Fremont City Council Meeting: 03/08/22 07:00 PM
3300 Capitol Avenue Div/Dept: Finance Department
Fremont, CA 94538 Category: Budget
SCHEDULED
Sponsors:
STAFF REPORT (ID # 4534) DOC ID: 4534
Updated: 3/4/2022 9:48 AM by Alberto Quintanilla Page 1 FISCAL YEAR 2021/22 MID-YEAR BUDGET REPORT - Update on the Status of the FY 2021/22 General Fund Operating Budget and Preliminary Three-Year Forecast; Approve Budget Adjustments
Contact Persons:
Name: David Persselin
Title: Finance Director
Div/Dept: Finance Department
Phone: 510-494-4631
E-Mail: [email protected]
EXECUTIVE SUMMARY: The Mid-Year Budget Report is an opportunity for staff to update the City Council on current-year budget performance based on actual operating results through December 31, 2021. Staff will present a brief review of economic trends, discuss revised General Fund revenue and expenditure projections for the current year, provide a preliminary General Fund forecast for the next three years, and present recommendations for mid-year budget adjustments.
BACKGROUND: The Fiscal Year 2021/22 operating budget was adopted by the City Council on June 15, 2021. The adopted budget was developed on the assumption of a gradual recovery from the public health emergency that would continue to depress certain sectors of the local economy and the City’s general revenues. As a result, the adopted uses of funds exceeded the estimated ongoing revenues in the General Fund by over $19 million.
However, the federal government provided the City with the opportunity to restore services that were reduced due to pandemic-related revenue losses through the American Rescue Plan Act (ARPA) State and Local Fiscal Recovery Fund. The City was allocated $22.1 million of fiscal recovery funds in FY 2020/21 and will receive a second allocation of the same amount in mid-2022. $20 million of fiscal recovery funds were used to balance the current year adopted budget with the remaining $2.1 million used to stabilize the Recreation Fund.
As part of the FY 2020/21 Year End Report presented to the City Council on November 2, 2021, staff noted that a fourth-quarter surge in sales tax revenue and unanticipated expenditure savings resulted in $5.8 million of available ending fund balance. To address the continuing revenue uncertainty, the City Council restored the Budget Uncertainty Reserve to its pre-pandemic level and then increased it to a total of $10 million.
DISCUSSION AND ANALYSIS:
Economic Trends: The national economy has continued to recover well from the pandemic-related recession, with fourth quarter growth of 7% and the unemployment rate at 4%, close to its level in February 2020. However, consumer confidence, while having improved over the last six months, is now beginning to reflect concerns over increasing inflation, and the recent Russian military action in Ukraine and associated economic sanctions may further discourage both consumers and businesses. While the City’s Staff Report (ID # 4534) Meeting of March 8, 2022
Updated: 3/4/2022 9:48 AM by Alberto Quintanilla Page 2 preliminary revenue forecast assumes continued increases over the next few years, it is important to recognize the significant economic uncertainties facing our community.
FY 2021/22 General Fund Revenue and Expenditure Estimates: The General Fund’s largest source of revenue, property tax, is performing slightly above the budget estimate, with expected growth of 4.2% over the prior year. Sales taxes, however, constituting the General Fund’s second largest source of revenue, are projected to increase by 29.1%, a $21.8 million increase above the adopted budget revenue estimate. The significant growth in sales tax revenue is largely attributable to what may be a temporary spike in new auto sales. Business tax revenue is projected to exceed the budgeted estimate by $1.8 million, although some of that may reflect payment of prior year delinquent taxes. The historically high level of real estate transactions is projected to generate $2 million more revenue than originally estimated, and fine revenue is also outperforming its estimate by $2 million.
Although hotel tax revenue continues to fall well below its pre-pandemic level, it is projected to exceed the budgeted estimate by $1 million.
Overall, General Fund revenues and transfers in are estimated to grow 3.2% in FY 2021/22 from the FY 2020/21 level, resulting in $31 million more of estimated resources than included in the adopted budget. Excluding the $20 million of fiscal recovery funds received in FY 2020/21, revenues and transfers in are projected to grow by 12.7%. This report includes a recommended adjustment to bring the budgeted revenue estimate for sales tax in line with the current projection.
General Fund expenditures and transfers out for FY 2021/22 are projected to end the year $6.9 million above the adjusted budget, primarily due to higher than anticipated citywide vacancy savings. In total, General Fund expenditures and transfers out are anticipated to increase 5.5% from the FY 2020/21 total use of funds.
The adjusted budget assumed that the General Fund would end the year with $0.9 million of unreserved fund balance. The $31 million increase in estimated General Fund resources, combined with $6.9 million of additional expenditure savings, results in an estimated ending fund balance for FY 2021/22 of $38.8 million.
Staff will return to the City Council on May 17, 2022, with updated estimates for FY 2021/22 incorporated into the FY 2022/23 Proposed Operating Budget.
The following table presents a comparison of FY 2020/21 actual results with the FY 2021/22 adjusted budget and staff’s FY 2021/22 mid-year estimate.
Staff Report (ID # 4534) Meeting of March 8, 2022
Updated: 3/4/2022 9:48 AM by Alberto Quintanilla Page 3
Preliminary General Fund Forecast: Revenue projections for the next three fiscal years are based on the most current information available and take into account historical trends, current-year performance through mid-year, projected development activity, and scheduled changes in various fees and rates. The FY 2022/23 revenue projection includes the second installment of fiscal recovery funds totaling $22.2 million.
The FY 2022/23 and subsequent year expenditure projections are net of estimated citywide savings of $6 million and include adjustments to reflect CalPERS pension contribution increases, higher retiree healthcare contributions, scheduled debt service payments, and contractual obligations. In accordance with the City Council’s Pension Liability Funding Policy, an additional pension contribution has been included in each year as well.
As this forecast is preliminary, the expenditures shown represent a “base budget” that delivers the existing level of services with no assumed compensation or staffing increases.
These expenditure levels may increase as the FY 2022/23 Proposed Operating Budget is developed with the benefit of additional information, including any recommendations for service level enhancements.
Staff Report (ID # 4534) Meeting of March 8, 2022
Updated: 3/4/2022 9:48 AM by Alberto Quintanilla Page 4
Revenue and Expenditure Adjustments: As discussed above, the current sales tax projection, based on two quarters of actual receipts, is exceeding the budgeted estimate by $21.8 million. All other revenue categories combined are projected to exceed the estimate by $9.2 million. As noted in the discussion of economic trends, the combination of increasing inflation and international instability are creating significant economic uncertainty. To accommodate the potential for a revenue slowdown during the remaining portion of the fiscal year, prudence suggests that only a portion of the projected excess be recognized at this time. For simplicity, staff recommends that the City Council increase the revenue estimate for sales tax by $21.8 million while leaving the estimates for the other revenues at their adopted levels.
At the City Council Retreat, held on February 25, 2022, staff reviewed a list of critical maintenance and capital replacement needs as well as unfunded future capital investments.
These include major City initiatives such as the parks master plan and the climate action plan, but also traffic signal modernization, replacement of deteriorating facilities in Central Park, and technology upgrades. Although the cost of these unfunded needs far exceeds the resources available, the unanticipated increase in current year revenue creates an opportunity to make progress on the highest priority projects. To create the capacity to fund some of these projects in the next capital improvement plan, staff recommends that the City Council appropriate the $21.8 million of additional revenue as a transfer to the Capital Improvements Fund.
FISCAL IMPACT: The recommended budget adjustments will better align the sales tax revenue estimate with the current projection and create funding capacity for the next capital Staff Report (ID # 4534) Meeting of March 8, 2022
Updated: 3/4/2022 9:48 AM by Alberto Quintanilla Page 5 improvement plan. Staff will return to the City Council on May 17, 2022 with the FY 2022/23 Proposed Operating Budget and a revised General Fund forecast.
ENVIRONMENTAL REVIEW: Not required.
ATTACHMENTS: None.
RECOMMENDATIONS:
1. Increase the General Fund revenue estimate for sales tax by $21.8 million.
2. Approve the transfer of $21.8 million to the Capital Improvements Fund (Fund 501).