Fremont City Council Meeting: 03/04/25 07:00 PM
3300 Capitol Avenue Div/Dept: Finance Department
Fremont, CA 94538 Category: Budget
SCHEDULED
Sponsors:
COUNCIL STAFF REPORT (ID # 5377) DOC ID: 5377
Updated: 2/27/2025 3:25 PM by Dina Lewis Page 1
FISCAL YEAR 2024/25 MID-YEAR BUDGET REPORT - Update on the Status of the FY 2024/25 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 2024/25 operating budget was adopted by the City Council on June 11, 2024. The adopted budget was developed on the assumption that growth in the local economy would continue and that General Fund ongoing revenues would increase by about 3.5%.
As a reminder, during FY 2023/24 the City was notified by the California Department of Tax and Fee Administration (CDTFA) that it would be recovering approximately $19.5 million of sales tax it overpaid to the City in FY 2022/23. The City Council responded by setting aside the $21.9 million FY 2022/23 ending unreserved fund balance and increasing the General Fund Budget Uncertainty Reserve to $30 million.
The State recovered the first half of the overpayment during the last quarter of FY 2023/24 and the second half during the first quarter of FY 2024/25. The combined impact of those recoveries is estimated at approximately $23 million, which also reflects the temporary drop in the City’s share of Countywide pooled sales tax revenue. To offset the one-time revenue reduction resulting from those recoveries, the FY 2024/25 adopted budget included the use of the General Fund Budget Uncertainty Reserve to maintain service levels.
DISCUSSION AND ANALYSIS:
Economic Trends: Calendar year 2024 saw the national economy expand at a healthy
2.8% annual rate, with growth in the third and fourth quarters averaging 2.7%. Over the past year, the labor market has remained relatively tight, with the national unemployment rate rising only slightly to 4.0%, from 3.7% in January 2024.
To combat inflation, the Federal Reserve raised interest rates repeatedly through mid-2023.
Having determined that their intervention appeared to be working, they began lowering rates in late 2024. However, the combination of a renewed increase in inflation and Council Staff Report (ID # 5377) Meeting of March 4, 2025 Updated: 2/27/2025 3:25 PM by Dina Lewis Page 2
uncertainty over the path of federal government fiscal policy has led the Federal Reserve to hold off on any additional rate reductions for the near future.
The City’s preliminary revenue forecast assumes the economy will grow at a moderate pace, but that continued high interest rates will suppress property sales and development activity at least through the end of 2025.
Additionally, uncertainty over the possible impacts of tariffs and immigration policy changes is likely to restrain both retail sales and business investment, possibly tempered by tax reductions or a more business-friendly regulatory environment. This uncertainty is reflected in the most recent consumer confidence survey, which in February registered the largest monthly decline since August 2021.
FY 2024/25 General Fund Revenue and Expenditure Estimates: Overall, General Fund revenues and transfers in are estimated to increase just 0.3% in FY 2024/25 from the FY 2023/24 level, resulting in $0.6 million less of estimated resources than included in the adopted budget. The General Fund’s largest source of revenue, property tax, is performing at about $1.4 million below the budget estimate, with expected growth of 3.9% over the prior year. This compares with the adopted budget estimate of 4.5% growth.
Sales taxes, constituting the General Fund’s second largest source of revenue, are projected to increase by 12.4%, which includes a $4.1 million reallocation in FY 2023/24 by the CDTFA to offset an overpayment in FY 2022/23. Without that reallocation, FY 2024/25 revenue would be projected to increase by 4.6%. The current sales tax estimate, based on two quarters of data, is $0.3 million less than the adopted budget amount.
Business tax is projected to fall $0.8 million below the budget estimate, primarily due to a drop off in the construction business tax component resulting from the lack of new development activity. Hotel tax is estimated to come in at about $0.4 million below the adopted budget and end the year at the same level as the last two years. The City’s one revenue stream that benefits from higher interest rates, investment earnings, is currently projected to bring in at least $2.3 million more than the adopted budget estimate.
This report includes recommended adjustments to bring the budgeted revenue estimates for property tax, sales tax, business tax, hotel tax, and investment earnings in line with the current projections.
General Fund expenditures and transfers out for FY 2024/25 are currently projected to end the year at their budgeted levels. Increases due to salary adjustments are expected to be more than offset by expenditure savings. In total, General Fund uses of funds are anticipated to increase by about 2.8% from the FY 2023/24 level.
The adjusted budget assumed that the General Fund would end the year with approximately $6.4 million in the Budget Uncertainty Reserve. The $0.6 million decrease in estimated General Fund resources reduces that projected ending balance to $5.8 million. Overall, the FY 2024/25 estimate applies $18.4 million of the Budget Uncertainty Reserve to address the one-time revenue shortfall due to the State’s sales tax recovery, partially offset by a $3.1 million increase to the Contingency Reserve.
Council Staff Report (ID # 5377) Meeting of March 4, 2025 Updated: 2/27/2025 3:25 PM by Dina Lewis Page 3
Staff will return to the City Council on May 13, 2025, with updated estimates for FY 2024/25 incorporated into the FY 2025/26 Proposed Operating Budget.
The following table presents a comparison of FY 2023/24 actual results with the FY 2024/25 adjusted budget and staff’s FY 2024/25 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 2025/26 and subsequent year expenditure projections include estimated citywide savings and adjustments to reflect CalPERS pension contributions, 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. 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 through FY 2027/28 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 change as the FY 2025/26 Proposed Operating Budget is developed with the benefit of additional information, including any recommendations for service level reductions or enhancements.
Council Staff Report (ID # 5377) Meeting of March 4, 2025 Updated: 2/27/2025 3:25 PM by Dina Lewis Page 4
Revenue Adjustments: As discussed above, the current revenue projections for property tax, sales tax, business tax, and hotel tax are falling below their budgeted estimates by a net amount of $2.9 million, partially offset by increased investment earnings revenue of $2.3 million. Staff recommends that the City Council amend the budget estimates for those revenues to match the current projections.
FISCAL IMPACT: The recommended budget adjustments will align the General Fund revenue estimates with the current projections. Staff will return to the City Council on May 13, 2025, with the FY 2025/26 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. Decrease the General Fund revenue estimate for property tax by $1.4 million, sales tax by $0.3 million, business tax by $0.8 million, and hotel tax by $0.4 million.
2. Increase the General Fund revenue estimate for interest earnings by $2.3 million.
3. Find the action is exempt from CEQA review, per CEQA Guidelines Section 15378(b).