Fremont City Council Meeting: 10/18/22 07:00 PM
3300 Capitol Avenue Div/Dept: Finance Department
Fremont, CA 94538 Category: Presentations
SCHEDULED
Sponsors:
STAFF REPORT (ID # 4726) DOC ID: 4726
Updated: 10/14/2022 11:13 AM by Alberto Quintanilla Page 1 FISCAL YEAR 2021/22 YEAR-END REPORT AND 2022/23 BUDGET UPDATE - Presentation of Year-End Results for FY 2021/22 and Recommended Fund Balance Allocation; Update on Revenue and Expenditure Estimates for FY 2022/23
Contact Persons:
Name: David Persselin
Title: Finance Director
Div/Dept: Finance Department
Phone: 510-494-4631
E-Mail: [email protected]
Executive Summary: The FY 2021/22 Year-End Report provides a summary of actual operating results for the General Fund, makes recommendations for allocating the General Fund ending fund balance of $13.2 million, and identifies appropriation actions taken by the City Manager in accordance with Resolution No. 2021-40, a Resolution of the City Council of the City of Fremont Approving and Adopting a Budget for the Fiscal Year July 1, 2021 through June 30, 2022 (the “Budget Resolution”).
In addition, staff will provide a brief update on revenue and expenditure estimates for the current fiscal year, 2022/23.
BACKGROUND: The FY 2021/22 Operating Budget was adopted by the City Council on June 15, 2021, and year-end estimates for General Fund revenues, expenditures, and ending fund balance were included with the FY 2022/23 Proposed Operating Budget presented to the City Council on May 17, 2022.
The audit of the City’s FY 2021/22 financial statements by an independent certified public accounting firm is underway, and the annual comprehensive financial report, including the audited financial statements, is expected to be available by December 31, 2022. To provide the City Council with more timely information about the year just completed, staff has prepared the following information using unaudited amounts. Staff will report on any material audit adjustments at the time the annual comprehensive financial repo rt is provided to the City Council.
This report includes a brief update on FY 2022/23 revenue and expenditure estimates. The FY 2022/23 Mid-Year Report, which will incorporate operating results for the first six months of the current fiscal year, will be presented to the City Council in March 2023.
DISCUSSION/ANALYSIS:
General Fund Operating Results: General Fund revenues and transfers in, totaling $280.3 million, are $12.5 million higher than the May estimate of $267.8 million. This is primarily due to higher than anticipated sales tax revenue. Property tax, business tax, and hotel tax also performed better than anticipated.
Staff Report (ID # 4726) Meeting of October 18, 2022
Updated: 10/14/2022 11:13 AM by Alberto Quintanilla Page 2 General Fund expenditures and transfers out of $255.3 million were $2.1 million lower than the May estimate of $257.4 million, largely as a result of savings in the public safety departments. Encumbrances, reflecting the portion of the fund balance that has been contractually obligated, but not yet spent, total $1.4 million.
As part of the FY 2021/22 adopted operating budget, the General Fund Contingency Reserve was increased by $3.0 million to meet the Council-adopted policy requirement of 16.7% of budgeted expenditures and transfers out, or $38.6 million. Previously, as part of the FY 2020/21 Year-End Report, the City Council restored and increased the General Fund Budget Uncertainty Reserve to $10.0 million. The resulting net addition to the existing reserves totaled $7.5 million.
The difference between sources of $307.4 million and uses of $256.7 million, along with the increase in General Fund reserves of $7.5 million, yields a FY 2021/22 General Fund ending unreserved fund balance of $43.2 million. The unreserved fund balance includes $22.1 million of federal fiscal recovery funds and another $7.8 million of General Fund prior year net revenues that were appropriated to balance the FY 2022/23 adopted operating budget and the next two years of the forecast, so the available unreserved ending fund balance is $13.2 million.
The table below provides a summary of the May estimates and the actual year end results.
Recommended Allocation of General Fund Ending Fund Balance: Consistent with the City Council’s adopted budget principles, staff will be recommending that the $13.2 million unanticipated ending fund balance be allocated to one-time uses.
Staff Report (ID # 4726) Meeting of October 18, 2022
Updated: 10/14/2022 11:13 AM by Alberto Quintanilla Page 3 Increase the General Fund Budget Uncertainty Reserve
The Budget Uncertainty Reserve is intended to offset revenue shortfalls resulting from future economic downturns and unanticipated cost increases. The funding level is determined by measuring the level of financial risk over the three-year forecast period, with the goal of providing sufficient resources to maintain service levels while giving the City an opportunity to respond appropriately to its budgetary challenges.
Recognizing both the importance of sales tax and its inherent volatility, as part of the FY 2019/20 adopted budget, the City Council increased the Budget Uncertainty Reserve to a level roughly equivalent to three years of projected sales tax growth. The current reserve level of $10 million is consistent with the three years of growth projected in the FY 2022/23 adopted budget forecast.
However, several factors suggest that the City could be facing even greater budgetary risk over the next several years. First, we’ve experienced significantly greater volatility in sales tax revenue over the last five years, particularly in the new auto sales category. Second, we’re seeing sustained high inflation levels that could ultimately lead to unanticipated increases in costs for services and supplies. Finally, the federal government is aggressively raising interest rates to curb inflation, but potentially at the cost of a recession which could result in lower revenues to the City.
To accommodate those additional risks, staff recommends that $2.5 million of the unanticipated ending fund balance be allocated to increase the Budget Uncertainty Reserve to $12.5 million, approximately 5% of budgeted revenues and expenditures.
Staff Report (ID # 4726) Meeting of October 18, 2022
Updated: 10/14/2022 11:13 AM by Alberto Quintanilla Page 4 Transfer the Remaining Ending Fund Balance to the Capital Improvement Fund 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 replacement of the deteriorating teen center and community center in Central Park, installation of electric vehicle charging stations to facilitate fleet electrification, traffic signal modernization, and technology upgrades.
Although the cost of these unfunded needs far exceeds the resources available, the unanticipated ending fund balance 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 approximately $10.7 million of remaining unanticipated ending fund balance as a transfer to the Capital Improvements Fund.
Appropriation Actions by the City Manager: The Resolution adopted by the City Council to implement the annual operating budget also includes authorization for the City Manager to take additional appropriation actions reflecting the following: (1) carryover of unexpended prior-year encumbrances; (2) cost center revenue increases; (3) grant revenue increases; and (4) increased General Fund revenue directly supported by General Fund expenditures. Included in the Resolution are requirements to report these actions to the City Council at year-end.
The amount of increased appropriations for FY 2022/23 due to unexpended FY 2021/22 encumbrances is $20.1 million. The majority of the carryover encumbrances, $11.4 million, were in the capital projects funds, and the General Fund carryover is $1.4 million . The remaining carryover encumbrances, totaling $7.3 million, are in Gas Tax Funds ($4.8 million), the Environmental Services Funds ($1.5 million), the Development Cost Center Funds ($0.2 million), and $0.8 million in miscellaneous other funds.
Additional donation and fee revenues resulted in increased appropriations by the City Manager as summarized in the following table.
Source Amount Recipient Purpose
ARHelp Donations $ 391,462 Human Services Afghan Refugee Assistance Private Donations 193,708 Family Resource Center Afghan Refugee Assistance Private Donations 22,896 Human Services Giving Hope Program AC Behavioral Health Fees 71,173 Human Services Substance Use Disorder Program County AAA Fees 51,229 Human Services Senior Services
State MSSP Fees 141,928 Human Services Senior Services
Federal CDBG Funds 167,567 Human Services FRC Facility ADA Compliance Development Impact Fees 12,750 Community Development Age Well Center Construction Total $1,052,713
FY 2022/23 Revenue and Expenditure Estimate Update: As labor negotiations were under way when the FY 2022/23 operating budget was prepared, the adopted budget includes 3% placeholder compensation increases over the forecast period. The final labor agreements, completed in July, provide for higher increases. At its meeting on July 12, the City Council requested that staff return in October with an update on current year revenue Staff Report (ID # 4726) Meeting of October 18, 2022
Updated: 10/14/2022 11:13 AM by Alberto Quintanilla Page 5 and expenditure estimates and, if necessary, recommended budget adjustments to ensure fiscal sustainability.
The adopted budget incorporates revenue and expenditure assumptions based on the information available in April when the budget was being developed. Significant assumptions include property tax and sales tax revenue, vacancy savings, and compensation increases. Since the budget was adopted, in addition to completion of labor negotiations and the adoption of new MOUs, we have received the property tax assessment roll for the year, two additional quarters of sales tax collection data, and four more months of vacancy savings information.
Based on the new assessment roll, which was certified in August, the City will be receiving approximately $1.8 million more in ongoing property tax revenue than we had assumed based on the preliminary information from the County Assessor’s Office. Additionally, the two additional quarters of sales tax collections suggest that at least $2.4 million of what we believed was one-time revenue related to new auto sales is actually ongoing. Finally, the additional months of payroll data, combined with more in-depth analysis of historical vacancy savings, indicate we should expect significantly higher vacancy savings than projected over the next several years.
The combination of higher ongoing revenues and vacancy savings is projected to more than offset the additional unanticipated labor costs over the forecast period. Consequently, staff is not recommending any adjustments to the current year budget.
As part of the FY 2022/23 Mid-Year Report in March 2023, staff may recommend adjustments to revenue estimates and expenditures to reflect information we’ve received through February which is our usual practice.
FISCAL IMPACT: Approval of staff’s recommendations will increase the General Fund Budget Uncertainty Reserve by $2.5 million and transfer approximately $10.7 million to the Capital Improvement Fund to support capital projects that will be brought forward for City Council approval in June 2023 as part of the 2023/24 – 2027/28 Capital Improvement Program.
ENVIRONMENTAL REVIEW: None required.
ATTACHMENTS: None.
RECOMMENDATIONS:
1. Accept the report and presentation.
2. Increase the Budget Uncertainty Reserve by $2.5 million.
3. Transfer the remaining $10.7 million of unanticipated General Fund unreserved ending fund balance to the Capital Improvements Fund (Fund 501).