for the City Council to identify those policy areas and the direction necessary.
It is recommended that the City Council confirm the following assumptions or otherwise provide policy direction to the City Manager regarding the following:
1.Service Level Expectations – Unless directed otherwise, the preliminary budget projections will assess the current level of staffing for FY 2024-25 to meet City Council’s strategic directives and continue to provide the same level of services to the community. A detailed line-item budget will be submitted for City Council review at the May 13, 2024 Budget Study Session and will ultimately be approved concurrently with adoption of the City budget which is scheduled for June 17, 2024.
2.Revenue Models – City staff plans to present additional information on BLT modernization and seek City Council direction on a potential BLT ballot measure for the November 2024 general election.
3.Sustainable Employee Compensation Policies – Unless directed otherwise, the City Manager recommends that personnel services costs for the preliminary budget include a 3% placeholder for annual wage increases as well as other provisions of current MOUs.
4.Long-Term Capital Improvement Project Funding – The current funding strategy entails a detailed analysis of the long-term capital improvement project funding needs based on a 15-year forecast. This strategy assumes a “pay as you go” philosophy that does not anticipate the use of debt financing except as noted with the Levee Protection Planning and Improvements Project (CIP 327-657) and 5 5
6 the Wastewater Treatment Plant Project (CIP 455-652). City staff expects to provide the long-term capital improvement project funding analysis to the City Council at its March 25, 2024 Budget Study Session. Except for the Wastewater Treatment Plant project that is currently in progress, does the City Council agree that a “pay as you go” funding model be employed that proactively funds long- term capital improvement projects from existing resources and operating transfers into capital improvement reserves?
5.Funding Internal Service Funds – The internal service funds analyses are also scheduled to be presented at the March 25, 2024 Budget Study Session. In anticipation of that session, there are three policy considerations identified for City Council consideration:
a.Equipment Replacement Funding – In regard to equipment related replacement funds (vehicle, equipment, information technology and building), the current funding strategy employs a “pay as you go” philosophy of proactively setting aside funds for replacements such that full funding of replacements is available at the time an asset is replaced.
The preliminary FY 2024-25 budget projections will continue using this philosophy. Are there other funding methods that the City Council wishes to explore or employ for the use of these funds?
b.Unfunded Obligations – The City typically performs an actuarial analysis of its Longevity Recognition defined benefit liability and Public Employees' Medical and Hospital Care Act (PEMHCA) retiree medical liability bi- annually. As of June 30, 2023, these liabilities were $3.16 million and $8.78 million respectively. The City continues to maintain internal service funds for both the Longevity Recognition and PEMHCA retiree medical funds on a cash benefit basis. As of June 30, 2023, the balances of these Funds were $2.66 million and $6.29 million respectively and the City continues to hold these funds internally and earning a substantially risk- free yield above 5%. Does the City Council wish City staff to explore options to fully fund its Longevity and PEMHCA liabilities and/or to establish irrevocable trusts for each?
c.Self-Insurance Funding – The current policy assumes that a $1 million self-insurance reserve is maintained in order to provide funding for the self-insured retention component of claims against the City. This level has provided adequate funding the prior years to ensure that funds are readily available to pay claims against the City.
6.Reserve Policy – The current General Fund reserve policy is to maintain a minimum General Fund reserve of 33-1/3% to 50% of annual operating 5 5
6 expenditures. The Water and Wastewater Operating Funds have minimum reserve levels of 25% of annual operating expenses, and $2 million reserve levels in each of the City, Water, and Wastewater CIP Funds. Unless directed otherwise, City staff will continue to follow this policy in the preparation of the FY 2024-25 budget and 5-year financial plan.
Budget Schedule and Next Steps
The following dates and topics have been established in developing the FY 2024-25 annual budget:
Monday, February 26 at 6:30 PM: Mid-Year Financial Review and direction from the City Council for the preparation of the FY 2024-25 preliminary budget and Five-Year Financial Plan.
Monday, March 25 at 6:30 PM: Enterprise Funds, Internal Service Funds, Capital Improvement Projects, Water and Wastewater Rates, Preliminary Master Fee Schedule, and Special Reports.
Monday, April 15 at 6:30 PM: Public Hearing on Master Fee Schedule for FY 2024-25.
Monday, May 13 at 6:30 PM: Preliminary Annual Budget and Five-Year Financial Plan (All Funds).
Monday, June 3 at 6:30 PM: Budget Public Hearing and follow-up from prior study sessions, Public Hearing and adoption of Water and Wastewater Rates, and Award of Non-Profit Agency Funding
Monday, June 17 at 6:30 PM: Annual Budget Adoption
Friday, June 28: Annual Budget and Five-Year Financial Plan Publication Conclusion
The decisions that will be made in the FY 2024-25 Annual Budget process will continue the City’s history of thoughtful stewardship of the public’s resources and preserve its path towards our long-term financial health.
Staff looks forward to working with the City Council in the months ahead as the Council discusses, deliberates, and decides on the important policy decisions necessary to secure our financial future and that make Foster City that great place where people want to live, work and play.
CALIFORNIA ENVIRONMENTAL QUALITY ACT
Not Applicable
FISCAL IMPACT
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6 There is no immediate fiscal impact from this report.
CITY COUNCIL VISION, MISSION, AND VALUE/PRIORITY AREA
Innovation and Sustainability