Agenda Report
Fullerton City Council
MEETING DATE: FEBRUARY 7, 2023
TO: CITY COUNCIL / SUCCESSOR AGENCY
SUBMITTED BY: Ellis chang, director of administrative services PREPARED BY: STEVEN AVALOS, BUDGET AND PURCHASING MANAGER
CINNDY BARRIOS, BUDGET ANALYST II
SUBJECT: SECOND QUARTER FINANCIAL REPORT AND MID-YEAR BUDGET AMENDMENTS FOR FISCAL YEAR 2022-23
SUMMARY
This report presents the City’s revenue performance and expenditures incurred from July 1 through December 31, 2022 compared to adopted budget levels, provides an update on the City’s financial position through the fiscal year midpoint and presents FY 2022-23 Mid-Year Budget Amendments for consideration.
RECOMMENDATION
Receive and file Second Quarter Financial Report for FY 2022-23.
Approve FY 2022-23 Mid-Year Budget Amendments (Attachment 4) and authorize City Manager, or designee, to make amendments to the FY 2022-23 Adopted Budget.
Authorize and approve addition of 1.0 Full-Time Equivalent (FTE) grant-funded Lieutenant position to Police Department Position Summary (Attachment 5).
CITY MANAGER REMARKS
This financial report is specifically focused at providing the City Council with an update.
BUDGET POLICY PRIORITY STATEMENT
This item matches the following Budget Policy Priority Statement:
Fiscal and Organizational Stability.
FISCAL IMPACT
Staff will use the information provided in these quarterly financial reports to ensure continued budgetary diligence and compliance to adopted budget levels through the end of the fiscal year.
The Mid-Year Budget Amendments for FY 2022-23 expenditures will total $305,515 to the General Fund and will come from unassigned General Fund Balance and assigned building permit surcharge funds. Staff proposes no revenue adjustments for the General Fund at this time. Revenues currently are performing well in several areas, particularly in sales tax and planning and development revenues. Staff may submit revenue adjustments with the Q3 Financial Report if General Fund revenues continue with this positive performance.
Budget adjustments for other City Funds will total $155,515 in expenditure adjustments to the Information Technology Fund (Fund 68). These budget adjustments relate to unanticipated IT services and new software subscriptions that originally not accounted for in the adopted budget. Increases to department IT cost allocations and building permit surcharge funds will support the requested IT budget adjustments.
The addition of 1.0 FTE Lieutenant police safety position will not require a budget amendment as a Homeless Outreach and Proactive Engagement (HOPE) Center collaborative grant will fund this position. However, staff requests City Council approval to add this position to the City’s Position Summary
DISCUSSION
Introduction
As part of the City’s budget monitoring and financial reporting practices, Staff provides quarterly financial reports on the current year budget to City Council. This is a sound financial practice and fiscal transparency tool to report on the City’s ongoing fiscal condition, to identify and address any budget issues as they arise, and to strengthen the City’s financial planning efforts. Quarterly financial reports also provide a measurement of the City’s overall fiscal condition relative to adopted budget levels.
The FY 2022-23 Second Quarter Financial Report, also referred to as the Mid-Year Budget Report, presents revenues received and expenditures incurred through the second quarter of the fiscal year, from July 1, 2022 through December 31, 2022, in comparison to adopted budget levels. The Q2 Report also includes Mid-Year Budget Amendments (Attachment 4) for City Council consideration to amend the FY 2022-23 Adopted Budget.
While assessing the fiscal condition of all City Funds is important, as customary, the Q2 Report will primarily focus on the General Fund, as this is the City’s chief operating fund that supports traditional municipal services, such as public safety, community, and economic development, parks and recreation and library community services, and public works. Other City Funds that require financial attention are included in the discussion section as needed.
FY 2022-23 Q2 Review of General Fund (including Library and Parks/Recreation) Through the second quarter (or first half) of FY 2022-23, General Fund revenues total $45.6 million and are at 40% of adopted revenues of $113.6 million. General Fund expenditures total $53.7 million and are at 47% of adopted expenditures of $114.3 million.
Revenues
General Fund revenues total $45.6 million and are at 40% of adopted revenues of $113.6 million. While revenues appear to be low at around 40% received through the mid-point of the year, this is not atypical as two large installments of Property Tax (including VLF In-Lieu) are received in the second half of the year in January and May, in addition to an installment of franchise fees which is also received in the latter half of the fiscal year. Overall, General Fund revenues are performing well and are up by $5.3 million (or by 13%) compared against the midpoint of FY 2021-22. The City’s major revenues are summarized below.
Property Tax – Property Tax revenues, the City’s largest revenue for the General Fund, are at $19.3 million through December 31, 2022 and are up by about $787,000 compared to the same period last fiscal year. As the City receives the majority of its property tax revenues during the second half of the fiscal year and as property tax revenues to date are up by about $787,000, property tax revenues appear to be on track with and may exceed adopted budgeted levels of $52.2 million. The City has also benefitted in recent years from an uptick in residual pass-thru property tax receipts that have aided property tax growth. As successor agencies continue to pay down its obligations, these property taxes get distributed to the taxing entities. Property Tax continues to be the City’s most stable revenue and is indicative of the strong assessed valuation of Fullerton properties.
Sales Tax – Sales Tax revenues are at $10.4 million through the first half of the fiscal year and up by $1.2 million (or 13.6%) from mid-FY 2021-22. In FY 2021-22, the City saw a faster than anticipated economic recovery from the pandemic, with sales tax revenues exceeding FY 2020-21 levels by $4.7 million, bringing the City’s sales tax revenue back to pre-pandemic levels. In FY 2022-23, sales tax receipts to date are in line with and are anticipated to exceed budgeted levels. The City’s sales tax revenue is generated from a diverse economic base that is not reliant on one single economic sector. The sales tax performance reflects continued economic recovery, the current high inflationary environment, an uptick to the City’s County Pool allocation from a State law enacted in 2019, which resulted in increases to online sales tax, and new business retailers coming to the City in recent years.
Transient Occupancy Tax – Transient Occupancy Tax, or TOT, is another revenue that appears to be back on track in FY 2022-23, as the economy has rebounded and travel and places of tourism have returned to pre-pandemic levels. Through the first half of FY 2022-23, TOT revenues total $1.2 million, compared to $1.0 million mid-FY 2021-22. The City may not experience full recovery of TOT to pre-pandemic levels as a hotel has closed in FY 2022-23. Staff will closely monitor TOT revenues throughout the fiscal year.
Planning and Development-Related Fees – Development activity and projects continue in the City resulting in increased planning and development-related permit and fee revenue in FY 2022-23. Through the first half of the year, development permits and planning and plan check fees are $740,000 above prior year levels and 85% of budgeted levels. Staff may bring forth budget adjustments for these revenues with the next financial report.
All other major revenues are performing in line with budgeted levels, and no revenue budget adjustments are requested at this time. As the year continues and if the City’s major revenues (e.g., property tax, sales tax, and planning / development fees) continue to perform well and are likely to exceed budgeted levels, revenue adjustments may be submitted with the subsequent financial report.
Expenditures
Expenditures tend to be more linear in nature, as payables such as payroll is processed biweekly, and invoices are processed and paid on a weekly basis. Through the first half of FY 2022-23, General Fund expenditures total $53.7 million and are at 47% of adopted expenditures of $114.3 million.
General Fund expenditures through December 2022 are inclusive of and include the Memorandum of Agreements (MOA) impacts with the Police Safety groups approved earlier this year in July 2022. While Police expenditures are tracking within budget for FY 2022-23, we may come back with a budget adjustment of $1.7 million in the third quarter to account for the approved Police salary-related increases. Lastly, the City’s high vacancy rate and vacancy savings continue to factor in the City’s expenditure levels (47% of budgeted levels) through the first half of FY 2022-23. While this is good from a budget-balancing perspective in the short-term, it is the City’s goal to fill its budgeted vacancies across the organization to support operating and service levels to the community.
Overall, for FY 2022-23, General Fund expenditures are currently in line with adopted budget levels through the mid-year point of the fiscal year.
FY 2022-23 Mid-Year Budget Amendments
Mid-Year budget amendments are typically taken at the Q2 Financial Report to account for any unanticipated costs, changes in revenues, and changes in budgeted assumptions that may occur during the fiscal year. The FY 2022-23 Mid-Year Budget Amendments, as presented in Exhibit A (Attachment 4) are summarized below.
Addition of 7th Lieutenant Position – An additional 1.0 FTE Lieutenant position in the Police Department is needed to oversee the public safety efforts and initiatives of the HOPE Center. Unlike the other mid-year requests, a budget amendment is not being requested for this new position as there is no direct fiscal impact to the General Fund. This new safety position is anticipated to be fully grant funded on a reimbursable basis.
Homelessness Encampment Cleanup ($150,000) – Homelessness encampment cleanup services were not budgeted in FY 2022-23 and is a much-needed service to address homelessness in the City. The City Manager’s office has put in a schedule to regularly manage the homeless encampments and is requesting the $150,000. We intend to supplement the General Fund expenditure with ARPA funds.
IT Services and Software ($155,515) – Budget adjustments are needed to the IT Fund’s (Fund 68) operating budget to account for additional software and licenses not originally included in the adopted budget. These will be supported by increases to department’s cost allocations and building permit surcharge fee.
All Proposed FY 2022-23 Mid-Year Budget Amendments are listed in Exhibit A (Attachment 4) for the City Council’s consideration. If further budget adjustments are needed in FY 2022-23, these will be presented in the Q3 Financial Report.
ARPA
The FY 2022-23 adopted budget includes the use and application of critical ARPA funds. In FY 2021-22, the City Council approved the City’s $32.7 million ARPA spending plan on a number of projects and programs in accordance with US Treasury guidelines. For FY 2022-23, the City is applying $5.5 million (of approved $13.1 million) for street improvements under the Revenue Replacement provision and $2 million for water main replacements. Other application of ARPA funds includes critical IT infrastructure, support of homelessness and a utility grant subsidy program to name a few. Also included for FY 2022-23 is the planned use of $2.6 million of ARPA revenue replacement to stabilize government finances. As the fiscal year progresses, and if revenues continue to perform well, and if the City comes under projected expenditures, Staff will assess if this is still needed to stabilize government finances for FY 2022-23.
Overall, the City continues to utilize ARPA according to the City Council approved spending plan for vital community programs and projects in FY 2022-23. To date, ARPA reports have been submitted timely to US Treasury.
CalPERS Actuarial Update
The 21.3% CalPERS investment return as of June 30, 2021, is reflected one year in arrears in the Annual Comprehensive Financial Report (ACFR) for fiscal year ended June 30, 2022. The 2021 gain will be offset with the (6.1)% CalPERS investment return as of June 30, 2022, which will be reflected in the ACFR for fiscal year ending June 30, 2023, which will be issued in December 2023.
The impact of the 2021 gains offset by the 2022 losses is presented in the chart below. The Experience Gain is the difference between the Actual Return less the Assumed Return (Experience Gain = Actual Return – Assumed Return).
Thus, the 2021 Experience Gain of 14.3% is the Actual Return of 21.3% less the 7.0% Assumed Return, while the 2022 Experience Loss of (12.9)% is the Actual Return of (6.1)% less the Assumed Return of 6.8%.
Source: GovInvest
The 2022 losses fully offset the 2021 gains. The resulting impact is reflected in an increase to the City’s Unfunded Accrued Liability (UAL). The chart below depicts the impact of CalPERS investment returns on the UAL. Using 2020 Results (solid green line) as a comparison, the 2021 Results (red dotted line) represents the decreased revision to the City’s UAL with the 14.3% Experience Gain applied. Using 2020 Results (solid green line) as a comparison, the 2022 Results (yellow dotted line) represents the increased revision to the City’s UAL with the (12.9)% Experience Loss applied.
As of June 30, 2022, the City’s projected UAL position is represented by the yellow dotted line. This will be reflected in the City’s ACFR for fiscal year ending June 30, 2022.
The 115 Pension Trust is one tool City Council may consider utilizing to help mitigate budgetary instability resulting from future UAL increases.
Next Steps
The City will continue to exercise fiscal diligence and monitor citywide expenditure budgets and revenue performance through the remainder of FY 2022-23. The FY 2023-24 Budget Study Session will be taken in late April 2023 and will provide a financial forecast for the General Fund and preliminary look at the FY 2023-24 Proposed Budget.
Staff will continue its quarterly financial reports for FY 2022-23, and the Q3 Financial Report will be the next financial report presented.
Attachments:
Attachment 1 – Presentation
Attachment 2 – Revenue Summaries - Q2 FY 2022-23
Attachment 3 – Expenditure Summaries - Q2 FY 2022-23
Attachment 4 – FY 2022-23 Mid-Year Budget Amendments
Attachment 5 – Police Department Redlined Position Summary cc: City Manager Eric J. Levitt
Q2 Financial Report and Mid-Year Budget Amendments for FY 2022-23 February 7, 2023 - Page 2