DATE: March 3, 2025
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/District Manager
Nate Cruz, Finance Director/Treasurer
DEPARTMENT: City Manager
SUBJECT: POLICY DIRECTION REGARDING PREPARATION OF THE FY 2025-26 ANNUAL BUDGET AND FIVE-YEAR FINANCIAL PLAN
RECOMMENDATION
It is recommended that the City Council/EMID Board of Directors (City and EMID are hereinafter referred to as “City”) by Minute Order, provide policy direction relative to the development of the FY 2025-26 Annual Budget and Five-Year Financial Plan.
EXECUTIVE SUMMARY
As indicated in the Mid-Year Financial Report discussed earlier this evening, General Fund revenues and expenses are proving better than budgeted largely due to: (a) the State’s unexpected backfill of the Property Tax in Lieu of Vehicle License Fee shortfall (the “VLF shortfall”), (b) the conservative budgeting assumption that no positions are vacant during the fiscal year, while normal levels range from 4-15%, and (c) higher than anticipated interest earnings. General Fund Reserves are $55.8 million as of December 31, 2024, or 90% of budgeted operating expenditures. Overall, FY 2024-25 is likely to be another positive year for the City.
Future year projections of the General Fund, however, are not so encouraging. Without new revenue sources or decreased expenses, deficits are likely due to ongoing
uncertainty surrounding the State’s backfill of the VLF shortfall. City staff seeks policy direction in several areas, including:
•Service levels
•New revenues
•CIP funding
Once policy direction is received, City staff will proceed with preparing the FY 2025-26 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 without the use of reserves.
2. Maintain reserves above the City Council’s General Fund reserve policy of 50% of annual operating expenditures.
Based on likely General Fund deficits, the City Council may want to consider policy options to achieve a balanced budget.
ANALYSIS
Staff has identified four general policy areas that the City Council may want to consider to address the deficit. This is not an exhaustive list and only 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 Levels
The City has historically provided high service levels to the community, and the 5-year forecast assumes those service levels remain high. Unless directed otherwise, staff will assume similar service levels moving forward without significant increases or decreases in staffing levels
2. New Revenues
Council may consider new revenue models to reduce forecasted General Fund deficit such as:
•Increasing the Transient Occupancy Tax (TOT) from 12% - Currently, other jurisdictions in San Mateo County have a rate as high as 14%, suggesting Foster City could increase its current rate and maintain competitiveness within the area.
•Increasing the Sales and Use Tax from 9.375% - Currently, other jurisdictions in San Mateo County have a rate as high as 9.875%, suggesting Foster City could increase its current rate and maintain competitiveness within the area.
•Becoming a Charter City, which may enable the City to collect property transfer taxes.
•Increasing fees up to cost recovery - The City charges fees for services, such as building permits, facility rentals, recreation programs, CalOpps use fees, etc. These fees are limited by law to the cost of providing the associated services and are approved by the Council in the City’s Master Fees & Charges Schedule. Council may consider increasing these fees to increase revenues.
•Creating a Storm Water Utility– Most jurisdictions in the Bay Area have storm water utility district, while Foster City does not, leaving storm water costs to be covered by the General Fund. The Council could consider establishing a Storm Water Utility District, subject to the approval of voters, which would create a new rate base to cover storm water management costs.
3. Long-Term Capital Improvement Project (CIP) Funding
The City has historically used a pay as you go method of financing capital projects, saving up over time to pay for projects (with some notable exceptions such as the General Obligation bond funded levee project). The Council could consider using GO debt more often, which would allow the cost of those projects to increase property tax rates, rather than pay as you go financing which is funded by General Fund subsidy.
Debt funding also has the benefit of placing the financial burden of future improvements on future residents, rather than past residents.
Budget Schedule and Next Steps
The following dates and topics have been established in developing the FY 2025-26 annual budget:
•Monday, March 24 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 21 at 6:30 PM: Public Hearing on Master Fee Schedule. •Monday, May 12 at 6:30 PM (tentative): Preliminary Annual Budget and Five- Year Financial Plan (All Funds).
•Monday, June 2 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 16 at 6:30 PM: Annual Budget Adoption
•Thursday, June 30: Annual Budget and Five-Year Financial Plan Publication
CALIFORNIA ENVIRONMENTAL QUALITY ACT
Not Applicable
FISCAL IMPACT
There is no fiscal impact directly associated with this item.
CITY COUNCIL VISION, MISSION, AND VALUE/PRIORITY AREA
Innovation and Sustainability
ATTACHMENTS
None