CITY OF PACIFICA
COUNCIL AGENDA SUMMARY REPORT
3/14/2022
1 SUBJECT:
Fiscal Year 2021-22 Mid-Year Budget Update
RECOMMENDED ACTION:
Adopt a resolution authorizing the adjustments to the FY 2021-22 Operating and Capital Budget.
STAFF CONTACT:
Kevin Woodhouse, City Manager
650-738-7409
[email protected]
Yulia Carter, Chief Financial Sustainability Officer
650-738-7301
[email protected]
BACKGROUND/DISCUSSION:
The Finance staff has completed a Midyear Budget review and is proposing adjustments to the FY2021-22 Adopted Budget.
The purpose of the midyear budget review is to analyze the year-to-date revenues and expenditures, to review assumptions made before the budget cycle and make necessary adjustments to reflect changes in the City’s financial conditions. Typically, the midyear budget review is also a segue to the next fiscal year’s budget development process, as the mid-year analysis is used to develop the base budget assumptions for the new year.
On June 28, 2021, the City Council adopted a balanced FY 2021-22 Budget that reflected the Council priorities and uses of American Rescue Plan Act (ARPA) funds for the upcoming fiscal year. The Budget was subsequently amended and adopted by the City Council on September 27, 2021, to include the outcomes of the labor negotiations with all employee groups and capture the impacts of the new MOUs with offsetting reductions in Operating budget.
BACKGROUND:
This FY 2021-22 Midyear Budget report will focus on the following key objectives:
1. Updating City Council on the status of revenues and expenditures within the FY2021-22 General Fund Revised Budget and requesting total revenue adjustment to the FY2021-22 General Fund of $2.3 million and appropriation increase of $0.6 million, including a net of $181,335 previously approved by Council throughout the year, as presented in Attachment 2.
Pacifica City Council 2
March 14, 2022
2. Updating City Council on the status of revenues and expenditures within the FY 2021-22 Non-General Fund Revised Budget and requesting increase to the FY2021-22 nongeneral (Other) Funds Revenues totaling $1.7 million or 4% of the Total Other Funds Adopted Budget (Attachment 3). The Other Funds Expenditures adjustments total $2.9 million or 3% (Attachment 4), most of which were the result of the CIP projects rollover previously approved by the Council and $0.5 million previously approved by Council throughout the year (Attachment 2).
3. Updating Council on the projected fund balance structure through June 30, 2022 (Attachment 5).
The FY 2021-22 Operating and Capital Budget was adopted as a balanced budget, meaning that the City’s operating expenditures did not exceed operating revenues. The reported structural deficit was addressed at budget adoption by a number of budget reduction measures that the Council approved as part of the FY2021-22 Budget, including using ARPA funds to replenish some of the COVID-related revenue losses.
The FY 2021-22 Revised General Fund budget is $43.1 million in revenue and $43 million in total General Fund expenditures.
City-wide revenues across all funds are projected to increase by $3.9 million, and citywide expenditures are projected to increase by $2.9 million primarily due to spending and delivery on CIP projects previously approved by Council in prior years.
1. Status of General Fund Revenues and Expenditures in FY 2021-22 Revised Budget FY 2021-22 General Fund Revenues
The General Fund is the City’s primary operating fund and is used to account for most day-today activities. It receives unrestricted revenues and provides the City’s general administrative services, public safety, parks, beaches and recreation, public works, and community development-related activities such as planning, building, and engineering. Revenue sources include, but are not limited to, property tax, sales tax, and transient occupancy tax (TOT), business tax registration, and current fees and charges for services.
The revised estimates for General Fund revenues (excluding transfers) are projected to be $43.1 million or $2.3 million (6%) higher than the Adopted Budget of $40.8 million mainly due to the City’s receipt of reimbursements and one-time revenues related to Vehicle License Fees backfill from the State and slightly higher than budgeted ARPA allocation. Without these onetime sources the regular General Fund revenues are right on target performing within 1% of the original budget.
The following table demonstrates General Fund revenues for the FY 2020-21 Actual, FY2021- 22 Adopted, and Revised FY 2021-22 budget projections.
Pacifica City Council 3
March 14, 2022
Description FY 2020-21
Actual
FY 2021-22
Adopted Budget
(amended as
9/27/2021)
FY 2021-22
Revised
Budget
$ Change
Revised over
Adopted
% Change
Revised
over
Adopted
Taxes $ 27,255,209 $ 26,501,531 $ 27,519,081 $ 1,017,550 4% Property Tax $ 15,131,117 $ 14,273,769 14,273,769 - -
Vehicle License Fees $ 2,643,981 $ 2,658,130 3,688,130 1,030,000 39% Business License Tax $ 444,171 $ 492,750 492,750 - -
Cannabis Tax $ 775,261 $ 910,295 795,595 (114,700) -13% Sales Tax $ 2,848,681 $ 2,860,153 3,017,753 157,600 6%
Transient Occupancy Tax $ 1,531,550 $ 1,750,423 1,695,073 (55,350) -3% Utility Users Tax $ 2,146,229 $ 1,868,218 1,868,218 - - Other Taxes $ 1,734,220 $ 1,687,793 1,687,793 - -
Intergovernmental $ 1,580,837 $ 4,963,718 6,125,018 1,161,300 23% Other Revenue $ 737,600 $ 88,000 88,000 - -
Charges for Services $ 5,370,569 $ 7,131,917 7,210,245 78,328 1% Sub-total $ 34,944,216 $ 38,685,166 $ 40,942,344 2,257,178 6% Transfers In $ 1,476,707 $ 2,150,898 $ 2,150,898 - -
Total $ 36,420,923 $ 40,836,064 $ 43,093,242 $ 2,257,178 6% FY 2021-22 General Fund Revenues Adjustments for Council Approval The following revenues are projected to reflect material changes over the FY 2020-21 Adopted Budget and are recommended for budget adjustment:
• Vehicle License Fee was converted to a property tax source by state legislation and grows as property tax grows in the City. The County of San Mateo remits the VLF related property tax twice a year in equal amounts. At the budget adoption, staff anticipated a delay in remittance of these revenues reflecting the impact of the State’s obligation to backfill VLF In Lieu revenues currently owed and forecasted. In the past, the State has backfilled any VLF shortfall, however, the State’s payment lags two years behind the shortfall year. Based on the most recent information provided by the County, the FY 2021-22 VLF allocation to Pacifica is $3.7 million, which includes a FY2021-22 shortfall adjustment, resulting in additional $1.03 million in one-time revenue backfill. • Cannabis Tax show a decrease of $114,700 or 13%, due to slower than anticipated business activities and delayed opening of two new dispensaries. Staff will continue monitoring these revenues to include accurate projections for the upcoming budget. • Sales Tax is the City’s second-largest revenue source. Based on discussions with HdL, the City’s sales tax advisor, the local sales tax activities forecast an increase of $157,600 or 6% over the Adopted budget due to gradual recovery of the local economy and increase in the State/County pool allocation for online sales. • Transient Occupancy Tax (TOT). The hospitality industry was affected the most by the pandemic. National and international tourism took the hardest hit, which negatively impacted the City’s hotel occupancy and TOT revenues. Although this was anticipated in budget assumptions, the FY 2021-22 Revised Budget projects an additional $55,400 or 3% decline over the Adopted Budget due to a slower than expected recovery in travel and tourism activities further hampered by the Omicron variant. • Intergovernmental revenue category includes general grants and reimbursements and projects an additional $1.2 million. It is important to note that the majority of these revenues are one-time. This includes additional allocation for American Rescue Plan Act of $0.4 million, cost reimbursement from Cal OES for Fire wildfire services, additional COVID-related grants that the City received earlier this year and reimbursements for increased senior lunch program activities with the corresponding increase in food cost accounted for on the expense side.
Pacifica City Council 4
March 14, 2022
• Charges for Services project a marginal increase of $78,300 or 1% due to an increase in reimbursable Planning Department pass-through legal fees on private development further described below, and anticipated increase in preschool / childcare funding and some recreation activities like swimming programs with offsetting decreases in others (day camp and senior programs) that were overstated in the budget.
FY 2021-22 General Fund Expenditures
FY 2021-22 General Fund Operating Expenditures Adjustments for Council Approval Expenditure projections were reviewed based on three categories: personnel costs and general government program budget in contract services, and materials & supply categories as listed below.
Expenditures FY 2020-21
Actual
FY 2021-22
Adopted Budget
FY 2021-22
Revised
Budget
$ Change
Revised over
Adopted
% Change
Revised
over
Adopted
Salaries & Benefits $ 25,098,441 $ 28,138,921 28,705,984 567,063 2% Contract Services $ 5,982,005 $ 6,893,746 7,828,046 934,300 14% Material/Supplies/Maintenance $ 3,264,977 $ 3,134,698 3,248,698 114,000 4% Salary Savings $ - $ - (1,000,000) (1,000,000) -
Sub-Total 34,345,424 38,167,365 38,782,728 615,363 2%
Transfers/Allocations Out $ 1,861,270 $ 4,219,481 4,219,481 - 0% Total 36,206,694 42,386,846 43,002,209 615,363 1%
General Fund Expenditures
Previously Approved Changes to the FY 2021-22 Budget
At every Council meeting, the City Manager recommends agenda items for the Council’s consideration and approval. Some of these items require amendments to the original budget, and Council approval of the agenda item specifically includes the budget amendment. During the mid-year budget review process, Finance staff incorporated all previously approved budget amendments year-to-date into the FY 2021-22 Revised Budget. These adjustments increased the General Fund appropriation by $351,863, as further described in Attachment 2.
Staff Adjustments to Budget
During the mid-year budget review process, staff makes a number of minor cleanup changes and adjustments within the department’s budgets. Money is moved from various individual lineitems with savings to other line items within a department budget. This is done when a line item may go over its original budget amount. These changes are considered routine as they have minimal effects on the overall budget and remain within the FY 2021-22 Council approved funding level.
Staff used the following methodology for the mid-year budget analysis: the year-end estimates in operating expenditures in excess of the adopted budget by 5% and $25,000 were considered material in nature and are being proposed for a budget adjustment.
Throughout this exercise, staff identified a number of items that would require an additional budget appropriation of $1.6 million (before salary savings), as listed below:
Salaries and Benefits
• Additional Fire Overtime Cost of nearly $0.5 million reimbursable by California Office of Emergency Services (OES) under the California Fire Assistance Agreement (CFAA) and Rescue Mutual Aid System related to wildland fire protection and relief from wildfire. This Pacifica City Council 5
March 14, 2022
cost was not budgeted due to the unpredictable nature of the service, but staff is including this in the mid-year budget adjustment with the corresponding reimbursement recorded in the Intergovernmental revenues as referenced above. • Reclass of the Finance Manager to a Deputy Finance Director position request. The Finance Manager position became vacant in December, 2021 due to a retirement. The City has conducted two unsuccessful recruitments trying to fill this position. Several Bay Area Cities ran similar recruitments at the same time with more competitive salary and benefits packages. The City Manager recommends upgrading this position to a Deputy Director classification to attract a better qualified pool of candidates. The FY2021-22 Budget impact for this reclass will be immaterial, as the recruitment is not expected to be complete with the new hire on board until June or July, but staff is requesting this upgrade as a matter of position control in preparation for the FY 22-23 Budget, so the recruitment can begin and be completed by the beginning of the new fiscal year. If approved, the fully burdened cost of the reclass of approximately $15,000 will be included in the FY2022-23 Budget.
Contract Services
• Legal Services need an additional increase of $220,000 to a total estimated FY 2021-22 cost of nearly $1.15 million to address the increase in City Attorney and outside legal counsel cost related to various legal matters, including litigations, claims and Public Records Act request processing. An additional $173,200 is also added to costreimbursable legal services in the Planning Department as pass-through charges on private development.
• Contractual Services in City Manager’s Department budget of an additional $60,000 to cover various unanticipated projects, including a purchase of the NextRequest software for Public Records requests and an upcoming six-month pilot contract with California Consulting for citywide grant writing services.
• Additional Part-time and contractual funding of $132,600 for substitute childcare teachers and janitorial services increase at PB&R and Childcare programs. • Contractual Services in the Public Works department need to be amended by $123,000 to cover engineering services and analysis that cannot be performed in-house.
Material, Supplies and Maintenance Services
• Food and Supplies Budget in PB&R department of $74,000 to cover the cost and increase in number of meals served for senior lunches with the offsetting additional reimbursements factored-in the estimated revenue increase above. • Planning Department budget requires additional allocation of $40,000 for services related to compliance with state affordable housing requirements per Regional Housing Needs Allocation (RHNA reporting). The first year cost of ADU compliance software is also included in this category.
Personnel Cost
Personnel cost projections are based on the most current payroll cost and projected for the remainder of the fiscal year after factoring in expected personnel changes. The City has been confronted by an unusually high vacancy rate and challenges in recruiting and retaining talent, challenges which are currently widespread in the local government sector, and exacerbated for Pacifica by its lower than median salaries. Some recruitments have had to be repeated multiple times without success. Because of this trend, staff is projecting substantial salary savings of approximately $1.4 million created by vacancies and new employees coming in at a lower salary step than the incumbents.
Typically, staff would not recommend reducing the personnel budget due to salary savings, as Pacifica City Council 6
March 14, 2022
this could be a misleading representation of fully-staffed personnel cost. Plus, salary savings may help offset any unexpected increases before the end of the year, while any unused savings would revert back to the General Fund balance. However, considering the projected upcoming structural deficit in the upcoming year and vulnerability of the General Fund unassigned fund balance reserves, the City Manager recommends making a one-time adjustment to factor-in salary savings of $1 million in the FY2021-22 Revised Budget to help offset the increased cost of the contract services and material & supply categories and replenish the General Fund projected reserves in preparation for the new budget cycle. This one-time reduction in the salary and benefits will be restored back in the FY2022-23 Base Budget with the full personnel cost.
Overall, FY 2021-22 General Fund operating expenditures are amended to net $0.6 million or 1%, which includes an operating increase of $1.6 million, including $0.4 million of previously approved Council adjustments throughout the year (Attachment 2) and $1.2 million requested adjustment as described above, as well as offsetting salary savings of $1 million.
2. Status of Non-General Fund Revenues and Expenditures in FY 2021-22 Revised Budget
Non-General Funds include the following categories.
• Enterprise Funds, including Sewer Operating and Capital and Beach Parking funds • Special Revenue and Capital Funds, including Gas Tax and Street funds, Drainage, General Capital, Housing and Park in lieu funds, PB&R Roy Davies Trust fund, Disaster Accounting and others.
• Internal Service Funds, including Motor Pool Operating and Replacement funds, Dental Benefit fund and Risk Management (Workers’ Comp and General Liability) funds. • Debt Service Fund
Non-General Fund FY 2021-22 Revenues
In the Adopted FY 2021-22 Budget, these revenues comprise $45 million or 52.4% of the City’s $85.8 million total revenue budget. The non-general fund revenues are projected to increase by nearly $1.7 million or 4% to $46.6 as listed in Attachment 3 and proposed mid-year adjustments as listed below.
Non-General Fund Revenues Adjustments for Council Approval The following non-General Fund revenues are projected to reflect material changes over the FY 2021-22 Adopted Budget and recommended for budget adjustment:
Enterprise Funds:
• Sewer Operating and Capital Fund projects $1.3 million in additional revenues due to increase in sewer connection charges and higher water usage during the 2020 period which resulted in undervalued projections during development of the FY 2021-22 Fiscal Year budget.
• Beach Parking Fund revenues are expected to go up by $100,000 from $565,000 to $665,000 as a result of higher recreational usage of outdoor space.
Special Revenue and Capital Funds:
• Street Construction Fund shows a reduction in revenues of $0.9 million or 28% per staff request to remove the Sharp Park ADA Resurfacing project from the CIP list. The project was planned to be funded by a grant submitted through Congresswoman Jackie Spier’s office and staff earmarked $1 million award during last year’s budget preparation. The City did not receive the grant and staff recommends removing this project from the CIP, which includes removing the corresponding expenditures of $1.2 million budgeted for the project. This reduction is partially offset by an increase in Measure A revenues. • Gas Tax Fund revenues are projected to increase by $38,100 or 2% compared to the Pacifica City Council 7
March 14, 2022
budgeted estimates.
• Park In-Lieu Fund is projected to receive additional $41,200 above the $50,000 estimated during the budget development due to higher activity and park in-lieu fees paid by developers.
• Disaster Accounting Fund received an additional $0.9 million in Excess Educational Revenue Augmentation Fund (ERAF) revenues. Staff budgeted Excess ERAF revenues at $2.5 million, divided between $88,000 in General Fund for assistance to local nonprofit organizations (Pacifica Resource Center and the Pacific Beach Coalition), $1.5 million in the General Capital Fund allocated towards the Civic Center project and the remainder of $0.9 was budgeted in the Disaster Recovery Fund. The current year’s Excess ERAF distribution was $3.5 million resulting in $0.9 million increase added to the Disaster Accounting Fund consistent with the past policy direction of the Council. • Motor Pool Replacement Fund received additional revenues of $40,100 as a result of the sale of surplus vehicles, including three commercial trucks and a Van.
Additional information on individual non-general fund revenue categories is presented in Attachment 5.
Non-General Fund FY 2021-22 Expenditures and Transfers
Non-General Fund FY 2021-22 Adopted expenditures comprise $55.2 million, or 56.5% of the City’s $97.6 million total expenditure budget. These expenditures are proposed to be amended by the net of $2.3 million or 4%, including previously approved by the City Council year-to-date and additional expenditures related to the rollover of capital projects from the prior years.
Non-General Fund Expenditure Appropriation Adjustments for Council Consideration Enterprise Funds:
• Sewer Fund shows nearly $0.45 million or 2% increase in expenditures due to higher gas, electric and water utility cost.
Special Revenue and Capital Funds:
• Supplemental Law Enforcement Services (SLES) Fund expenditure need to be adjusted up by $27,000 due to a Police Department’s purchase of equipment, including Body and Dashboard Cameras and required patrol car upgrades.
• Street Construction Fund projected increase in expenditures of $1.3 million is mainly due to Public Works staff catching up on the prior year’s projects approved and budgeted in previous years, while the current year’s CIP budget is also projected as spent before the end of the year for accurate accounting of the available fund balances in preparation for the new budget.
• PB&R Roy Davies Trust Fund also shows an additional expense of $39,400 over budget which is related to the completion of the Fitness Court CIP project budgeted in the previous years and delayed in execution.
Capital expenditures will be further reviewed by staff during the FY 2022-23 CIP Budget development process that is now being prepared by Public Works department.
3. Projected Fund Balance Structure
The FY 2021-22 revised budget amounts have been updated from the adopted budget figures following the independent audit of FY 2020-21. Under GASB 54, this balance is made up of the following components: non-spendable items or portions of fund balance that cannot be liquidated, restricted amounts for use by outside agencies, committed amounts by Council action such as emergency/contingency reserves and assigned balances to pay off unfunded liabilities and to fund infrastructure improvements.
Pacifica City Council 8
March 14, 2022
These restricted reserves and operating contingency are projected slightly under $10 million leaving an unassigned projected balance of $6.7 million, which equates to 16.7% of the General Fund operating expenditures (excluding one-time and capital transfers). This is an increase of nearly $1.6 or 3.8% from the Adopted Budget (adjusted by the beginning fund balance), which complies with the Government Finance Officers Association of the US and Canada (GFOA) recommendation for government entities of meeting at least two months of operating revenues or expenditures. Although a further increase in the General Fund unassigned fund balance would be desirable, this is certainly a move in the right direction that puts the City in a slightly better financial position to face difficult budget choices in the upcoming years.
Designations Actual
2020-21
Adopted
2021-22
(Amended
9/27/21)
Revised
2021-22
(Midyear)
Variance
Revised vs.
Adopted
Beginning Fund Balance $ 15,917,102 $ 16,501,373 $ 16,501,373 $ - Total Revenue* 36,445,882 40,836,064 43,093,242 2,257,178 Total Expenditures 35,861,611 42,386,846 43,002,209 615,363 Ending Fund Balance 16,501,373 14,950,591 16,592,406 1,641,815 Non-Spendable 3,983,270 4,600,986 4,600,986 $ -
Assigned Reserves
Policy Level of 10% of Expenditures 3,726,639 4,238,685 4,300,221 61,536 Facility Maintenance & Replacement * 10,000 205,000 205,000 0 Compensated Absences 200,000 200,000 200,000 0
Child Care Reserve* 169,908 488,591 488,591 0
Legal Reserves 100,000 100,000 100,000 0
Assigned Reserves 4,206,547 5,232,276 5,293,812 61,536
Total Designations 8,189,817 9,833,262 9,894,798 61,536 Unassigned Fund Balance 8,311,556 5,117,330 6,697,608 1,580,279 Operating Expenses 36,222,623 39,386,846 40,002,209 615,363 Unassigned Fund Balance as % of Op. Expenses 23% 13.0% 16.7% 3.8% FY2021-22 REVISED BUDGET
GENERAL FUND (ASSIGNED & UNASSIGNED BALANCES)
Although the impact of the mid-year budget review on the General Fund Revenues and Expenditures is mostly cost-neutral, the overall impact on the General Fund is positive. This results from a better than expected performance at the FY2020-21 year-end, which increased the unassigned Actual FY2020-21 General Fund balance of $8.3 million by approximately $2.3 million compared to the FY 2020-21 Projected figure of $6 million that was used for the Budget.
Another major contributing factor is prudent fiscal management by the City Council and demonstrated financial discipline by the City Manager and all City Departments in keeping their operations within the reduced budget means. Also, factoring-in the anticipated FY 2021-23 salary savings in the Revised budget will further replenish the General Fund reserves and increase the fund balance starting point in preparation for the new budget and City Council discussion of strategic goals and priorities for the upcoming budget cycle.
Should the Council approve the recommendations listed above, the estimated ending General Fund balance as of June 30, 2022, is projected to be approximately $16.6 million, which is higher than the FY2021-22 Adopted projected balance. Again, this is due to overall slightly better than expected performance coupled with budget reductions in FY 2020-21, and a number of prior year clean-up adjustments made during the year-end and audit process that resulted in the increase in audited FY 2020-21 ending General Fund balance by $2.3 million, plus the current mid-year adjustments, including the salary savings that (if approved) will further replenish the available General Fund balance. The FY2021-22 Revised unassigned General Pacifica City Council 9
March 14, 2022
Fund Balance is projected at $6.7 million or 16.7% of the Operating expenditure which is a significant improvement from $3 million or 7.2% reported at Budget Adoption.
Staff will continue monitoring remaining fund balances and reevaluate strategies for future use of these funds as part of the FY2022-23 Budget. Please refer to the attached summary schedule presented in Attachment 5 for additional information on the City’s Revised FY 2021-22 projected fund balances across all funds.
The City of Pacifica prides itself on an open, inclusive, and comprehensive budget process. This process traditionally takes place over the course of several months and involves numerous Council study sessions in which the public is invited to participate. This begins with the City Council Goal Setting workshop, scheduled for March 25-26, 2022. Annual Goal Setting provides a critically important roadmap for the organization as it establishes the framework for the City’s short and long-term objectives and work plan for the upcoming year to be reflected in the budget.
The City Manager and staff look forward to working with the Council and community to address any current and potential financial challenges that may lay ahead. This work may include identifying operational opportunities and efficiencies, assessing appropriate tax and fee structure, pursuing acceptable economic development opportunities, and advising on alternative revenue options available to the City and the community to facilitate economic recovery and ensure the continuing high quality of life for the residents and visitors of the City.
ALTERNATIVE ACTION:
The City Council is being asked to adopt the resolution amending the FY2021-22 Budget. No alternative action is identified.
RELATION TO CITY COUNCIL GOALS AND WORK PLAN:
A balanced and structurally sustainable budget is consistent with all of the City Council's goals.
FISCAL IMPACT:
As part of the FY 2021-22 mid-year review, the General Fund revenues are amended to $43.1 million, an increase of $2.3 million or 6%, and General Fund operating expenditures are amended to $43 million, an increase of $0.6 million or 1.4% over the Adopted FY 2021-22 budget. Staff recommends a total revenue increase of $1.7 million and appropriation adjustment of $2.3 million or 4% to other Non-General Funds primarily due to revenue increase in the Sewer fund additional Excess ERAF allocation, as well as increase in capital spending from the prior years.
ORIGINATED BY:
Finance Department
ATTACHMENT LIST:
Attachment 1 - Resolution Authorizing Adjustments to the FY 2021-22 Operating and Capital Budget(DOCX)
Attachment 2 - FY 2021-22 City Council Previously Approved Budget Amendments (PDF) Pacifica City Council 10 March 14, 2022
Attachment 3 - FY 2021-22 Summary of Revenues and Transfers by Fund (PDF) Attachment 4 - FY 2021-22 Summary of Expenditures and Transfers by Fund (PDF) Attachment 5 - FY 2021-22 Fund Balance Summary by Fund (PDF)