CITY OF PACIFICA
COUNCIL AGENDA SUMMARY REPORT
6/26/2023
1 SUBJECT:
Adoption of the Fiscal Year 2023-24 Operating and Capital Budget.
RECOMMENDED ACTION:
Hold a public hearing, review, and move to adopt the following resolutions:
1. Adopt the resolution approving the FY 2023-24 Operating and Capital Budget;
2. Adopt the FY 2023-24 Capital Improvement Program appropriation of $1.205 million from the Roy Davies Trust Fund by a 4/5 vote
3. Adopt the resolution establishing GANN Appropriation Limit for FY 2023-24;
4. Adopt the resolution approving the City's annual review of the Investment Policy included as Exhibit A to the resolution, with no changes for FY 2023-24.
STAFF CONTACT:
Kevin Woodhouse, City Manager
[email protected]
650-738-7409
Yulia Carter, Assistant City Manager
[email protected]
650-738-7301
BACKGROUND:
Each year, the City of Pacifica adopts an annual operating and capital budget that reflects the planned activities for the next fiscal year based on the best information available at the time of adoption.
The City Council held several study sessions related to the FY 2023-24 Budget. On April 10, 2023, in the first budget study session, staff presented the Budget planning process, methodology, timeline, and long-term financial forecast. Unlike the forecast leading into the Budget last year when the City's long-term financial forecast projected a significant ongoing structural deficit, this condition has now been mitigated by improved post-COVID revenue projections and, most importantly, by Pacifica voters passing a new Measure Y - ½ Transactions & Use Tax in November 2022. As a result, the long-term financial forecast projected a positive outlook with a structurally balanced budget for FY 2023-24 and beyond but did not leave sufficient funds for needed service enhancements, adequate staffing and employee compensation levels, and ongoing investments in capital infrastructure.On May 8, 2023, staff presented the General Fund Base Budget, Preliminary Budget Strategies, and the Proposed Capital Improvement Plan for FY 2023-24. The Base Budget included an approximately $1.3 million preliminarily projected surplus available to address all service needs and meet Council priorities for the upcoming Budget. At the Budget study session on June 12, 2023, City Council held a public hearing and adopted the FY2023-24 Master Fee Schedule. At that meeting, the City Manager also brought forward all recommended budget options for the Pacifica City Council 2
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upcoming budget. Staff received City Council feedback for developing the Proposed Budget and incorporated Council direction in the budget presented for adoption in this report. Since the last meeting, staff has prepared the Proposed FY 2023-24 Budget for all city funds.
The primary focus of today’s discussion is to provide Council with the final Proposed FY 2023- 24 Operating and Capital Budget for adoption, presented in Attachments 4 and 5 to this report.
DISCUSSION
The goal of the budget process is to develop a structurally balanced City 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.
Budgetary Reserves and Fund Balance Structure
The Proposed FY 2023-24 Operating and Capital Budget is being presented as a balanced budget, meaning that the City’s operating expenditures do not exceed general revenues. With all program options discussed at the last meeting included, the General Fund will project an ending surplus of about $333,844 and maintain all previously approved reserves necessary for long-term fiscal and operational sustainability.
The General Fund Base Budget revenues and transfers are projected at $48.9 million. The total General expenditures and transfers out are budgeted at $48.6, which includes a one-time General Fund contribution of $650,000 (projected current year’s measure Y revenues) towards the FY 2023-24 CIP Budget to expand the street resurfacing project to include streets outside of the five-year street resurfacing plan. The table below demonstrates the Net change to the General Fund Balance.
FY 2023-24
Adj Base
Budget
6/12/23
FY 2023-24
Adopted
Budget
Revenues:
Operating Revenues $47,402,500 $47,649,200
Operating Transfers In 1,291,900 1,291,900
Total Revenues 48,694,400 48,941,100
Expenditures and Transfers :
Operating Expenditures 43,732,226 44,581,056
Operating Transfers Out 3,376,200 3,376,200
Capital Transfers Out 650,000 650,000
Total Expenditures and Transfers 47,758,426 48,607,256
Surplus (Deficit) $ 935,974 $ 333,844
FY 2023-24 ADOPTED BUDGET
NET GENERAL FUND SURPLUS (DEFICIT)
After applying all changes described above, the Proposed General Fund Budget will have a $333,844 surplus, leaving $8.4 million in the Unassigned General Fund Balance, which is about 18% of the City’s Operating expenditures in addition to 10% or $4.8 million minimum policy reserve and compliant with the Government Finance Officers Association of the US and Canada (GFOA) standards.
The City’s Fund Balance Policy identifies fund balances (or reserves) that fall into the following categories: non-spendable items or portions of fund balance that cannot be liquidated, restricted Pacifica City Council 3
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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 the General Fund Committed Balance.
• Budget Shortfall Policy Reserve of 10% of Expenditures ($4.8 million) • Facilities Maintenance & Replacement ($205,000)
• Compensated Absences Reserve ($0.2 million)
• Child Care Reserve ($0.5 million)
• Legal Reserves ($0.1 million)
The Recommended FY 2023-24 Budget is balanced, meaning that the operating revenues do not exceed the operating expenditures and includes an undesignated General Fund Balance of $8.4 million. The rest of the General Fund balances are detailed in the table below.
Designations Actual
FY 2021-22
Adopted FY
2022-23
Revised
2022-23
FY 2023-24
Adj Base
Budget
6/12/23
FY 2023-24
Adopted
Beginning Fund Balance $ 15,669,797 $ 16,063,391 $ 16,063,391 $ 18,309,534 $ 18,309,534 Total Revenue 43,581,527 47,275,263 50,677,370 48,694,400 48,941,100 Total Operating Expenditures 40,187,933 46,617,227 47,776,227 47,108,426 47,957,256 Total Capital Project Expenditures 3,000,000 655,000 655,000 650,000 650,000 Ending Fund Balance 16,063,391 16,066,427 18,309,534 19,245,508 18,643,378 Non-Spendable 3,768,557 4,371,453 4,480,137 4,417,515 4,417,515 Assigned Reserves
Policy Level of 10% of Expenditures 4,018,793 4,661,723 4,777,623 4,710,843 4,795,726 Facility Maintenance & Replacement 205,000 205,000 205,000 205,000 205,000 Compensated Absences 200,000 200,000 200,000 200,000 200,000 Child Care Reserve 697,908 488,591 488,591 488,591 488,591 Legal Reserves 100,000 100,000 100,000 100,000 100,000
Assigned Reserves 5,221,701 5,655,314 5,771,214 5,704,434 5,789,317 Total Designations 8,990,258 10,026,767 10,251,350 10,121,948 10,206,831 Unassigned Fund Balance 7,073,133 6,039,660 8,058,184 9,123,560 8,436,547 Operating Expenses 40,187,933 46,617,227 47,776,227 47,108,426 47,957,256 Unassigned Fund Balance as % of Op. Expenses 18% 13.0% 16.9% 19% 18% FY2023-24 ADOPTED BUDGET
GENERAL FUND (ASSIGNED & UNASSIGNED BALANCES)
Maintaining a sufficient level of the projected ending fund balance is necessary for the City’s fiscal and operational sustainability. After factoring in the restricted reserves and operating contingencies, the ending undesignated General Fund balance is projected close to $8.4 million or 18% of the General Fund operating expenditures (excluding one-time capital transfers), which is slightly above the GFOA recommendation for government entities of no less than two months of regular general fund operating expenditures, which is approximately $7.9 million for the City of Pacifica in FY2023-24.
Other Funds
Staff used the same basic assumptions for all other funds to factor in a 2% cost of living Pacifica City Council 4
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increase for most contract and professional services categories and 1% 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. Revenues under expenditures for Enterprise Fund and Internal Service Fund reflect the uses of the available fund balance for one-time needs (e.g., capital investments in Wastewater infrastructure or vehicle replacement purchases in the Motor Pool Fund).
Fund Name
Projected Fund
Balance
6/30/2023
Revenues &
Transfers In
Adopted Budget
Expenditures &
Transfers Out
Adopted Budget
Revenue
Over (Under)
Expenditures
Projected Fund
Balance 6/30/2024
GENERAL FUND $ 18,309,534 $ 48,941,100 $ 48,607,256 $ 333,844 $ 18,643,378 ENTERPRISE FUNDS 21,619,153 19,739,000 28,066,231 (8,327,231) 13,291,922 SPECIAL REVENUE FUNDS 23,295,302 17,579,900 16,852,479 727,421 24,022,723 INTERNAL SERVICE FUNDS 2,667,158 4,986,100 5,821,490 (835,390) 1,831,768 DEBT SERVICE FUNDS 5,317,384 2,499,800 2,499,800 0 5,317,384 Total Other Funds $ 52,898,997 $ 44,804,800 $ 53,240,001 $ (8,435,201) $ 44,463,796 Total All Funds $ 71,208,531 $ 93,745,900 $ 101,847,257 $ (8,101,357) $ 63,107,174 Other Matters (Action Items):
GANN Appropriation Limit
The City is required by the State Constitution to annually establish and adhere to a limit on the amount of its appropriations. Such limit is prescribed by a State formula calculated by taking the prior year's limit and applying growth factors as appropriate. The growth factors are determined by 1) the change in population in either the City or the County and 2) the change in per capita income or non-residential new construction. For the Fiscal Year 2023-24, staff has calculated that the appropriations limit is $53.0 million. Per the Recommended FY 2023-24 Budget, the City expects to collect and has budgeted to appropriate $40.0 million, which is 24.7% or $13.1 million below the appropriations limit (Attachment 2).
Investment Policy
Following the CA Government Code requirement for annual review of the Investment Policy, staff is bringing the City's Investment Policy to City Council together with the budget to satisfy this requirement. The Council previously approved Investment Policy changes in October 2018 (Attachment 3). There are no changes to the Investment Policy recommended at this time.
Conclusion and Future Outlook
The Proposed FY 2023-24 Budget is balanced and reflects the City Council's direction and priorities. Fiscal and organizational stability is one of the Council’s top priorities as the City continues to provide quality programs and services in a financially sustainable manner.
Although the passage of Measure Y was a considerable achievement for Pacifica that resolves the City's ongoing structural deficit, the financial outlook only covers the current level of municipal services. It does not address other critical organizational needs that exist. The cost to deliver services and City operations has increased due to inflation and personnel costs due to labor increases and unfunded liabilities related to pension and OPEB. Although Measure Y essentially helped balance the budget deficit, the City’s tax revenue base remains significantly lower than the majority of Bay Area cities, and the City’s long-term financial outlook is not sustainable to address future fiscal challenges that are common for all Bay Area local agencies and those that are unique to Pacifica. Specifically, the modest structural surplus projected for this Budget does not fully address the following ongoing challenges the City will likely continue facing in the upcoming years. As staff previously shared with the Council, the following challenges will likely remain in the near future:
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1. Labor Market
Staff has previously shared with the Council the challenging labor market condition in the Bay Area. Like many Bay Area agencies, the City has been experiencing critical recruitment and retention challenges (over 30% turnover rate), having to conduct multiple recruitments for the most critical professional and management positions and their replacement is often challenging, taking a long time and often results in loss of institutional knowledge and substantial training and onboarding needs.
On average, the City is running a 10-15% vacancy rate, translating into 19-28 vacant positions at any given time. This is partially because more than 1/3 of City classifications appear below market in total compensation. Yet, the City does not have sufficient resources to bring them all to the market median at once. It is important to note that the FY 2023-24 Budget does not include any assumptions for the outcome of the labor negotiations with all labor groups that are currently in progress. The FY 2023-24 Budget will have to be amended to include the new labor cost once the new labor agreements are in place.
2. Staffing Level and Organizational Capacity
In addition to the ongoing recruitment and retention challenges, Pacifica historically had been staffed approximately 23% lower than comparable full-service public agencies of the same size.
This finding translates into over 40 additional full-time-equivalent (FTE) positions that a fullservice City of our size should have to be a par with the industry standards to adequately provide municipal services.
The current staffing level 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 any service enhancements.
The FY 2023-24 Budget starts addressing this challenge by funding a Project Manager, Sr.
Code Enforcement Officer, Mental Health Clinician, and a limited-term Maintenance Worker positions. However, these are far from addressing the overwhelming need for additional staffing throughout the organization.
3. Council Priorities for Service Enhancements and Capital Improvement Needs This year, the City Council transitioned to the broader strategic planning process versus the annual goal-setting workshop in previous years, focusing on short-term goals and priorities for the upcoming budget cycle. The broader 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 staff’s work plan over a 7-year timeframe.
The new Strategic Plan is now adopted and is included in the attached FY 2023-24 Budget document, as it will guide the Council’s strategic vision and staff’s work plan for the upcoming years. Given the diverse organizational challenges and the limited resources available to meet these needs, the Council will likely have future challenges in prioritizing the service needs to develop balanced and sustainable budgets in the future.
Staff identifies ongoing funding for non-discretionary capital projects as another future budget challenge. The FY 2023-24 Budget does not include any General Fund contribution towards the Capital Program (except for a one-time allocation of the FY2022-23 Measure Y Funds mentioned above). However, this approach is not sustainable long-term. When no external funding sources can be identified, the General Fund will need to be allocated to help fund identified priority projects. Given that the City does not have dedicated capital revenue sources, a more considerable ongoing General Fund contribution towards CIP of approximately $1 million will likely be required annually. CIP funding will probably be another competing priority Pacifica City Council 6
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for the Council in the future.
City staff looks forward to continued work with the City Council and the community to address future financial challenges that may lay ahead and identify operational opportunities and efficiencies, assess appropriate fee structures, pursue economic development opportunities, and advise on alternative revenue options available to the City and the community to ensure Pacifica continues to be a desirable community in which to live, work, and play.
ALTERNATIVE ACTION:
The City Council is being asked to adopt the FY2023-24 Proposed Budget. No alternative action is identified.
RELATION TO CITY COUNCIL GOALS AND WORK PLAN:
A balanced and structurally sustainable budget is consistent with all City Council goals.
FISCAL IMPACT:
The FY 2023-24 Recommended Budget is balanced. The General Fund Operating Revenues Budget is $48.9 million and slightly exceeds the General Fund Operating Expenditures Budget of $48.6 million. General Fund expenditures include $0.6 million in a one-time transfer toward the CIP program. The FY 2023-24 Other Funds revenues and expenditures total $44.8 million and $53.2 million, respectively, and include the FY 2023-24 Capital Improvement Plan (CIP) budget of $17.5 million, which is partially funded by one-time use of various fund reserves and outside funding sources.
ORIGINATED BY:
City Manager's Office
ATTACHMENT LIST:
Attachment 1 - Resolution Adopting Operting and CIP Budgets-FY 2023-24-Final (PDF) Attachment 2 - Resolution Establishing GANN Appropriation-FY 2023-24 (PDF) Attachment 3 - Resolution - Investment Policy-FY 2023-24 (PDF) Attachment 4 - Proposed Budget Book FY 23-24 (PDF)
Attachment 5 - FY 2023-28 Capital Budget (PDF)
Attachment 6 - FY 2023-24 Fund Balance Summary (PDF)