Long-T
erm
Financial Forecast
202
3 ATTACHMENT 1
1 2023 Lo
ng-Term Financial Forecast
T
rends and Forecast Analysis
T
ABLE OF CONTENTS
I: INTRODUCTION…………………………………………………………. 3
Purpose of the Long-Term Financial Forecast
Components of this Long-Term Financial Forecast
II. FINANCIAL FORECAST……………………………….…….….……… 5
Development of the Financial Forecast
COVID-19 Pandemic
Housing Market
Consumer Confidence
Unemployment Rate
Local, State and Federal Issues
Lodging/Tourism
Economic Assumptions
Factors Not Included in the Forecast
Forecast Summary and Results
Revenues & Expenditures
Reserve Fund Balances
Revenue Forecasts
Property Tax Revenues
Sales Tax Revenues
Transient Occupancy Tax Revenues
Expenditure Forecasts
Salaries and Benefits vs Total Expenditures
III. FINDINGS ………………….……………………………….…………… 18
IV. RECOMMENDED ISSUES FOR STUDY / ACTION …….…..……… 19
VI. FINANCIAL TREND ANALYSIS …………………………….………… 20
Overview of the City’s Financial Condition
Summary of Trends & Indicators
Rating Changes
General Fund Revenue Trend Indicators
Indicator 1: Revenues Per Capita
Indicator 2: Property Tax Revenues
Indicator 3: Sales Tax Revenues
Indicator 4: Transient Occupancy Tax Revenues
Indicator 5: Business License Tax Revenues
ATTACHMENT 1
2 T
ABLE OF CONTENTS (continued)
General Fund Expenditure Trend Indicators
Indicator 6: Fringe Benefits vs Total Operating Expenditures Indicator 7: Salary vs Total Operating Expenditures
Indicator 8: Capital Outlay as a Percentage of Operating Expenditures
General Fund Operating Position Trend Indicators
Indicator 9: Operating Position
Indicator 10: Projected Balance of Reserve Funds
Indicator 11: Liquidity Ratio
ATTACHMENT 1
3 2023 Lo
ng Term Financial Forecast
Fore
cast Analysis and Trends
I: INTRODU
CTION
This document is the City of Napa’s Long Term Financial Forecast (LTFF). Staff regularly updates the forecast to assist in planning for a successful future for the City of Napa. The entire City organization is committed to doing all that is necessary to develop and stabilize our financial base . A strong financial foundation is essential to the provision of critical services to the community. Regardless of whether the economy is expanding, contracting, or remaining stable, financial planning is a prudent activity, and maintenance of the LTFF is essential to sound fiscal management. In general, budgetary problems will result when revenues do not keep pace with expenditures, but there is more to financial planning than trying to keep the budget in balance. The LTFF provides the strategic foundation to understanding the various trends to allow a comprehensive review of programs and services provided to the community and how these needs may change both in the near- term and long-term.
Purpose of the Long-Term Financial Forecast
The LTFF takes a forward look at the City’s General Fund operating revenues and expenditures. Its purpose is to identify financial trends, shortfalls, opportunities, and issues so the City can proactively address them. It does so by projecting the future fiscal results of continuing the City’s current service levels and policies.
The LTFF lays the foundation for the budget, aiding both the City Manager and Council in establishing priorities and allocating resources appropriately . The City experienced economic recovery from the pandemic in the last fiscal year, and the fo recast projects continued moderate revenue growth. However, the rising rate of expenditure growth reveals that the City has structural budget issues that will need to be addressed with decisive Council action.
Components of this Long-Term Financial Forecast
The City’s forecast is focused on emerging issues and has been documented for public review to encourage input and feedback from various stakeholders.
This forecast includes the current fiscal year (FY 2022/23) and a five-year forecast through FY 2027/28, a statement of current financial position, and a trend analysis for FY 2012/13 through FY 2021/22.
The LTFF is not able to predict the City’s fiscal future, rather it serves as a tool to highlight significant trends or issues that must be addressed if the City’s goals are to be achieved.
ATTACHMENT 1
4 The
following table displays the status of the recommended issues for study/action from the 2022 LTFF.
D
escription/Item S
tatus C
omments
Contin
ued monitoring of hotel
development projects and
impacts/reliance on transient occupancy
tax revenue projections
Ongoing Baseline Transient Occupancy Tax revenues grew
significantly in FY22 for the first time since FY17;
will continue to monitor potential impacts of new
development on pre-existing hotels.
Fiscal
policy changes to provide
parameters for usage and replenishment
of reserve balances
In process Finance updated the General Fund Reserve
policies with the FY 2019/20 and 2020/21 budget
adoption. Policy updates for other fund reserves
are in process.
Research potential ways to boost City
revenues
Ongoing City Council adopted a 3-year update of the
Master Fee Schedule in October 2021, increasing
the City’s user fees. Finance continues to research
other ways to boost revenues in order to keep
pace with rising expenditures.
ATTACHMENT 1
5 II: FIN
ANCIAL FORECAST
An updated financial forecast for the General Fund has been prepared to reflect economic projections o f the City’s future financial condition. The General Fund provides the resources to pay for most City services such as police services, street maintenance, park maintenance, recreational and other critical programs. The General Fund is also the most vulnerable to outside influences, such as State and Federal takeaways, downturns in the economy, taxpayer initiatives and other factors.
Development of the Financial Forecast
An updated financial forecast for the fiscal years 2023/24 through 2027/28 has been developed for the General Fund. The objective of the financial forecast is to provide a frame of reference for evaluating the City’s financial c ondition as a basis for decision - making.
The forecast presented uses the present level of services and capital needs as the baseline. Inflation and historical analysis are used to predict expenditure patterns while revenues are projected by trend or by s pecific known events. Information regarding economic indicators and the performance of the economy over the forecast period was taken from the California Department of Finance, the Napa County Auditor/Controller’s office, the City’s Community Development D epartment, and the City’s economic consultant, Economic Forensics and Analytics.
The COVID-19 pandemic, which began to impact the City of Napa in March 2020, dramatically reduced City revenues in fiscal years 2019/20 and 2020/21 . Multiple prolonged shutdowns caused reductions in sales tax and transient occupancy tax, and while revenue is recovering, expe nses have continued to climb. The City’s business license tax revenue and charges for services revenue were also adversely impacted by the pandemic. The City experienced revenue recovery in fiscal year 2021/22 , but future growth levels are uncertain due to inflation and other economic pressures. If expenditures grow at their historical rates, they will outpace revenues in nearly every year of the forecast.
These continuing factors in the nati onal, state and local economies could impact the forecast:
COVID-19 Pandemic
Housing Market
Consumer Confidence
Rising Prices
Unemployment Rate
Lodging/Tourism
Local, State, and Federal Issues
ATTACHMENT 1
6 COVID-19 P
andemic
As of January 3, 2023:
Napa County
o Cumulative Cases: 35,041
o Deaths: 163
State of California
o Cumulative Cases: 11,826,523
o Deaths: 100,865
United States
o Cumulative Cases: 100,749,731
o Deaths: 1,099,860
The pandemic continues across the country, with new variants periodically emerging.
While the hope was that widespread vaccination would curb the spread and allow us to return to “normal”, lack of vaccine mandates and the politicization of the vaccine has left America vulnerable to mutations of the virus. While business closures no longer seem to be a viable option, we do see the ongoing ramifications of the pandemic in ongoing staffing and labor issues.
Housing Market
Median housing prices continue to climb for Napa, with increased growth during the pandemic due to increased demand based on lower interest rates and the greater ability to work remotely. Home prices, as well as assessed valuations, are projected to continue to increase during the forecast period, though at a lower rate. Higher mortgage rates are expected to exert a cooling effect on the market in the coming months.
ATTACHMENT 1
7 Co
nsumer Confidence
The Conference Board’s Consumer Confidence Survey ™ indicates that the Consumer Confidence Index™ has a fair amount of volatility and experienced a sharp decline with the onset of the pandemic. While confidence grew during the first half of calendar 2021, the onset of the Delta variant combined with rising interest rates has caused the index to steeply decline over the last year . Napa has reason to be cautious considering our reliance on elastic revenues.
Rising Pri
ces
Inflation has surged in the United States, with a total 15.4% increase when comparing pre-pandemic times (January 2020) to November 2022. Rising prices can mean more sales tax income for the City if demand remains the same. High prices are putting pressure on consumers , with additional stress on low-income earners. Approximately 28% of households in the City of Napa earn $50,000 or less annually, meaning inflation is severely impacting over a quarter of households in the City. Rent costs have also increased in the City, with median rent rising to $3,210/month in September 2022 as compared to $2,598 in September 2019, an increase of 23.6%.
Un
employment Rate
Unemployment rates across California continue to decline as compared to the initial pandemic highs. The unemployment rates for October 2022 show Napa County at 2.7% and the State at 4.0%.
However, these declining rates can obscure the fact that the labor force for the City has also declined. In February 2020, the City had a labor force of 41,400, with 40,000 employed. As of September 2022, the City’s labor force has decreased to 39,399 with just 38,034 employed for an unemployment rate of 3.5%.
Lodging/Tourism
ATTACHMENT 1
8 Napa
County hotel occupancy rates have shown strong growth, rebounding to near 2019 (pre-pandemic) levels. Typically, Transient Occupancy Tax ( TOT) is the City’s second largest revenue source and comprises about 23% of the total General Fund revenue for the City. The substantial decreases felt from March 2020 through FY 2020/21 reduced City revenue by millions of dollars. TOT strongly rebounded in FY 2021/22, due not only to rising occupancy rates, but to increased Average Daily Room Rates. In September 2019 the hotel occupancy rate was 79% and the average daily rate was $335.22. In September 2022 the occupancy rate was 72.5% and the average daily rate was $354.27.
Higher room rates have offset the lower occupancy rates, and new hotels that opened during the pandemic have also brought in additional TOT for the City.
Local, State and Federal Issues
The
Federal Reserve Board has increased rates multiple times in calendar 2022, with the ben
chmark interest rate at 4.25%-4.5% as of the end of the year. This is the highest level in
15 years. Officials indicated that rates will be kept high through 2023, with no reductions li
kely until 2024. Currently the expected “terminal rate” is 5.1%. These rate increases are me
ant to fight inflation, which has been surging for the United States. In the 12 -month period en
ding in November 2022, food prices rose 10.6%, energy prices rose 13.1%, and all
other items rose by an average of 6.0%. The all-items CPI percentage change was
7.1 % as of November, significantly lower than the June high of 9.1% but still higher than the
pre-pandemic high of 5.6% in July 2008 during the Great Recession.
The Fed’s low interest rates during the early years of the pandemic spurred large purchases for people in higher economic tiers and helped to buoy Napa home sales. With mortgage rates now around 6.8%, a slowdown in housing sales is anticipated.
The City received a $15.1 million payment from the American Rescue Plan Act. Council approved plans for these funds include a mix of one -time operating and CIP projects, which will not impact the operating funds as shown in this forecast.
Revenue and Expenditure Assumptions
ATTACHMENT 1
9 The L
ong-Term Financial Forecast includes a baseline (most likely) revenue assumption, along with optimistic and pessimistic revenue scenarios. The pessimistic scenario is not a recession model, but rather shows slower growth. The key assumption differences between these scenarios are as follows:
Most Likely:
Sales Tax: 3.2% average annual growth
Transient Occupancy Tax: 2.0% increase per year plus most likely new development estimate
Business License Taxes: 4.0% annual growth
Charges for Services (non-Dispatch): 2.0% annual growth
Optimistic:
Sales Tax: 4.7% annual growth
Transient Occupancy Tax: 3.0% increase per year, plus optimistic new development estimate
Business License Taxes: 5.0% annual growth
Charges for Services (non-Dispatch): 3.0% annual growth
Pessimistic:
Sales Tax: 2.0% annual growth
Transient Occupancy Tax: 0.5% increase per year, plus pessimistic new development estimate
Business License Taxes: 2.0% annual growth
Charges for Services (non-Dispatch): 1.0% annual growth
The assumptions (most likely scenario) utilized in this forecast are summarized below:
Revenue Assumptions
o Property Tax: 4.0% growth/year, no Excess ERAF (non-operating revenue).
Aligns with HdL Coren & Cone’s current forecast assumptions. Property Tax is then reduced each year by the estimated amount for the EIFD fund. o Sales Tax: HdL’s current forecast of average annual growth of 3.2% o Transient Occupancy Tax: 2.0% average annual growth based on FY 2022/23 projections; plus estimated new development
o Business License Tax: 4.0% growth/year
o Other Revenues: 2.3% average annual growth
o Transfers In: 4.3% growth/year (uses salary growth assumptions: CPI plus merit increases)
Expenditure Assumptions
o Salaries: current MOU’s for each growth, followed by 4.35% growth/year (combined COLA and merit increases). Baseline FY 2022/23 budget as shown in this report includes budget increases that will be included in the FY 2022/23 Mid- Year Report for MOU updates that were higher than budgeted.
o Health/Dental: 3.31% growth/year (6-year average historical growth rate) ATTACHMENT 1
10 o CalPER
S Normal Cost: annual percentages pulled from CalPERS Pension Outlook calculator based on updated Asset Liability Management Assumptions. Miscellaneous Plan average annual rate of 10. 78%, Safety Plan average annual rate of 19.68%.
o CalPERS UAL Payment: from CalPERS Actuarial Reports. General Fund Miscellaneous payment estimated at 78.5% of total based on current budgeted positions. Assumes that City will continue prepaying the UAL at the beginning of each fiscal year to obtain a discount. o Self-Funded Insurance: 7.09% gro wth per year (6 -year average historical growth rate)
o Semi-Discretionary Services and Supplies: 9.41% growth/year (6-year average historical growth rate)
o Internal Services: Fleet Operations at salaries growth rate of 4.35%, General Liability at 6-year average historical growth rate of 11.67% o Discretionary Services and Supplies: 2.56% growth/year (6-year average historical growth rate)
o Replacement Reserves: 3.66% growth/year (CPI)
o Fiscal Policy Transfers
1% Operating Budget transfer to the CIP General Reserve 2% Operating Budget transfer to the CIP Facilities Reserve Transfers to General Fund Reserves (Emergency, Operating, Contingency) to bring reserves to fiscal policy levels
Emergency Reserve should equal 14% of current year
operating budget
Operating Reserve should equal 5% of current year operating budget
Contingency Reserve should equal 1% of current year
operating budget
$100,000/year transfer to the General Plan Reserve
o Other Transfers
$900,000/year transfer to the Sidewalk Replacement Fund $100,000/year transfer to the CDD Technology Reserve
ATTACHMENT 1
11 Factors No
t Included in the Forecast
This forecast is based on the General Fund only. Disaster related Federal Emergency Management Agency (FEMA) and State of California Office of Emergency Services (CalOES) revenues and expenditures are not included.
Other non-recurring revenues and expenditures have also not been included such as major non-recurring development fees and expenditures or one-time transfers to rebuild reserves.
The American Rescue Plan Act allocation for Napa of $15.12 million is not included in this forecast.
The forecast does not include the cost of fiscal changes that the City may want to consider, including:
o New positions
o New or enhanced programs.
o State impacts (e.g., offset for lost Redevelopment Agency Tax Increment).
Only sizable commercial development under construction or with a high likelihood of becoming reality has been included.
Forecast Summary and Results
Operating position refers to the City’s ability to match operating revenues to expenditure levels, i.e., if revenues exceed expenditures, the City will have an operating surplus. If revenues fall below expenditures the result is an operating deficit. Over the forecast period, the City’s revenue and expenditure projections show a negative operating position.
FY
19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28
Actual Actual Actual Actual Budget Proj Proj Proj Proj Proj Revenue 97.20 89.28 86.71 101.86 108.58 118.02 122.37 127.51 132.04 136.51 Expenditures 93.77 95.45 92.58 100.60 110.82 121.37 125.04 130.52 135.86 141.35 Surplus / (Deficit) 3.43 (6.16) (5.87) 1.26 (2.24) (3.35) (2.67) (3.01) (3.81) (4.84) Most Likely (in millions)
ATTACHMENT 1
12 Revenue
s & Expenditures
Total General Fund revenues are forecast (using the most likely scenario) to grow by an average annual increase of approximately 3.6% per year over the forecast period, from projected FY 2022/23 revenue.
Expenditures are projected to increase from the FY 2022/23 budget at an average annual rate of 4.4% per year. This growth rate assumes that expenditure budgets are allowed to increase by historical growth rates and are not controlled by budgetary decisions or fiscal policy changes. Projected expenditures include retirement contribution increases, other benefit increases, and cost of living adjustments (COLA). No new positions or programs are included in this forecast.
Even with record high revenues in the General Fund, i n most years of the f orecast expenditure growth outpaces revenue growth. That, as well as basing the forecast on a fiscal year with a small budgeted surplus , leads to deficits in each year of this forecast.
These deficits would require usage of the City’s General Fund reserves , without a plan for repayment over the forecast period.
Based on this forecast model, the City would most likely experience deficits each year.
50 70
90 110
130
150
170
FY19
Actual
FY20
Actual
FY21
Actual
FY22
Actual
FY23
Budget
FY24
Proj
FY25
Proj
FY26
Proj
FY27
Proj
FY28
Proj
Millions
20 23 LTFF with three revenue scenarios
Exp
enditures Revenue - Most Like
ly Revenue - Opt
imistic Revenue - Pessimistic
ATTACHMENT 1
13 The
City will need to consider how to either boost revenues or reduce costs. The budget process for coming years will require priority- setting and budget control decisions to reduce potential deficits.
To better analyze the City’s costs, expenditures were divided into two categories: Semi- Discretionary/Non-Discretionary and Discretionary.
Semi-Discretionary/Non-Discretionary Expenditures : 91% of total expenditures for forecast period
Salaries and Benefits (including COLA’s and Merit Increases) CalPERS UAL payments (Non-Discretionary)
Services and Supplies (includes utilities, software licenses, agreements with other agencies, banking fees, etc.)
Internal Services (Fleet, Risk, IT Replacement, etc.) Contributions to Replacement Reserves
Transfers to CIP and General Fund Reserves per Fiscal Policy Other Transfers Out per Fiscal Policy
Discretionary Expenditures: 9% of total expenditures for forecast period Services and Supplies (includes professional services, travel/training, office supplies, etc.)
Transfer to Sidewalks Program
Increases in labor costs, self-funded insurances, internal services , and contributions to General Fund reserves are the primary drivers of expenditure growth. The forecast includes an estimated COLA for all bargaining groups equivalent to average CPI growth over the past five years in the Bay Area. Bargaining groups have received cost of living adjustments for the past several years, so estimated COLA’s were included to show the impact of continuing current practices. Costs for self- funded insurance s have risen steeply, and while the General Fund Emergency Reserve was overfunded in FY 2019/20, contributions will need to be made again beginning in FY 2023/24 to comply with fiscal policy.
(15)
(10)
(5)
-
5 10
15 FY19
Actual
FY20
Actual
FY21
Actual
FY22
Actual
FY23
Budget
FY24
Proj
FY25
Proj
FY26
Proj
FY27
Proj
FY28
Proj
Million
s
Ann
ual Net Position
Most Likely Optimi
stic Pessimist
ic
ATTACHMENT 1
14 Reserve Fu
nd Balances
Current fiscal policy sets the level s of the Operating, Contingency, and Emergency Reserves at 5%, 1% and 14% of the budgeted operating expenditure appropriations for each year, respectively.
The chart above shows the estimated ending balance of the General Fund reserves in each year of the forecast. The City does have sufficient funding to cover the deficits, but there is no way to pay the funds back in the forecast period.
Controlling future expenditures is the key to maintaining reserves and ensuring the future fiscal health of the City.
-
5 10
15 20
25 FY24
Proj
FY25
Proj
FY26
Proj
FY27
Proj
FY28
Proj
Million
s
Pr
ojected General Fund Reserve Balances
ATTACHMENT 1
15 Revenue For
ecasts
Sales Tax Revenues
Sales tax is one of the City’s most economically sensitive revenue sources and experienced a dip in FY 2019/20 due to the pandemic. Sales tax revenue rebounded in FY 2021/22, and the FY 2022/23 budget will be adjusted upward in the City’s Mid- Year Report. The forecast is based on the City’s consultant forecast from HdL Companies.
Continued growth is anticipated, but at a slower level than experienced in the last fiscal year.
The sales tax projections do not include future expansion, based on the HdL Companies model. Future development, such as the approved Costco project, could boost revenues further.
The City’s current sales tax rate is 7.75%. Of this rate, the City receives 1% under the Bradley-Burns Uniform Sales and Use Tax law into the Genera l Fund. The City also receives an allocation of the 0.5% Prop 172 sales tax from the State of California into the General Fund; these dollars support the Public Safety budget. Another 0.5% accounts for the Measure T tax, which is booked in a separate fund and used solely for transportation expenditures. In California, municipalities can increase their transactions and use tax rate FY
19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28
Actual Actual Actual Actual Budget Proj Proj Proj Proj Proj Property Tax 34.47 35.35 37.55 40.13 40.99 45.03 46.55 48.16 50.08 52.05 Sales Tax 19.39 16.96 18.81 21.75 21.30 22.00 22.76 23.52 24.29 25.02 Transient Occupancy Tax 22.66 16.75 11.72 28.73 28.03 30.88 32.35 34.44 35.57 36.59 Business License Tax 3.86 3.88 3.29 4.04 3.73 3.95 4.11 4.27 4.44 4.62 Other Taxes 2.57 2.50 2.71 2.80 2.46 2.76 2.82 2.88 2.94 3.00 Licenses and Permits 2.33 2.62 2.49 3.02 2.29 2.58 2.65 2.73 2.81 2.90 Charges for Services 5.94 5.95 4.87 6.16 5.66 6.50 6.71 6.92 7.14 7.37 Other Revenue 2.90 2.23 2.13 -7.79 1.01 1.07 1.03 1.05 1.08 1.10 Transfers In 3.08 3.05 3.14 3.01 3.12 3.26 3.40 3.54 3.69 3.85 Total Operating Revenues 97.20 89.28 86.71 101.86 108.58 118.02 122.37 127.51 132.04 136.51 Most Likely (in millions)
FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28
Most Likely 19.4 17.0 18.8 21.7 21.3 22.0 22.8 23.5 24.3 25.0 Optimi
stic 21.3 22.4 23.4 24.5 25.7 26.8
Pessimist
ic 21.3 21.8 22.2 22.7 23.1 23.6
-
5.0 10.0
15.0 20.0
25.0 30.0
Million
s
Sales
Tax Forecast
ATTACHMENT 1
16 wi
th voter approval up to a maximum of 10.5% for the combined state/local tax rate. The City of Napa has one of the lowest tax rates in the Bay Area, with most other municipalities ranging from 8.25% to 9.75%.
Transient Occupancy Tax Revenues
Transient occupancy tax is the other of the City’s most economically sensitive revenue sources and is typically the City’s second largest revenue source at 23% of General Fund revenues. The pandemic and associated multiple shutdowns drastically reduced TOT revenues for the City in FY 2019/20 and FY 2020/21. A surge in demand, along with rising average daily room rates led to high revenue in FY 2021/22 . This revenue source will need to be closely monitored to determine if the recent growth observed is sustainable ; the Most Likely forecast assumes that FY 2021/22 included pent-up demand that will slow down in future years.
Average annual growth of 2.0% for room rate increases has been included in the base TOT calculation for the forecast period. This rate is slightly higher than the historical increases observed from FY 2015/16 thorough FY 2018/19. The New Development total includes recent hotel openings that are still ramping up to full occupancy, as well as projected future development.
FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28
Most Likely 22.7 16.7 11.7 28.7 28.0 30.9 32.3 34.4 35.6 36.6 Optimi
stic 28.0 31.4 34.6 40.7 43.8 46.2
Pessimist
ic 28.0 30.2 30.7 31.1 31.3 31.5
-
10.0 20.0
30.0 40.0
50.0 60.0
Million
s
T
ransient Occupancy Tax Forecast
FY19 FY20 FY
21 FY22 FY23 FY24 FY25 FY26 FY27 FY28
Actual Actual Actual Actual Budget Proj Proj Proj Proj Proj Base TOT Revenue 19.66 14.37 9.83 23.38 20.46 22.66 23.11 23.57 24.04 24.52 New Development 3.00 2.38 1.88 5.35 7.57 8.23 9.24 10.87 11.52 12.06 Total 22.66 16.75 11.72 28.73 28.03 30.88 32.35 34.44 35.57 36.59 Year-over-Year % Increase -26.1% -30.0% 145.2% -2.5% 7.5% 4.7% 6.5% 3.3% 2.9% Transient Occupancy Tax Revenue Most Likely Forecast
(in millions)
ATTACHMENT 1
17 Expenditu
re Forecasts
Salaries and Benefits vs Budgeted Operating Expenditures
Based on the assumptions used in the forecast model, salaries and benefits account for 71% of total expenditures, on average. These costs include the non -discretionary CalPERS UAL payments , as well as assumptions for COLA’s and merit increases. No new positions are included in the forecast. The City can manage these costs through negotiations with bargaining groups and/or management of vacant positions.
FY
19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28
Actual Actual Actual Actual Budget Proj Proj Proj Proj Proj Semi- & Non-Discretionary
Salaries and Benefits 59.25 60.28 57.36 61.48 67.66 73.75 76.33 79.48 82.77 86.18 PERS UAL 8.17 9.25 10.17 11.67 12.36 14.23 13.69 13.60 13.32 12.87 Services & Supplies 5.81 6.85 6.85 8.19 7.36 8.05 8.81 9.64 10.54 11.54 Internal Services 5.63 6.60 6.80 7.53 8.86 9.58 10.37 11.24 12.20 13.26 Transfers to Reserves 2.77 2.80 2.94 2.87 3.57 4.50 4.31 4.74 4.92 5.13 Semi- & Non-Discretionary 81.63 85.77 84.12 91.74 99.81 110.11 113.51 118.71 123.77 128.97 Discretionary
Services & Supplies 7.72 7.39 5.77 6.92 10.00 10.26 10.53 10.80 11.09 11.38 Other Transfers Out 4.42 2.28 2.69 1.94 1.01 1.00 1.00 1.00 1.00 1.00 Discretionary 12.14 9.67 8.46 8.86 11.01 11.26 11.53 11.80 12.09 12.38 Total Expenditures 93.77 95.45 92.58 100.60 110.82 121.37 125.04 130.52 135.86 141.35 Most Likely (in millions)
FY19
Actual
FY20
Actual
FY21
Actual
FY22
Actual
FY23
Budget
FY24
Proj
FY25
Proj
FY26
Proj
FY27
Proj
FY28
Proj
Benefits 24.04 24.93 24.84 28.78 30.80 36.12 36.34 36.91 37.31 37.52 Sala
ries 43.37 44.61 42.68 44.37 49.22 51.85 53.67 56.17 58.79 61.53 Total Expen
ditures 93.77 95.45 92.58 100.60 110.82 121.37 125.04 130.52 135.86 141.35 -
20 40
60 80
100
120
140
160Million
s
Salar
ies and Benefits vs Total Expenditures
ATTACHMENT 1
18 III: FIND
INGS
The preceding forecast, and the historical trends in the Financial Trend Analysis section to follow, indicate that the City of Napa is recovering from a period of fiscal instability. The COVID-19 pandemic devastated the nation and had an initial negative economic impact on the City’s elastic revenue sources. Revenue rebounded in FY 2021/22 and continues to remain strong in the current fiscal year. The forecast model is based on economic assumptions, and actual future revenues could differ greatly from the projections.
Expenditure growth in the forecast is based on historical growth rates . This forecast shows that the City will need to find ways to control costs, rather than allowing them to grow as they did in prior years. With potential revenue shortfalls in coming years, a focus on reducing expenditures will allow the City to prolong the life of its reserv es. Allowing uncontrolled expenditure growth will result in the rapid use of reserves, leaving the City at risk of insolvency. The other solution to t his issue is to look at the possibility of increasing City revenues, whether through use tax increases or other means.
It should be noted that this forecast focuses on the City’s ability to provide for operating service delivery programs that are currently in effect using existing sources of revenue at current staffing levels . This forecast does not include new positions, funding for new programs, or other initiatives above and beyond current operations.
The following actions warrant consideration by the City Council and City staff in order to stabilize and secure the City’s fiscal future.
IV: RECOMMENDED ISSUES FOR STUDY/ACTION:
Continued monitoring of hotel development projects and impacts / reliance on transient occupancy tax revenue projections
Fiscal policy updates to provide parameters for usage and replenishment of non- General Fund reserve balances
Research potential ways to boost City revenues
Continued monitoring of operational budgets and processes to find ways to reduce costs
ATTACHMENT 1
19 VI: F
INANCIAL TREND ANALYSIS
Utilizing the International City Management Association’s (ICMA) Financial Trend Monitoring System, we have provided a comprehensive Financial Trend Report. Ratings assigned to each trend include: Favorable (F), Caution (C), Warning (W), or Unfavorable (U).
As part of the long-term financial forecast update process, the City’s financial trends have been analyzed for the past te n years. Many factors are utilized to analyze the financial condition of the City of Napa. These factors include:
The economic condition of the City;
Types and amounts of revenues and whether they are sufficient and have the right mix to support the constituents of the City;
Expenditure levels and whether these expenditures are sufficient to provide the citizens of Napa with the desired level of serv ices in the future, especially considering the City’s diversity of programs;
Fund balances and reserve levels and whether they are sufficient to protect the City against an economic downturn and /or natural disaster.
ATTACHMENT 1
20 Overview of t
he City’s Financial Condition
The City’s General Fund operating revenues d ecreased in FY 2020/21 as the City experienced its first full fiscal year during the COVID-19 pandemic. FY 2020/21 operating revenues were $84.4 million, just 86% of pre -pandemic FY 2018/19 revenue. The City responded to decreased revenue projections by reducing operating budgets, freezing full- time positions, and bringing one -time revenues into the General Fund to offset the operating deficit. While initially the City’s revenues were not expected to recover until FY 2022/23 or FY 2023/24, the City experienced surging tourism in FY 2021/22 and strong growth in all revenue categories.
Looking forward, while the City’s revenues are projected to continue to increase, those increases could easily be outpaced by expenditure growth if th ose budgets are allowed to increase at historical rates. Inflation has caused the cost of goods to increase and spurred higher COLA’s in recent MOU’s with labor groups. The City was able to avoid annual contributions to the City’s Emergency Reserve in recent years by pre-funding the reserve with settlement dollars; beginning in FY 2023/24 the City will need to again make annual contributions to the reserve to comply with fiscal po licy. The PERS UAL annual payment peaks in FY 2023/24, and only declines slightly over the forecast period. Self- funded insurances, such as General Liability and Workers Compensation have seen higher claims and costs over the past several years, with average annual growth of 7%- 11%. All of these cost pressures combine to show expenditures growing at higher rates than revenues over the forecast period.
Over the past several years the City has incurred multiple FEMA eligible events: an earthquake (FY 2014/15), flooding (FY 2016/17), and fire (FY 2017/18). The expenditures and related FEMA reimbursements have been reflected in the Non-Recurring General Fund and Enterprise Funds . Because these occurrences are sporadic and can skew trends, the costs and related expenditures are not reflected in the trends and projections, which only include the Operating General Fund.
Some areas of concern include:
Community programs and services must continue to be evaluated to ensure needs are met in the most effective and efficient way possible. Benefit costs are on the rise due to the CalPERS discount rate decrease and scheduled UAL increases
The City has substantial deferred maintenance costs for facilities and infrastructure that will need to be addressed.
The City is reliant on elastic revenue sources, and these revenue sources are susceptible to negative impacts from fragile global and national economies.
We must plan with caution and work to achieve and maintain a positive operating position for the upcoming years, keeping in mind potential fiscal opportunities and threats.
ATTACHMENT 1
21 Summary of
Trends & Indicators
The 20
14 through 2023 financial trend analysis combines several sources of data into a meaningful overview of the General Fund’s current financial position and assists the City Administration and Council in making determinations that will lead to adoption of City fiscal polici es. Reports examined as part of this analysis include those combining information from budgets and financial reports, annual State Controller’s Reports, and the International City Management Association’s (ICMA) Trend Monitoring System.
The following pag es contain a listing of the indicators analyzed as part of this financial trend analysis and a brief summary of the rating assigned to each indicator. An expanded discussion of each indicator follows the summary. The table below is a summary of the indicators and the assigned ratings over the past five LTFFs.
Indica
tor 20
19 20
20 20
21 20
22 20
23 R
evenues per Capita F F C C F
P
roperty Tax Revenues F F F C F
S
ales Tax Revenues F F W C C
Tran
sient Occupancy Tax Revenues C C U C F
B
usiness License Tax Revenues F F C C F
Fri
nge Benefits as Compared to
Total Operating Expenditures C C W W W
S
alary Expenditures as Compared
to Total Operating Expenditures F F C W C
C
apital Outlay as a Percentage of
Operating Expenditures F F F F F
Opera
ting Position F F U U C
R
eserve Fund Balances F F U C C
Li
quidity Ratio F F W W C
Favor
able (F): This trend is positive with respect to the City’s goals, policies, and na
tional criteria.
Caution (C): Thi
s rating is used when there are factors influencing the indicator that may not be apparent in existing trend but could result in a change of status from
a positive to a negative direction in the future.
W
arning (W): This rating indicates that a trend has changed from a positive direction an
d is going in a direction that may have an adverse effect on the City’s fi
nancial condition. The City also uses this rating to indicate that, although a trend may appear to be favorable, it is not yet in conformance with adopted fiscal policies.
Unfavora
ble (U): This trend is negative, and there is an immediate need for the City to take corrective a
ction.
ATTACHMENT 1
22 Ind
icator
Number Descr
iption Fi
nding Com
ments
Gene
ral Fund Revenue Trends
1 Revenu
es Per Capita F Revenues rebounded strongly in the last fiscal year and continue to show growth
in the current fiscal year.
2 Property T
ax Revenues
F Property values continue to increase,
and the median sales price of housing
remains high.
3 Sales Tax
Revenues
C Sales Tax revenues rebounded in the
last fiscal year , but concerns regarding
inflation and reduced consumer demand
warrant continued monitoring of this
revenue source.
4 Tr
ansient Occupancy
Tax Revenues
F Multiple shutdowns due to the pandemic
greatly reduced the City’s TOT revenue.
However, the City experienced a surge
in TOT in the last fiscal year that has
continued into the current fiscal year.
Planned new development will also
bolster this revenue source in future
years.
5 Business
License
Tax Revenues
F Business license tax revenues are based
on gross receipts of individual
businesses. Revenues dropped during
the pandemic but have since recovered.
F: Favorab
le C: Caut
ion
W: Warning U: Unfa
vorable
ATTACHMENT 1
23 Gene
ral Fund Expenditure Trends
6 Fr
inge Benefits vs Total
Operating Expenditures
W Fringe benefit costs as compared to the
city’s total operating expenditures have
stabilized through increased cost sharing
and employee incentives to control the
increased cost of benefits. However, the
City’s CalPERS Unfunded Accrued
Liability payments are rising dramatically
over the next ten fiscal years and will put
pressure on City finances.
7 Salary Exp
enditures vs
Total Operating
Expenditures
C Salary expenditures as compared to
operating expenditures have remained
relatively stable over the past five years.
With the potential need to reduce
expenditures to align with revenue
growth, this trend could change in the
futu
re.
8 Capital O
utlay as a
Percentage of
Operating Expenditures
F Fiscal policy was created in FY 2015/16
to create an Equipment Replacement
Reserve. R egular contributions to this
reserve will provide a stable source of
fun
ds for capital outlay.
Gene
ral Fund Operating Position Trends
9 Operatin
g Position
C The City’s General Fund had operating
deficits in FY 2019/20 and FY 2020/21.
The City experienced an operating
surplus in FY 2021/22 and is projecting a
surplus in the current fiscal year. Looking
forward, if expenditures are not
controlled to match revenue growth, the
City could face continued deficit
positions
.
10 Reserv
e Fund Balances
C The potential
upcoming need to draw on
reserves to support the General Fund
would reduce the reserves, and the
forecast does not include the future
payback of those funds.
11 Liquidity Ra
tio
C The City’s liquidity has been bolstered by
the cash kept in its General Fund
reserves. Potential future usage of those
reserves would reduce liquidity and could
cause cash flow issues.
F: Favorab
le C: Caut
ion W: Warni
ng U: Un
favorable
ATTACHMENT 1
24 Revenue
Trends Operating
Position
1. Revenu
es per Capita F 9. Operating Position C
2. Property T
ax F 10. Reserve Fund Balances C
3. Sales Tax C 11. Liquidity C
4. Transient Occupancy Tax F
5. Business License Tax F
Expenditu
re Trends
6. Fr
inge Benefits W
7. Salary Exp
enditure C
8. Capital Outlay F
Rating Changes
The City’s strong revenue growth in FY 2021/22 led to all revenue indicators except for Sales Tax Revenues to be upgraded from Caution to Favorable. Sales Tax Revenues remains at Caution due to concerns of a potential slowdown in consumer demand due to rising inflation. Salary Expenditures as Compared to Total Operating Expenditures was upgraded from Warning to Caution, as growth in operating expenditures led to a decline in this ratio. Operating Position was upgraded to Caution from Unfavorable due to the FY 2021/22 surplus and projected current year surplus, although looking forward expenditures will need to be controlled (or revenues boosted) in order to maintain surplus positions. This reasoning also caused the Liquidity Ratio indicator to be upgraded fr om Warning to Caution.
0 2
4 6
8 10
2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 Favorabl
e Caution Warning Unfavorable
ATTACHMENT 1
25 Genera
l Fund Revenue Trend Indicators
General Fund revenues finance the majority of the daily operations of the City. As a result, changes in revenue levels and composition of these revenues will have a significant impact on the City’s ability to provide services to the citizens of Napa. The dollar amount received is important, but the type of revenue received also plays an important role in the financial stability of the City. Revenues should be balanced between those that ch ange as the economy shifts (elastic) and those that flow independently of economic activity (inelastic). General Fund revenues should also come from diverse sources within the community and be sufficiently flexible to finance expenditures as the needs of the City change.
The following section evaluates five indicators used to determine the financial condition of the City’s revenue base. A detailed revenue analysis is provided for the following indicators:
Revenu
es per Capita
Property Tax Revenues
Sales Tax Revenues
Transient Occupancy Tax Revenues
Business License Tax Revenues
ATTACHMENT 1
26 Indicator 1: Re
venues Per Capita
2023 Finding: Favorable
2022 Finding: Caution
Description
Revenues per capita are a measure of the City’s ability to maintain service levels.
Comments and Analysis
Prior to FY 2019/20, revenues per capita steadily increased as the City emerged from the Great Recession. These increases were largely driven by tourism and increased transient occupancy tax and sales tax collections, as well as escalating property values and retail and hotel development within the City. The impact of the COVID -19 pandemic caused this indicator to decrease . General Fund revenue recovered in FY 2021/22 and is expected to continue increasing in the future.
Population growth has decreased, averaging -0.06% per year over the past ten years (about 878 fewer residents in total).
The 2022 rating of Caution has been upgraded to Favorable in 2023 for this indicator due to strong City revenues in the last fiscal year.
2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 Revenues per Ca
pita 857 914 990 1,013 1,049 1,170 1,236 1,146 1,112 1,315 $0
$200
$400
$600
$800
$1,000
$1,200
$1,400
R
evenues per Capita
ATTACHMENT 1
27 Indicator 2: Propert
y Tax Revenues
2023 Finding: Favorable
2022 Finding: Caution
Description
Property tax revenues are evaluated over time to measure the City’s economic health.
Property taxes are the City’s largest source of revenue and are relatively inelastic in that they should remain constant as the economy changes. By State law (Proposition 13), the County levies property taxes at one percent of full market value at the time of purchase.
Assessed values can be increased by no more than two percent per year. The City also has the authority to impose an excess property tax levy to pay debt service on voter- approved debt. Currently, no such debt exists.
Co
mments and Analysis
Property taxes have grown steadily over the past several years, and local property values show no signs of declining. Home prices are consistently higher than they were prior to the last recession. The amounts shown in the chart above do not include Excess ERAF revenues included in the General Fund. While home price growth is expected to slow due to inflation and high mortgage rates, a repeat of the 2008 housing bust is not anticipated.
The 2022 rating of Caution is upgraded to Favorable for 2023, as the possibility of losing VLF as feared in the last forecast is no longer an issue. 2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 Propert
y Tax 23.0 24.0 26.0 27.8 29.1 32.1 35.0 36.3 38.9 40.1 $.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
Dollars
in Millions
Pr
operty Tax Revenues
ATTACHMENT 1
28 Indicator 3: Sales
Tax Revenues
2023 Finding: Caution
2022 Finding: Caution
Description
Sales tax revenue is a strong indicator of the city’s economic health. Sales taxes are typically the City’s third largest source of revenue (20%) and are elastic in nature, varying with changes in the economy. The California Department of Tax and Fee Administration levies the sales tax on most retail sales wi th principal exemptions applying to sales of food for home consumption and prescription drugs. The overall Napa County sales tax rate is 7.75%, of which the City receives the 1.0% local portion. The city also receives a portion of the 0.5% earmarked for pu blic safety as mandated by the State (Proposition 172), as well as a portion of the 0.5% for County Measure T (recorded in a separate fund for qualified transportation projects).
Comments and Analysis
Napa’s sales tax revenue is heavily dependent on the tourism industry and therefore tends to follow econom ic cycles. In FY 2019/20, sales tax receipts were strong through February, and steeply declined March -June due to the COVID -19 pandemic. Sales tax revenues rebounded in FY 2020/21 as consumers switched to online purchases, resulting in higher revenues than anticipated at the beginning of the pandemic. Sales tax grew rapidly in FY 2021/22, but slower growth rates are expected in the future.
The 2022 rating of Caution is maintained for this indicator due to current concerns regarding inflation and consumer demand. Sales tax revenues will be monitored to see if they are impacted by economic pressures.
2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 Sales Tax 14.3 15.1 16.2 16.1 17.2 17.9 19.4 17.0 18.8 21.7 $.0
$5.0
$10.0
$15.0
$20.0
$25.0
Dollars
in Millions
Sales
Tax Revenues
ATTACHMENT 1
29 Indicator 4: T
ransient Occupancy Tax Revenues
2023 Finding: Favorable
2022 Finding: Caution
Description
Transient occupancy tax revenue (TOT) is a strong indicator of the city’s economic health.
This revenue source is typically the City’s second largest source of revenue (23.0%) and is elastic in nature, varying with changes in the economy. The City of Napa levies the tax on rooms at hotels, motels, bed and breakfasts and vacation rentals within the City. The tax rate is 1 3%, of which 1% goes to an Affordable Housing Fund. A n additional 2% assessment rate is collected on behalf of the Tourism Improvement District, bringing the total rate paid to 15%. The “New Development” on the chart above designates new hotel development since the Great Recession.
Comments and Analysis
Napa’s TOT revenue is heavily dependent on the tourism industry and therefore tends to follow economic cycles. The City experienced a significant rise in tourism beginning in FY 2010/11, along with increasing room rates, which are indicated by the strong upward trend in overall TOT receipts through FY 2018/19. However, prior to the pandemic, the actual baseline growth rate slowed in recent years, with most of the City’s TOT growth coming from new development. The pandemic led to initial steep declines in TOT revenue, with hotels shut down for periods of time and most people remaining home rather than traveling. TOT strongly rebounded in FY 2021/22, reaching all -time highs. The forecast assumes that TOT will continue to grow at a slower rate in the future, and that much of the FY 2021/22 revenu e was due to a surge in demand as people emerged from quarantine.
The 2022 rating of Caution is upgraded to Favorable due to the revenue growth observed in fiscal year 2021/22.
2012
/13
2013
/14
2014
/15
2015
/16
2016
/17
2017
/18
2018
/19
2019
/20
2020
/21
2021
/22
Baseline
TOT 12.7 14.2 14.7 16.7 17.3 17.1 17.4 12.7 8.7 20.7
TOT wi
th New Development 13.5 15.2 15.9 18.3 19.5 20.1 22.7 16.7 11.7 28.7 $.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
Dollar
s in Millions
T
ransient Occupancy Tax Revenues
ATTACHMENT 1
30 Indicator 5: Bu
siness License Tax Revenues
2023 Finding: Favorable
2022 Finding: Caution
Description
Business license tax revenue typically accounts for 3.9% of the City’s revenues and is a good indicator of the City’s economic health. This tax is generally based on gross receipts of individual business within the City. Much like sales tax revenues, business license tax revenues are relatively elastic as they vary directly with changes in the economy.
Comments and Analysis
Business license tax receipts steadily increased from the Great Recession to the onset of the pandemic. As this tax is based on business gross receipts, we saw a steep decline in the amount collected in FY 2020/21. Along with sales tax and TOT, this revenue source strongly rebounded in FY 2021/22.
The 2022 rating of Caution is upgraded to Favorable due to the revenue growth observed in fiscal year 2021/22.
2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 Busine
ss License 2.8 2.9 3.2 3.2 3.4 3.7 3.9 3.9 3.3 4.0
$.0
$.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
Dollars
in Millions
Business
License Tax Revenues
ATTACHMENT 1
31 Genera
l Fund Expenditure Trend Indicators
General Fund expenditures are largely indicative of the level and types of services the City provides. Changes in the total dollar amount of expenditures can indicate a shift in the level of services delivered, either because demand has changed or because the cost of maintaining existing services has increased or decreased. Therefore, the analyses that follow show not only the change in total dollars, but changes in the types of expenditures for the past fiscal year.
A full expenditure analysis is provided for the following:
Fringe Benefits vs Operating Expenditures
Salaries vs Operating Expenditures
Capital Outlay as a Percentage of Operating Expenditures
ATTACHMENT 1
32 Indicator 6: Fring
e Benefits vs Total Operating Expenditures
2023 Finding: Warning
2022 Finding: Warning
Description
Fringe benefits include, but are not limited to , the City’s share of payroll taxes, pension plan costs, medical, life and disability insurance, and workers’ compensation funding.
Comments and Analysis
Fringe benefit costs have ranged from 21-29% of the City’s total operating expenditures over the past ten years. CalPERS adjusted its discount rate in November 2021 from 7% to 6.8% due to high investment returns, increases the City’s costs. The City’s CalPERS Unfunded Accrued Liability annual payment continues to grow over the next ten years.
Looking forward, the City will need to reduce expenditures where possible to cope with slower revenue growth, which will cause the amount of fringe benefits as compared to total operating expenditures to increase.
The 2022 rating of Warning for this indicator is maintained for 2023. Although the City has demonstrated the ability to manage some impact of increasing benefit costs through increased cost sharing and employee incentives to control the increased cost of benefits, the volatility of fringe benefits (specifically pension plan and workers compensation) and the significance of fringe benefits as a whole (approximately 29% of the City’s operating costs), require strong and constant management of this indicator.
$.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 Dollar
s in Millions
Fri
nge Benefits vs Total Operating Expenditures
Total Benefits Total Expen
ditures
ATTACHMENT 1
33 Indicator 7: Salarie
s vs Total Operating Expenditures
2023 Finding: Caution
2022 Finding: Warning
Description
These expenditures include salary and wages paid to regular, part -time, and temporary staff and represent 42-50% of General Fund disbursements over the last ten years. Any changes in salary expenditures will have a material impact on the City’s finances.
Comments and Analysis
Salary expenditures as compared to operating expenditures have remained relatively stable over the past ten years and have remained at or below 50% for the past ten years.
Continued monitoring of this indicator is warranted since these expenditures represent the largest category of General Fund operating costs , and directly drive many of the benefit amounts including pension costs . Looking forward, the City will need to reduce expenditures where possible to match revenue growth, which will cause the total salaries as compared to total operating expenditures to increase. In FY 2020/21 and FY 2021/22 the City froze positions to reduce operating expenditures. These positions were restored in the FY 2022/23 budget.
The 2022 rating of Warning is upgraded to Caution as increases in other budget areas have reduced this ratio as of FY 2021/22. However, MOU’s approved for most groups in FY 2022/23 included pay increases higher than budgeted and will put increased pressure on City funds moving forward.
$.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 Dollar
s in Millions
Salar
ies vs Total Operating Expenditures
Total Salarie
s Total Expen
ditures
ATTACHMENT 1
34 Indicator 8: Capit
al Outlay as a Percentage of Operating Expenditures
2023 Finding: Favorable
2022 Finding: Favorable
Description
This category includes General Fund expenditures to replace radios, equipment, computers and other IT components and any purchases of capitalizable assets. This category does not include capital project expenditures for the construction of improvements or buildings, or for infrastructure such as streets or storm drains.
Additionally, this category does not include replacement vehicles as the City has a Vehicle Replacement Policy that provides a mechanism for that funding. The ratio of capital outlay to total operating expenditures is an indicator as to whether worn or obsolete equipment is being replaced. A decline in this ratio over a period of years may indicate that capital outlay needs are being deferred and that inefficient or obsolete equipment is being utilized.
Comments and Analysis
While spending has fluctuated over the past 10 years, on average the annual amount spent is equivalent to 0.59% of total operating expenditures. Additionally, an Equipment Replacement Reserve was created in FY 2015/16 , and has a current balance of $0.75 million. An analysis of current equipment will be conducted to determine how much should be set aside annually to ensure that all City equipment is replac ed as needed. This commitment to funding equipment replacement is the main driver of the Favorable finding. 2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 Capi
tal Outlay 0.41% 0.65% 0.35% 0.67% 0.71% 0.55% 0.63% 0.70% 0.58% 0.65%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
Cap
ital Outlay
As a P
ercentage of Operating Expenditures
ATTACHMENT 1
35 Genera
l Fund Operating Position Trend Indicators
Operating position is defined as the City’s ability to balance current revenues against current expenditures, maintain adequate reserve levels, and cover short- term liabilities with short-term assets.
A complete analysis is provided in this section, and the following indicators are examined in detail:
Operating Position
Balance of Reserve Funds
Liquidity Ratio
ATTACHMENT 1
36 Indicator 9: Op
erating Position
2023 Finding: Caution
2022 Finding: Unfavorable
Description
This indicator measures the City’s ability to balance operating revenues, excluding fund balances from the prior year, against operating expenditures. When operating revenues exceed operating expenditures an operating surplus is achieved. A deficit occurs when the reverse happens, and the City is forced to utilize available fund balances from prior years or General Fund reserves.
Comments and Analysis
As shown in the graph above , the City experienced operating surpluses as it emerged from the Great Recession and through FY 2018/19. In FY 2019/20, the pandemic arriving in the last quarter of the fiscal year caused large declines in revenue through FY 2020/21.
The operating position shown above does not include one-time transfers and funds used to offset the operating deficits experienced in FY 2019/20 and FY 20 20/21. A stronger than anticipated rebound in operating revenues led to an operating surplus in FY 2021/22.
The 2022 rating of Unfavorable is upgraded to Caution for 2023 due to the strong revenue growth experienced in the last year, as well as the forecasted trend of expenditure growth outpacing operating revenue growth in the future.
2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 Opera
ting Position 5.4 8.1 7.8 9.4 6.6 8.5 4.8 (4.9) (4.3) 1.3 ($6.0)
($4.0)
($2.0)
$.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
Dollar
s in Millions
Op
erating Position
ATTACHMENT 1
37 Indicator 1
0: Balance of Reserve Funds
2023 Finding: Caution
2022 Finding: Caution
Description
The City has three main reserves available for use in the event of a financial emergency, short-term revenue fluctuations or an economic downturn. The Emergency Reserve, Operating Reserve and Contingency Reserve are funded with the use of fiscal year -end surplus dollars. The City attempt s to operate each year at a surplus to ensure the maintenance of adequate fund balance and reserve levels.
Comments and Analysis
The City has a fiscal policy d esignating an amount of annual operating expenditures as an emergency reserve and has achieved full compliance since the policy was first implemented in FY 2007/08 at 12% of operating expenditures and then increased in FY 2014/15 to 14%. Undesignated Fund Balance was used to meet budget shortfalls during the recession . The Operating Reserve is to be maintained at 5% of operating expenditures. The Contingency Reserve has a funding goal of 1% of operating expenditures. All reserves are currently fully funded per fiscal policy.
The City’s reserves were not tapped during the worst of the pandemic downturn, and the Emergency Reserve has been overfunded after the deposit of PG&E Settlement dollars in FY 2019/20. Moving into the forecast period, the City will again need to begin making annual contributions to this reserve.
The 2022 rating of Caution is maintained for 2023 due to the potential deficits shown in the forecast model.
$.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 Dollars
in Millions
R
eserve Fund Balances
Emergency Reserv
e Opera
ting Reserve Co
ntingency Reserve
Other Reserves / L
egally Restricted Unassigned Reserv
es
ATTACHMENT 1
38 Indicator 11: Liqu
idity Ratio
2023 Finding: Caution
2022 Finding: Warning
Description
Liquidity measures the City’s ability to meet short-term obligations. Liquidity is measured by comparing current assets to current liabilities. Current assets include cash, short-term investments, accounts receivable, and other assets that can be rapidly converted to cash.
Current liabilities include accounts payable, accrued wages, accrued expenses, and deposits, all obligations that can be immediately demanded for payment. A liquidity ratio of less tha n 1:1 can indicate insolvency and is cause for alarm. A ratio above that is considered favorable.
Comments and Analysis
The City has been able to maintain a liquidity ratio well above 1:1 for the past ten years.
The ratio stood at 2.52 at the end of FY 2020/21, meaning the City’s General Fund has enough current assets to cover its current liabilities more than twice over. This decline from FY 2019/20 to FY 2020/21 is due to the receipt of the as yet unspent American Rescue Plan Act (ARPA) funding, which increased the City’s current assets by 27% but more than doubled its current liabilities. In FY 2021/22 the ARPA funding was moved to a separate fund for better tracking, shifting the City’s liquidity ratio upwards. The City’s liquidity has been buoyed by the cash in its General Fund reserves. If reserves are spent in future years, the liquidity ratio will decrease.
The 2022 rating of Warning is upgraded to Caution for 2023 due to the increase in the liquidity ratio in FY 2021/22. Due to the potential usage of reserves in future years, cash flow and liquidity will need to be closely monitored to ensur e the City is able to stay solvent.
2012/
13 2013/
14 2014/
15 2015/
16 2016/
17 2017/
18 2018/
19 2019/
20 2020/
21 2021/
22 L
iquidity Ratio 3.36 4.86 3.59 4.21 4.57 4.22 4.42 4.30 2.52 3.60
0.00 1.00
2.00 3.00
4.00 5.00
6.00 Liqu
idity Ratio
ATTACHMENT 1