CITY OF PACIFICA
COUNCIL AGENDA SUMMARY REPORT
4/10/2023
1 SUBJECT:
Fiscal Year 2023-24 Budget Planning Process, Timeline, Long-Term Financial Forecast, Summary of Future Challenges.
RECOMMENDED ACTION:
Accept the report and provide feedback and additional policy direction for preparation of the FY2023-24 Budget.
STAFF CONTACT:
Kevin Woodhouse, City Manager
[email protected]
650-738-7409
Yulia Carter, Assistant City Manager
[email protected]
650-501-6004
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 to the City Council and staff at the time of adoption. This narrative report is the first step in this process and is not intended to provide in-depth budgetary details for FY2023-24.
The next step in the budget process will be a detailed FY 2023-24 Base Budget presentation and subsequent public hearings and budget adoption. This report provides Council with the general outline of the budget development process, including timeline, methodology, long-term financial forecast, and a summary of future challenges.
Budget Calendar
The annual budget cycle begins each year with the development of budget instructions, including policy directives and a budget calendar in January-February, and is completed with the budget adoption by the City Council in June of each year. A summary of the tentative FY 2023-24 budget schedule is as follows:
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April 10, 2023
This year's budget cycle launched in March with the Council's mid-year review of the FY2022-23 Budget. At that time, the Council reviewed revenues and expenditures and made adjustments that will be factored in developing the FY2023-24 Base Budget to be presented on May 8,2023.
This report provides the City Council with an opportunity to review and discuss the budget outlook to identify initial focus and areas of recommendations to help guide the development of the proposed Budget for the Fiscal Year 2023-24. Although the Council is not being asked to provide specific direction on any information included in this report, staff will track the Council's discussion and questions, which will be helpful for the preparation of the proposed FY2023-24 Budget for the Council's future consideration and adoption in June 2023.
Budget Methodology
The Adopted Budget is achieved after an inclusive and interactive budget development process, which aims to reach a balanced and sustainable budget. Last year, staff modified the City's budget process to apply a modified zero-based budget methodology, which is a systematic financial management strategy commonly used by local governments to help achieve more cost-effective delivery of public services.
The Base Budget reflects the current level of services and operations. The Base Budget is not an exact duplication of the prior year's adopted Budget because of actions that the Council may have taken that modified the Budget over the course of the year and, most importantly, because of the updated FY2023-24 Budget assumptions used to develop the base budget.
Although the preliminary General Fund Base Budget estimates are being used for the Longterm Financial Forecast presented in this report, staff will provide the complete FY 2023-24 Base Budget at the next Budget Study session on May 8.
The Base Budget will reflect the existing level of services under current economic conditions.
Once this base is developed, each department will be given an opportunity to request prioritized program changes for service enhancements or reductions and to identify any necessary or desirable service increase or reduction options, in order to reach a balanced and sustainable budget. The City Manager will review department requests and formulate budget recommendations for service-level changes for the Council's consideration. These recommendations will be based on many factors, including the Council's newly adopted strategic plan, staffing capacity, and potential impacts on overall City operations and services provided to the Community.
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April 10, 2023
The final budget document will incorporate the City Manager's recommendations based on the priorities of the City Council. Throughout the upcoming budget public meetings, Council will have an opportunity to review and consider budget options and provide direction to the City Manager regarding any changes.
The City's budget goal is to achieve a balanced budget with operating revenue equal to or greater than operating expenditures, including debt obligations and any reimbursements from other funds for services. Under this policy, it is allowable for total expenditures to exceed revenue in a given year to fund capital improvement plan projects or other "one-time" nonrecurring expenditures. The City's financial position and the resources in each fund will determine the level of services and the projects that the City will be able to deliver to the Community in the upcoming fiscal year.
Long-Term Financial Forecast
This report presents the Long-Term Financial Forecast for 2023-24 and beyond. After completing the mid-year budget review, the Finance staff refined the preliminary 10-year Financial Forecast to include in this presentation. Staff will further fine-tune and refine the FY2023-24 Base Budget to be presented at the next budget study session, but this financial forecast provides a general overview of the City's long-term fiscal health at the current Base Budget level in the General Fund.
The forecast considers current revenue and expenditure trends at the FY 2022-23 mid-year mark with preliminary FY 2023-24 Base Budget assumptions forecasted into future years. It accounts for cost-of-living adjustments for contractual and other services, includes basic merit increases, PERS retirement, and medical cost increases, factors in the previously Councilapproved funding policy to address the unfunded OPEB and pension liability, and assumes updated annual debt service, including the Civic Center Renovation project. The forecast does not account for employee compensation increases (other than merit increases), because labor union negotiations are currently in progress. The FY23-24 budget forecast removes one-time projects funded in the current year. It also does not include any ongoing General Fund contribution towards the capital improvement program, as this will be a Council policy decision during the budget development process.
Finally, this forecast only projects forward the current level of municipal services and does not consider any service enhancements or reductions that may be reflected in the final FY2023-24 Budget once it is developed and adopted. Additional information on the revenue and expenditure assumptions used for the financial forecast can be found in Attachment 1 to this report.
Projected 10-Year Financial Forecast is Structurally Positive The structural deficit reported by staff last year has been mitigated by improved post-COVID revenue projections, a substantial increase in property tax, and, most importantly, by the successful voter-approved Measure Y - a ½ cent Transaction & Use Tax (sales tax) in November 2022.
Because of this important decision by Pacifica's voters to enact locally controlled funding to help fund city services, the City's long-term financial outlook no longer projects the ongoing structural deficit of approximately $2.7 million reported last year. With Measure Y revenues combined with other increased revenues, the forecast projects a positive outlook for a structurally balanced budget for FY 2023-24 and beyond at current service levels, with an estimated $1.3 million of revenues over expenditures projected to be available to meet Council priorities for operating and capital expenditures for the upcoming Budget.
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April 10, 2023
As shown in the below chart, the baseline revenues and expenditures are aligned and maintain a slight positive structural trend for the forecasted years.
General Fund Reserves in Future Years
The balanced structural Budget outlook now leaves the City's unassigned General Fund Reserves fully compliant and slightly above the Government Finance Officers Association (GFOA) recommendation for a minimum level of no less than two months of regular general fund operating expenditures for years ahead. Yet, it is important to note that this only reflects the current level of services.
Future Challenges
Although the passage of Measure Y is a huge achievement for Pacifica that resolves the City's ongoing structural deficit for now, the financial outlook only covers the current level of municipal services. It does not address other critical organizational needs that exist. Therefore this outlook is not a sustainable model to address current and future financial challenges that are common for all Bay Area local agencies and those that are unique to Pacifica.
Specifically, the modest preliminary structural surplus of approximately $1.3 million projected for the upcoming Base Budget does not address the following challenges to be confronted in developing the FY 2023-24 Budget:
1. Labor Market
Staff has shared with the Council on several occasions throughout recent years the challenging labor market condition in the Bay Area. Like many Bay Area agencies, the City has been experiencing critical recruitment and retention challenges, having to conduct multiple recruitments for the most critical professional and management positions. Since the beginning of the last fiscal year that started on July 1, 2021 (less than two years timeframe), 55 full-time employees have left the organization due to retirement, a better job, or quality-of-life decisions (this is a 30% turnover rate), and the replacement recruitment process is often challenging, taking a long time and often resulting in loss of institutional knowledge and substantial training and onboarding needs.
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April 10, 2023
On average, the City is running a 10-15% vacancy rate, which is the equivalent of 19-28 vacant positions at any given time. Some recruitments are challenging because more than 1/3 of City classifications are below market in total compensation (value of salaries plus benefits). Each additional 1% of salary adjustment translates into an additional $230k across all labor groups.
The City is currently in labor negotiations with all labor groups, therefore any new labor costs will have to be factored into the FY 2023-24 Budget once agreements are reached and City Council approves new labor contracts.
2. Staffing Level and Organizational Capacity
In addition to the ongoing recruitment and retention challenges, Pacifica’s staffing levels are approximately 23% lower on average across departments than comparable full-service public agencies of the same size. This finding equates to more than 40 additional full-time-equivalent (FTE) positions that Pacifica should have to be on par with comparable agencies in our region.
The current staffing levels and ongoing recruitment & retention challenges result in an unsustainable staff workload to provide "core" municipal services and significantly limit the organizational capacity to execute new projects and/or implement service enhancements.
For reference, the table below lists the total annual cost for some positions, based on the current total compensation (including health and pension benefits) as a reference:
Job Classification Total Compensation
Police Officer $152,800
Firefighter $153,200
Associate Civil Engineer $171,300
Maintenance Worker $115,100
Management Analyst $168,400
3. Capital Improvement Program Funding
The complete FY 2023-28 CIP Program Budget will be discussed at a future meeting. However, staff identifies funding for non-discretionary capital projects as another upcoming budget challenge to give the Council a full picture of the City's financial position and resources needed to fund the FY 2023-24 Capital Program. Over the next few weeks, Finance and Public Works staff will be working on identifying all available funding sources (State Grants, County contributions, Gas Tax, and various other funds) to build in necessary capital transfers to fund these projects. When no external funding sources can be identified, General Fund revenues will need to be allocated to help fund identified priority projects. Based on the preliminary assessment by Public Works staff, 11 projects were identified in the non-discretionary priority category that will require funding of $1.75 million in the FY 2023-24. This count includes both new and ongoing projects. This non-discretionary need does not include the lower Linda Mar Storm Drainage Improvement design or the paving of City street areas that were not included in the 2020 5-year street maintenance plan. Funding these projects would require additional funding.
The current FY 2022-23 Adopted Budget included a modest General Fund contribution of $655,000 to the Capital program, which is not a sustainable funding level to address the City's increasing capital needs. Given that the City does not have dedicated capital revenue sources, a larger ongoing General Fund contribution towards CIP of approximately $1 million will likely be required annually. This is another decision point for Council to make that may be competing with other strategic priorities.
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4. Funding for Service Enhancements and Council Priorities As part of the budget development process every year, the Council discusses strategic priorities that result in a number of recommended service enhancements. This policy decision process leads to the development of the work plan and funding of projects, services, and initiatives that are most critical to execute in the upcoming year to address the diverse community needs.
City Council Strategic Planning and Next Steps
This year, the City Council undertook a comprehensive strategic planning process instead of the normal annual goal-setting workshop in previous years. This comprehensive Strategic Planning process provides a critically important roadmap for the organization, as it captures its strategic vision and establishes the framework for the City's short and longer-term priorities and objectives that translate into the workplan over a 5-year timeframe.
The first Strategic Planning session was held on March 4, 2023, when the Council worked on the City's mission and vision statements and discussed City values and goals. The Council also heard directly from community members to gain additional insight to inform their decisions regarding the Community's priorities for budget allocation of resources over the next year and beyond.
The second Strategic Planning session is scheduled for April 11, 2023, when the Council will develop, discuss and prioritize potential strategies to achieve their goals, which will be translated into a workplan for the upcoming year to be reflected in the Budget.
Given the organizational challenges listed above and the limited resources available to meet these needs, the City has a difficult task ahead to prioritize service needs to develop a balanced and sustainable budget. This work will develop over the next few months.
At the next Budget Study session on May 8, 2023, the Council’s strategic planning workshop results will be presented for adoption, and staff will present the FY 2023-24 Base Budget and introduce the FY 2023-28 Capital Improvement Plan. In addition, the City Manager will present some initial budget strategies for the FY 2023-24 Budget. At subsequent budget meetings, more developed budget options and recommendations will be brought forward before the final adoption of the FY 2023-24 Budget in June
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FISCAL IMPACT:
There is no action or fiscal impact associated with this item. This is an informational presentation seeking Council input to help guide further development of budget recommendations. As reflected in the budget calendar above, staff will be bringing forward the FY2023-24 Base Budget and specific budget strategies, policy options, and service change recommendations at future meetings.
ORIGINATED BY:
City Manager's Office
ATTACHMENT LIST:
Attachment 1 - Long Term Financial Forecast with Assumptions (PDF)