Fremont City Council Meeting: 03/05/24 07:00 PM
3300 Capitol Avenue Div/Dept: Finance Department
Fremont, CA 94538 Category: Budget
REVIEWED
Sponsors:
COUNCIL STAFF REPORT (ID # 5097) DOC ID: 5097
Updated: 3/1/2024 2:09 PM by Dina Lewis Page 1
FISCAL YEAR 2023/24 MID-YEAR BUDGET REPORT - Update on the Status of the FY 2023/24 General Fund Operating Budget and Preliminary Three-Year Forecast; Approve Budget Adjustments; Make Findings of CEQA Exemption 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.
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 2023/24 operating budget was adopted by the City Council on June 13, 2023. The adopted budget was developed on the assumption that growth in the local economy would slow and that General Fund ongoing revenues would increase by about
4.9%. The costs of the adopted budget were expected to be covered by projected ongoing resources. To address both the increasing contribution of sales tax revenue to General Fund resources and the heightened possibility of an economic slowdown, the adopted budget increased the Budget Uncertainty Reserve to $20 million.
In July, the City Council appropriated $3.4 million from the General Fund Contingency Reserve to begin repair work on City infrastructure that was damaged by the winter storms, with the expectation that a portion of those costs would be reimbursed by the federal government.
As part of the FY 2022/23 Year End Report presented to the City Council on November 7, 2023, staff discussed information received from the California Department of Tax and Fee Administration (CDTFA) regarding overpayment of sales tax to the City during FY 2022/23.
At that time, staff estimated the CDTFA would recover approximately $28 million by reducing future quarterly sales tax remittances.
Consequently, the City Council chose to leave the FY 2022/23 ending unreserved fund balance of $21.9 million unappropriated so it would be available to absorb the loss of revenue we expected to experience. Staff also noted plans to suspend the $5.5 million of ongoing increases we budgeted this year for street, building, and parks maintenance.
In late November, as part of the “true-up” of payments for the quarter ended September 30, 2023, the CDTFA reduced the City’s sales tax allocation by $4.1 million to recover the amount over-advanced during the quarter that ended June 30, 2023.
Council Staff Report (ID # 5097) Meeting of March 5, 2024 Updated: 3/1/2024 2:09 PM by Dina Lewis Page 2
In late February, staff were notified by the CDTFA that the overpayment of sales tax occurred during the two quarters ended December 31, 2022, and March 31, 2023, and totaled approximately $19.5 million. Staff plan to request that the CDTFA mitigate the impact of the reallocation by recovering that amount over the next four quarters (two in the current fiscal year and two in FY 2024/25). Because the amount of City point-of-sale revenue will be reduced in each of those four quarters, the City’s share of Countywide pool revenue will also be reduced. Staff estimates that additional revenue loss will total $4.3 million.
Because sales tax information is confidential under State law, the level of detail staff can provide is very limited.
DISCUSSION AND ANALYSIS:
Economic Trends: Calendar year 2023 saw the national economy expand at a healthy
2.5% annual rate, with particularly high growth in the third and fourth quarters. Consistent with an economic expansion, the labor market has remained tight, with the national unemployment rate remaining close to record low levels at 3.7%.
To combat inflation, the Federal Reserve has raised interest rates repeatedly over the last two years, and that intervention appears to be working, with the consumer price index declining from 6.4% in January 2023 to 3.1% in January 2024. Expectations of lower interest rates in the next few months have prompted a rally in the stock market and an increase in consumer confidence.
Although the City’s preliminary revenue forecast assumes continued increases over the next few years, the continuation of armed conflicts internationally and political polarization domestically create significant economic uncertainties.
FY 2023/24 General Fund Revenue and Expenditure Estimates: Overall, General Fund revenues and transfers in are estimated to drop 17.3% in FY 2023/24 from the FY 2022/23 level, resulting in $46.0 million less of estimated resources than included in the adopted budget. The General Fund’s largest source of revenue, property tax, is performing about $5.3 million above the budget estimate, with expected growth of 8.0% over the prior year.
Conversely, sales taxes, constituting the General Fund’s second largest source of revenue, are projected to fall by 54.7%, a $50.3 million shortfall from the adopted budget revenue estimate. Approximately $16.1 million of that shortfall is attributable to overpayments to be recovered by the State and the associated reductions in Countywide pool revenue. The remaining shortfall, about $34 million, reflects the ongoing difference between the forecast from May 2023, which assumed the then-current revenue level, and the current adjusted forecast.
Additionally, the post-pandemic recovery in hotel tax revenue appears to have slowed, reducing the current year estimate by $1 million. This report includes recommended adjustments to bring the budgeted revenue estimates for property tax, sales tax, and hotel tax in line with the current projections.
Council Staff Report (ID # 5097) Meeting of March 5, 2024 Updated: 3/1/2024 2:09 PM by Dina Lewis Page 3
General Fund expenditures and transfers out for FY 2023/24 are projected to end the year $8.8 million below the adjusted budget due to the suspension of new transfers for streets and buildings maintenance and higher than anticipated citywide vacancy savings. In total, General Fund expenditures and transfers out are anticipated to fall about 12.4% below the FY 2022/23 level.
The adjusted budget assumed that the General Fund would end the year with $22.9 million of unreserved fund balance. The $46.0 million decrease in estimated General Fund resources, partially offset by $8.8 million of additional expenditure savings, results in an operating deficit of $37.2 million. That deficit is projected to be addressed with the projected $22.9 million of unreserved fund balance and $14.3 million of the General Fund Budget Uncertainty Reserve.
Staff will return to the City Council on May 14, 2024, with updated estimates for FY 2023/24 incorporated into the FY 2024/25 Proposed Operating Budget.
The following table presents a comparison of FY 2022/23 actual results with the FY 2023/24 adjusted budget and staff’s FY 2023/24 mid-year estimate.
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 2024/25 and subsequent year expenditure projections include estimated citywide savings and adjustments to reflect labor agreements, CalPERS pension contributions, retiree Council Staff Report (ID # 5097) Meeting of March 5, 2024 Updated: 3/1/2024 2:09 PM by Dina Lewis Page 4
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. It is important to note that the City’s labor agreements expire on June 30, 2025, and no compensation increases have been assumed in the FY 2025/26 and FY 2026/27 expenditure projections.
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 2024/25 Proposed Operating Budget is developed with the benefit of additional information, including any recommendations for service level enhancements.
Revenue and Expenditure Adjustments: As discussed above, the current revenue projections for property tax, sales tax, and hotel tax are varying from their budgeted estimates by a net amount of $46.0 million, and expenditures are projected fall below the budgeted appropriations by $8.8 million. Staff recommends that the City Council amend the budget estimates for those three revenues, increase the expenditure savings estimate to match the current projection, and reduce the transfers for street and building maintenance by $4.5 million (retaining the current year $1 million increased appropriation for parks maintenance to address contractual commitments).
Additionally, staff anticipates that approximately $14.3 million of the General Fund Budget Uncertainty Reserve will be needed to address the current-year revenue shortfall. Given the potential for higher than anticipated expenditures or lower than expected revenues in the
Council Staff Report (ID # 5097) Meeting of March 5, 2024 Updated: 3/1/2024 2:09 PM by Dina Lewis Page 5
current year, and the importance of having a well-funded reserve in place as we plan for next year, staff recommends that the City Council partially restore the Budget Uncertainty Reserve by transferring $10 million from the Accrued Leave Liability Reserve it established last year. The projected ending fund balance in the Accrued Leave Liability Reserve, along with ongoing contributions from the operating funds, will be more than adequate to address the City’s near-term leave liquidation needs.
FISCAL IMPACT: The recommended budget adjustments will better align the General Fund revenue and expenditure estimates with the current projections and partially restore the General Fund Budget Uncertainty Reserve. Staff will return to the City Council on May 14, 2024, with the FY 2024/25 Proposed Operating Budget and a revised General Fund forecast.
ENVIRONMENTAL REVIEW: Action on this item is exempt from the requirements of the California Environmental Quality Act (CEQA), per CEQA Guidelines Section 15378(b), as an administrative and/or fiscal activity that does not involve commitment to a specific project that will result in any significant physical impact on the environment.
ATTACHMENTS: None.
RECOMMENDATIONS:
1. Increase the General Fund revenue estimate for property tax by $5.3 million.
2. Decrease the General Fund revenue estimates for sales tax by $50.3 million and hotel tax by $1.0 million.
3. Decrease the General Fund transfer appropriation to the Capital Improvements Fund (Fund 501) for street and building maintenance by $4.5 million.
4. Increase the General Fund citywide savings estimate by $4.3 million.
5. Approve the transfer of $10 million from the Accrued Leave Liability Reserve in the Employee Benefits Fund (Fund 630) to the General Fund Budget Uncertainty Reserve.
6. Find the action is exempt from CEQA review, per CEQA Guidelines Section 15378(b).