CITY OF PACIFICA
COUNCIL AGENDA SUMMARY REPORT
6/13/2022
1 SUBJECT:
FY 2022-2023 Program Options and Proposed Budget
RECOMMENDED ACTION:
Hold public hearing and review and discuss the Fiscal Year 2022-23 Proposed General Fund and Other Funds Budget and provide additional policy direction on the desired budget options and strategies for the upcoming FY 2022-23 Budget
STAFF CONTACT:
Kevin Woodhouse, City Manager
[email protected]
650-738-7409
Yulia Carter, Chief Financial Sustainability Officer
[email protected]
650-738-7301
BACKGROUND:
Each year, the City of Pacifica adopts an annual operating budget that reflects the planned activities for the next fiscal year based on the best information available at the time of adoption.
At mid-year, staff revisits the projections and reports to the Council any changes that are needed to reflect new information and keep the City budget on track.
The City Council adopted the current FY 2021-22 Budget on June 28, 2021, which reflected the second year of the COVID-19 pandemic and included the projected pandemic-induced losses in revenue. On March 14, 2022, staff presented the FY2021-22 Midyear Budget analysis, which showed the budget was on track. During the mid-year budget review, the Council authorized additional adjustments to the FY 2021-22 Budget that included factoring-in salary savings and replenishing some General Fund reserves.
On April 11, 2022, staff presented the Narrative Budget report outlining the Budget planning process, methodology, timeline, and long-term financial forecast and provided the City Manager’s recommended budget strategies. The City's long-term financial forecast continues to project an ongoing structural deficit. Therefore, staff proposed using the modified zero-based budget methodology, a systematic financial management strategy commonly used by local governments to help achieve more cost-effective delivery of public services, which was discussed at length during the meeting.
On May 23, 2022, staff presented the General Fund Base Budget, preliminary position recommendations, Master Fee Schedule and Proposed Capital Improvement Plan for FY 2022- 23 and received City Council feedback for development of the Recommended Budget options, which is the subject for this report. Since the last meeting, staff prepared the Proposed FY 2022-23 Budget for all other city funds including recommended Capital Improvement Program Pacifica City Council 2
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for the upcoming FY 2022-23 Budget.
The primary focus of today’s discussion is to provide Council with the recommended program options for the FY 2021-22 Proposed Budget and get additional policy direction for any additional inclusions in the budget prior to the adoption at the next meeting.
Adjustments to the Base Budget
Staff also made a few minor adjustments to the General Fund baseline budget to include some refinements related to the previously approved second year ARPA budget allocations.
Returned ERAF Revenues
At the last meeting, staff discussed the proposed trailer bill language published by the Department of Finance in connection with the Proposed Budget that was designed to harm cities by permanently “capping” the ERAF funds that would be returned to them (after schools have been fully funded) and, instead, use these local revenues to pay the State’s in-Lieu Vehicle License Fee (VLF) backfill obligations. The San Mateo County’s City Managers and Finance Directors, as well as cities, have prepared strong opposition letters to the Returned ERAF trailer bill language as both VLF backfill and Returned ERAF are due to the local agencies.
The recently-released joint legislative budget agreement received by staff since the last Council meeting recommended that the excess (returned) ERAF/VLF shortfall trailer bill be rejected and the FY2019-20 VLF shortfall backfill be approved. This is good news and the result of the Cities’ individual and collective advocacy efforts, that resulted in successful reversal of the trailer bill with the strong leadership of the County’s state delegation.
Staff reversed the negative budget impact of $216,000 from the proposed cap that was previously reported in Disaster Accounting Fund (Fund 38). The FY 2022-23 Recommended Budget adds back this amount to the Disaster Accounting Fund revenues. Staff will continue to monitor any new development on this matter. Unfortunately reversing this trailer bill doesn’t take care of the growing VLF shortfall issue for future years, so the long-term solution will need to be developed in the future.
City Manager’s Recommendations for the FY 2022-23 Budget The goal of any budget process is to develop the City's Budget by completing a full analysis of the City's revenue structure and current service level to identify necessary service increase and/or reduction options, which, when combined, will reach a balanced and sustainable budget.
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Economic recovery continues to be one of the prime goals and objectives for the upcoming year. At the last budget meeting, staff presented the Base Budget with and without factoring in the one-time ARPA revenues. The Base Budget showed the operating surplus of approximately $1.9 million when the full ARPA revenues were taken into account. However, when the ARPA revenues were backed out, the Base Budget showed a structural deficit of $2.7 million at the Base Budget level before any additional options further described in this report.
Since last meeting each City Department was given an opportunity to submit their budget requests in their priority order of importance with the reference to the Council’s goals and priorities. Knowing the challenges of the City’s long-term financial outlook and projected future base budget deficit, all department directors knew going into the budget process that the prospects for funding new programs and initiatives not mandated by law, funded by outside sources or that result in recovery of the City’s revenue base would be challenging to achieve.
The Recommended Budget is balanced and includes new programs and services recommended for funding in the FY 2022-23. However, staff recognizes that some of these options may not be sustainable beyond the upcoming budget if the local economy and the City’s revenue base does not improve in future years.
In developing budget recommendations for service changes, the City Manager had to balance the knowledge of future revenue shortfall with the Council’s overall strategic vision, staffing capacity, and impacts on the City operations and services provided to the community. The goal of this process was to identify necessary and required service change options, which in combination will reach a balanced and sustainable budget, and to achieve a balanced budget while preserving as much of City services as possible. To this end, the City Manager reviewed department requests and formulated a packaged budget recommendation of enhancements for the Council’s consideration as later presented in this report and in Attachments 1-6.
The City Manager identified the following priority groups for his ranking of the recommended Budget options:
Priority A - Non-discretionary / Legal / Safety Matters Priority B - Recruitments / Retention / Capacity
Priority C - Organizational / Financial/Planning Efficiency Staff structured the Preliminary Budget Recommendations in these categories: 1) Additional programs and initiatives, 2) Programs funded under the American Rescue Plan Act; 3) Revenue Enhancements; and 4) Recommended Budget Transfers
1. Additional programs included in the General Fund budget (Attachment 2).
At the last meeting, staff presented a preliminary list of position recommendations that the City Manager recommended to include in the upcoming FY 2022-23 General Fund Budget. Staff completed the costing and included those changes per Council direction provided at the last meeting. All together there are 19 recommended budget options included in the FY 2022-23 Recommended Budget for Council consideration.
Priority A - Non-discretionary / Legal / Safety Matters
1. Anticipated additional legal work related to the upcoming labor negotiations. All employment contracts expire on June 30, 2023 and the negotiations work will have to commence no later than January, 2023. - $100,000
2. Additional Contractual Services to ensure OSHA and other Safety Compliance - $30,000
3. Additional budget allocation for citywide election - $90,000
4. New Fire Station Alerting System Implementation - $28,000
5. Housing Element Update - $20,000
6. ADA Transition Plan Update - $160,000
Priority B - Recruitments / Retention / Capacity
7. Reorganization of the City Manager’s Office - $160,900 Pacifica City Council 4
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8. Additional professional services budget allocation to increase the capacity of Human Resources Department by outsourcing recruitment and other HR services - $100,000
9. Child Care Staffing Adjustments and Reorganization - No fiscal impact as an additional expense is fully offset by increased reimbursements.
10. Reclassification of Recreation Coordinator to Recreation Supervisor - $21,410
11. Reclassification of Associate Engineer to Project Manager - $12,050
12. Reclassification of Ranger to Lead Ranger - $5,693
Priority C - Organizational / Financial/Planning Efficiency
13. Ongoing Unfunded Pension Liability Allocation to PARS Trust to reach the desired funding policy threshold of 85% funded status in 20 years - $167,500
14. Additional Budget for Citywide Records Management and Scanning Services - $35,000
15. Additional contract for part-time hourly help with Helpdesk tickets in IT Department - $35,000
16. Partially restore the Building Repair & Maintenance Emergency Fund in Fire Department - $30,000
17. Comprehensive Zoning Ordinance Update - $40,000
18. Rockaway Beach Specific Plan Update - $40,000
2. Programs funded under the American Rescue Plan Act included in the FY 2022-23 (Attachment 2).
19. Additional Two-Year Limited- Term Records Clerk Position in Police Department - $120,500
20. Addition of Two-Year Limited- Term Sr. Accountant / Project Manager Position - 179,590
21. Business Assistance Allocation for Shop Pacifica Program - $50,000
3. Revenue Enhancements included in the FY 2022-23 (Attachment 4).
22. Additional Grant and Federal Revenue Reimbursements in PB&R - $504,853
4. New Budget Transfers included in the FY 2022-23 (Attachment 5).
23. Restoring Annual Contribution to the Vehicle Replacement Fund - $100,000
24. Creating a New Fire Equipment Replacement Fund with ongoing annual allocation.
There is no fiscal impact for this option as it just represents different accounting practice that will replace the former allocation towards Capital Outlay included in the Base Budget with the transfer in the new Fire Equipment Replacement Fund Additional information about these budget options could be found in Attachments 2-5 to this report.
Projected Fund Balance Structure and Budgetary Reserves The Proposed FY 2022-23 Operating and Capital Budget is being presented as a balanced budget, meaning that the City’s operating expenditures do not exceed general revenues.
At the last meeting staff reported that the City’s FY 2022-23 Budget will be largely balanced by the use of ARPA funds. The eased reporting requirements for small agencies now allow for more flexibility in the use of these funds. Staff has also reported projected future structural deficit of approximately $2.7 million at the current baseline level of services without applying ARPA relief funds. A structural deficit exists when the general revenues can no longer support operating expenditures without applying additional budget strategies to balance the Budget.
This means that the City budget in the future years (beyond the upcoming FY2022-23) will neither be sustainable, nor compliant with the Government Finance Officers Association (GFOA) best practices unless the City’s revenue base changes or substantial programmatic changes are made in the FY 2023-24 Budget to balance.
If all program options identified in this report are approved by City Council, the General Fund will project a small ending surplus of about $3,000, and will maintain all previously approved reserves which is necessary for fiscal and operational sustainability.
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After factoring in the above-mentioned budget options the General Fund Base Budget revenues and transfers are projected at $47.3 million, including the $4.6 million General Fund portion of ARPA funds. The total General expenditures and transfers out are also budgeted at $47.3, which includes a one-time contribution of $655,000 towards the FY 2022-23 CIP Budget.
The table below demonstrates the Net change to the General Fund Balance.
After applying all changes described above and recognizing ARPA relief funds and programming a portion of it for the FY 2022-23 General Fund Budget, the Proposed General Fund Budget will have approximately $3,000 surplus, leaving about $5.4 million in the Unassigned General Fund Balance, which is about 12% of the City’s Operating expenditures in addition to 10% or $4.7 million policy reserves.
The City’s Fund Balance Policy identifies fund balances (or reserves) which fall into the following categories: 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.
In accordance with GASB Statement No. 54 requirements and the City policy, the Council established the following designations or contingencies of General Fund Committed Balance. ➢ Budget Shortfall Policy Reserve of 10% of Expenditures ($4.7 million) ➢ Facilities Maintenance & Replacement ($0.55 million) - a one-time policy reduction of $150,000 for Station 71 CIP project planned for the FY 2022-23 ➢ Compensated Absences Reserve ($0.2 million)
➢ Child Care Reserve ($0.5 million)
➢ Legal Reserves ($0.1 million)
The General Fund balances for the FY 2022-23 Recommended Budget are detailed in the table below. If all options presented in this report are approved by the Council, the City will have a balanced FY 2022-23 Budget with an undesignated General Fund Balance of $5.4 million.
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Maintaining a sufficient level of the projected ending fund balance is necessary for fiscal and operational sustainability. It is especially critical in the current uncertain economic situation when the City projects a long-term structural deficit in the future years if the City’s revenue base does not change.
After factoring-in the restricted reserves and operating contingency the ending undesignated General Fund balance is projected at $5.4 million or 12% of the General Fund operating expenditures (excluding one-time and capital transfers), which is lower than the Government Finance Officers Association of the US and Canada (GFOA) recommendation for government entities of no less than two months of regular general fund operating expenditures, which is approximately $7.8 million for the City of Pacifica in FY2022-23. However, if combined with the 10% Budget Shortfall reserve of $4.7 million mentioned above, the General Fund reserves exceed the minimum-recommended threshold and are compliant with the GFOA guidelines.
Other Funds
Staff used the same basic assumptions for all other funds to factor-in 2% cost of living increase to most contract and professional services categories and 1.5% for materials and supply categories. The summary of Revenues, Expenditures, and Fund Balances for all of the City’s fund categories is shown in the table below and further described in Attachment 7.
Enterprise Funds consist of the Wastewater Operating and Capital and Beach Parking Funds.
Enterprise funds are used for services that are financed and operated in a manner similar to a private business enterprise. The FY 2022-23 total enterprise funds budget is $28.3 million, Pacifica City Council 7
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which is 28.3% of the City’s overall budget. Sewer funds are used to account for sewage collection, treatment, major replacements, and maintenance and protection improvements to the sewer system. Sewer charges of $18.6 million are based on a 3.5% rate increase in FY 2022-
23. The sewer operating expenditures include the same inflationary base budget assumptions.
The Salaries and Benefit costs of approximately $5.4 million are based on 14 FTE allocated to the Sewer Fund and include all current MOU provisions.
The Recommended FY 2022-23 Budget includes the following program additions further described in Attachment 6.
1. Reclassification of a Senior Engineer to Engineering Manager Position - $9,534
2. Addition of a part-time Operator in Training Program - $35,000
3. Addition of an Assistant / Associate Engineer Position - $201,389 The Beach Parking Fund is used to account for parking services to residents and visitors. The revenues are projected at $0.7 million, which is in-line with the FY 2021-22 Revised Budget Special Revenue and Capital Funds are used to account for specific revenue sources or financial resources for which expenditures are restricted by law or administrative action to specific purposes. This Category includes Gas Tax and Streets Funds, General Capital, Drainage, Housing in-lieu, Parking in-Lieu, Park in-Lieu, PB&R Special Revenue and Roy Davies Trust, Disaster Accounting, and other funds.
The FY 2022-23 revenues for this category is $19 million and includes revised estimates for the Returned ERAF revenues in the Disaster Accounting Fund per the most recent information. This is an increase of $216,730 as described above. Also included in this category is an increase in Gas Tax revenues of $0.2 million and another $0.2 million in Street Maintenance Fund to account for the new Impact Fees. The FY 2022-23 expenditures of $18.6 million for this Category represent around 19% of the City's total budget and include the recommended FY 2022-23 CIP Budget allocation.
Internal Service Funds serve the needs of the City and are used to account for Citywide services on a cost-reimbursement basis. These funds accommodate vehicle, employee benefits, and risk management needs of the City and are supported by the funds that receive benefit. The FY 2022-23 budget for this category is $3 million, which is 3% of the City’s budget.
The Motor Pool Replacement Fund receives a transfer of $100,000 from the General Fund as described above and in the attached Budget Form.
The Debt Service Fund is used to account for all ongoing debt payment obligations. The FY 2022-23 Budget of $2.9 million factors-in all debt service payment obligations according to the current debt service schedules and includes the payment on the Pension Obligation Refunding Bonds. Staff also factored-in additional allocation to the Debt Service Fund to account for the future payment on financing Civic Center improvement project. The Debt Service Fund represents around 3% of the City’s total budget.
Additional details on any individual funds and their projected fund balances could be found in Attachment 7.
ALTERNATIVE ACTION:
The City Council is being asked to provide input and direction on the FY2022-23 Proposed Budget. No alternative action is identified.
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RELATION TO CITY COUNCIL GOALS AND WORK PLAN:
A balanced and structurally sustainable budget is consistent with all of the City Council goals.
FISCAL IMPACT:
Because the recommendation is to review and discuss budget options, there is no direct fiscal impact associated with this item.
ATTACHMENT LIST:
1. Summary of FY 2022-23 Recommended General Fund Budget Options
2. FY 2022-23 Recommended General Fund Budget Options - Additional Resources
3. FY 2022-23 Recommended General Fund Budget Options - ARPA-Funded Additional Resources
4. FY 2022-23 Recommended General Fund Budget Options - Revenue Enhancements
5. FY 2022-23 Recommended General Fund Budget Options - Budget Transfers
6. FY 2022-23 Recommended Wastewater Fund Budget Options - Additional Resources
7. FY 2022-23 Projected Fund Balance Schedule
ORIGINATED BY:
Finance Department
ATTACHMENT LIST:
Attachment 1 - Summary of FY 2022-23 Recommended General Fund Budget Options (PDF) Attachment 2 - FY 2022-23 Recommended General Fund Budget Options - Additional Resources (PDF)
Attachment 3 - FY 2022-23 Recommended General Fund Budget Options - ARPA-Funded Additional Resources (PDF)
Attachment 4 - FY 2022-23 Recommended General Fund Budget Options - Revenue Enhancements (PDF)
Attachment 5 - FY 2022-23 Recommended General Fund Budget Options - Budget Transfers (PDF)
Attachment 6 - FY 2022-23 Recommended Wastewater Fund Budget Options - Additional Resources (PDF)
Attachment 7 - FY 2022-23 Projected Fund Balance Schedule (PDF)