Exhibit A
CITY OF PATTERSON
Mid-year Budget Review Report
Fiscal Year 2023/24
OVERVIEW
The City Council approved the Fiscal Year 2023/24 Adopted Budget on June 13, 2023. The Mid-Year Budget Status Report provides a tool for the City of Patterson (City) to monitor its finances and to prepare for the upcoming fiscal year budget process. This report provides an update of the City’s budgetary position approximately midway through the fiscal year, with updates based on the requested amendments.
The major components to this report include the following:
I. Economic Update
An economic update on National, State, and local trends provides context to the Fiscal Year 2023/24 Mid-Year Budget Status Report.
II. Fiscal Year 2023/24 Mid-year Budget Status Summary
This section of the report provides estimated Fiscal Year 2023/24 operating results based on current revenue and expenditure trends for the fiscal year.
III. Proposed Mid-year Budget Amendments
This section of the report includes proposed mid-year budget amendments, including a significant one-time increase in Sales Tax Revenues, for Fiscal Year 2023/24.
BACKGROUND AND ANALYSIS
I. ECONOMIC UPDATE
The economic conditions discussed below help inform the Fiscal Year 2023/24 Mid-year Budget Status Report.
National
Inflation has been a major driver in the economy over the past year. As the national economy continues to recover from the COVID-19 pandemic, the Federal Reserve’s primary focus has been to rein in inflation. There has been a major shift in employment and priorities leading to a strong jobs market. Job creation remains strong and the national unemployment rate at 3.5%, which is up from 3.3% from a year earlier per the US Bureau of Labor Statistics as of February 6, 2024.
According to the statistics for the San Francisco Area as of December 2023, over the last 12 months the CPI-U advanced 2.6 percent. (See Chart 1 and Table A.) Food prices advanced 2.0 percent.
Energy prices increased 6.0 percent, largely the result of an increase in the price of electricity. Table A shows that the index for all items less food and energy rose 2.5 percent over the year.
NOTE: Area indexes do not measure differences in the level of prices between cities; they only measure the average change in prices for each area since the base period.
State
In January 2024, Governor Gavin Newsom released his Fiscal Year 2023/24 Proposed Budget, which projects a $38 billion dollar deficit. However, the Legislative Analyst Office is showing an estimated $68 billion dollar deficit. Because the State Constitution requires the budget to be balanced, the Governor has proposed a combination of solutions to address the budget shortfall, including delays or reductions in previously planned spending, cost shifts, reversion of unspent funds, as well as the use of the State’s substantial reserves.
The tables and related information below is directly from the General Fund Condition Under Fiscal Outlook as published by the California Legislative Analyst Office on December 7, 2023:
State Faces a $68 Billion Deficit. Under current law and policy, we estimate the state faces a budget problem of $68 billion. Figure 3 reflects the budget problem in the 2024-25 ending balance in the Special Fund for Economic Uncertainties.
Extent of Future Deficits Depends on Legislative Decisions This Year. The multiyear deficits shown in Figure 4 are subject to substantial uncertainty. First, revenue estimates can easily differ from our estimates by tens of billions of dollars in either direction. Second, these deficits are based on our assessment of the costs of the state’s programs under current law and policy. The state’s actual costs will be higher or lower depending on decisions made by the Legislature, including, for example, about how to fund schools and community colleges in 2022-23.
State Has Various Options to Address the Budget Problem. While addressing a deficit of $68 billion will be challenging, the Legislature has several options available to do so. These options include:
• Withdraw Reserves. Under our estimates, the state would have about $24 billion in reserves to help address the budget problem (assuming a budget emergency is declared). • Reduce Proposition 98 Spending. Over the three-year period, the state could reduce General Fund costs by $16.7 billion if it were to lower school spending to the constitutional minimum allowed under Proposition 98. One option for implementing some of this reduction would be to use the Proposition 98 Reserve to cover school-related costs that exceed the Proposition 98 minimum requirement in 2022-23.
• Reduce Other One-Time Spending. We estimate the state has at least $8 billion in one-time and temporary spending in 2024-25 that could be pulled back to help address the budget problem. In addition, there are potentially billions of dollars more in spending from prior years that has been committed but not yet distributed, and therefore also could be reduced to help address the budget problem.
• Identify Other Solutions. Even after using most or all of these solutions, the Legislature still would need to find more solutions to address the remainder of the budget problem. Other options include additional cost shifts (such as more loans from special funds), revenue solutions, and ongoing spending reductions.
The State’s budget shortfalls could have potential impacts to city revenues, primarily in the form of grants and loans.
Local
The City continues to see strong economic growth over the last several years. The City of Patterson remains focused on new business opportunities and residential growth, including amenities for our residents. Factors that will impact our economic strength are the online sales which, in some instances, do not provide the City with a “point-of-sale” taxable nexus. The city has a diverse revenue structure and can continue to benefit from Measure L, SB1 revenue, new businesses such as the Loves Travel Center, Valero Gas Station, Grocery Outlet, Popeyes Chicken, and other interested businesses.
The City’s water, sewer, and garbage rates were approved in the last few years and will provide stable enterprise funding to provide a high level of infrastructure maintenance in these areas.
Our budget provides for a continuation of high levels of service, capital improvement projects provided by grants and Capital Facility fees, and continued funds to further improve the City and maintain public safety staffing, and new programs to enhance community quality of life for our city’s residents.
The American Rescue Plan Act funds are recorded as part of the General Fund. The city received $5.3 million over a two-year period that will be used to help stimulate our economy and provide much needed economic stimulus and programming to assist businesses and our volunteer organizations.
Several new businesses are coming to Patterson include one new industrial Warehouse (1,000,000 sf), a 120,000 sf furniture manufacturing company, Old Water Office Restaurant, just to name a few. A new Javi’s restaurant was also recently opened in the Historic downtown core and is currently open for business.
The city is fortunate that sales tax remains strong in FY 2023. The major contributing factors for the strong sales tax revenues is primarily due to ongoing on-line sales, agricultural products sales, and a diverse business portfolio. In addition, the city will receive a one-time adjustment of approximately $1.3 million in FY 2023/24 due to adjustments in sales tax allocations by the state.
II. FISCAL YEAR 2023-24 MID-YEAR BUDGET STATUS SUMMARY
The Mid-Year Budget Status Report represents staff’s best estimate of the City’s budgetary position at approximately midway through the fiscal year, based on activity to date, and making certain adjustments for revenues and expenditures as requested for the remainder of the fiscal year.
This section of the report includes a discussion of Fiscal Year 2023/24 revenue and expenditure estimates compared to budget for the General Fund and Enterprise Utility Funds.
A comparison of mid-year estimated amounts to budget for the General Fund follows:
• The FY 23/24 expenditure budget includes expenditures related to ARPA funding received in the prior fiscal year, which is the major contributor to the expenditure budget exceeding revenues. • Adjusted Budget includes staff Mid-year Budget recommendations previously approved by the City Manager or through prior Council action.
General Fund
Total requested budget adjustments for mid-year include an increase in revenue estimates in the amount of $2,619,209 due to a one-time increase in sales tax revenue and also a significant increase in earnings on investments. The total offsetting expenditure requests of $1,052,570.
Revenues
Estimated results of the major revenue categories, Property Taxes and Sales Tax are trending higher than budget. Taxes represent the major sources of revenue for the City including property taxes, sales taxes and other local taxes.
A detailed discussion of major revenue categories is as follows:
Property Taxes are the largest single source of revenue for the General Fund. Property tax revenue is based on the assessed valuation of property in the City. Current fiscal year projections are expected to not change from the original budget. As a result, no amendment is proposed for FY 2023/24.
While California’s statewide median price slightly decreased from November, it posted its largest year-over-year gain since May 2022. December’s statewide median home price was $817,740, down 0.3 percent from November and up 6.4 percent from a year ago. 2023 was a tough year as a shortage of homes for sale and high costs of borrowing continued to have a negative impact on housing inventory and demand. With mortgage rates expected to decline in the next 12 months, home sales will bounce back as buyers and sellers return to a more favorable housing market.
Home prices should see a moderate increase in 2024 as well.
The information in the tables below from HdL shows the number of detached single-family residential sales (by quarter) and the median sale price for those properties.
Sales Tax revenues are the second largest source of revenue for the General Fund. Despite the slowing economy, consumer spending has remained relatively steady, although slightly below the pace forecast in the original budget.
Current projections from the City’s sales tax consultant estimate FY 2023/24 sales tax revenues will be $1.3 Million higher than the adopted budget due to unanticipated sales tax adjustments made by the state. After this adjustment, our sales tax revenue budget would be approximately $14.4 million for FY 2023/24. However, the estimate for FY 2024/25 is expected to return to a modest increase over the originally adopted budget in FY 2023/24.
Below are HdL reports showing the Sales Tax by Major Industry Group as well as the trends for the past few years:
Charges for Services are estimated at $500,000 higher than the adopted budget, primarily due to a change in accounting treatment for reimbursable expenditures. This revenue comes from developer deposits and is reclassified as revenue once the offsetting expenditures are incurred.
Investment Earnings are estimated to increase by $725,000, which is significantly higher than the Adopted Budget, primarily due to an increase in return on investments for Pension and Other Post Employment Benefit (OPEB) prefunding deposits at the Public Agency Retirement Service (PARS), as well as favorable returns on increased deposits with the Local Agency Investment Fund (LAIF).
In addition, the current predictions about the falling interest rate environment for the remainder of the fiscal year indicate that the city will experience large end of year fair market value adjustment gains in the investment portfolio that will positively impact the surplus at the end of the fiscal year. While this amount is not factored into the Mid-Year Budget adjustments, the result will positively contribute to this year’s final ending balances that will be made available for future budget needs.
Expenditures
The underspending of expenditures, or budget savings, are expected each fiscal year due to vacant positions and other budgeted expenditures not incurred during the fiscal year. Total estimated expenditures are $38 million, approximately $1 million more than the Adjusted Budget.
A brief explanation of the assumptions and major changes in expenditures follows:
Salaries and Benefits expenditures are estimated at $10.26, approximately $157,000 higher than the adjusted budget. Savings in Salaries & Wages are expected at the end of the year as not all positions are filled for the entire fiscal year. This is typically the case for newly budgeted positions each year as the positions are not immediately filled.
Other Services & Charges are estimated at approximately $500,000 higher than the adjusted budget, primarily due to a change in accounting treatment for reimbursable expenditures. The reimbursable expenditures are covered by revenue from developer deposits.
Capital Outlay expenditures are estimated at $4.2 million, approximately $160,000 more than the adjusted budget. However, budgeted Capital Outlay expenditures are frequently delayed due to various project delays, and any unspent budget will be carried forward into future fiscal years to complete these projects.
Total combined General Fund budget amendments result in a net positive Mid-Year change of approximately $1.5 million.
Enterprise Utility Funds
The City’s three enterprise utility funds (Garbage, Sewer and Water) are funded by the rates charged to customers. A rate study for each of the utilities is performed every 5 years, with rates modifications developed for the 5-year period. The rates are designed to comply with Article 13D of the California Constitution and to a) recover the City’s cost of providing water, sewer or garbage services, and b) allocate costs in proportion to the cost for serving each customer class.
Garbage Fund
This fund accounts for all financial transactions relating to the City’s garbage services. Services are on a user charge basis to residents and business owners located in Patterson. The city operates and maintains a solid waste system that serves approximately 6,800 customers, primarily residential. The City contracts with a third party to collect and dispose of its solid waste and has a contract with the County of Stanislaus to use its solid waste disposal sites.
A comparison of mid-year estimated amounts to budget for the Garbage Fund follows (dollars in thousands):
• Adjusted Budget includes staff Mid-year Budget recommendations previously approved by the City Manager or through prior Council action.
Garbage Fund
Account Type Adopted
Budget
Prior Budget
Adjustments
Adjusted
Budget
Mid-Year
Requests
Budget
Estimate
Revenue
Taxes $ (35,494) $ - $ (35,494) $ - $ (35,494)
Intergovernmental (4,320) - (4,320) - (4,320)
Charges for Services (4,300,917) - (4,300,917) - (4,300,917) Investment Earnings (3,563) - (3,563) - (3,563)
Other Revenues (35,000) - (35,000) - (35,000)
Revenue Total $ (4,379,294) $ - $ (4,379,294) $ - $ (4,379,294) Expense
Salaries & Wages $ 959,739 $ - $ 959,739 $ - $ 959,739
Benefits 436,845 - 436,845 - 436,845
Professional & Contracted Serv 2,480,292 - 2,480,292 - 2,480,292 Repair & Maintenance 13,650 (713) 12,937 1,750 14,687
Materials & Supplies 29,017 3,050 32,067 5,500 37,567
Other Services & Charges 27,200 2,838 30,038 - 30,038
Capital Outlay 7,260 190,908 198,168 - 198,168
Transfers Out 789,206 - 789,206 - 789,206
Rentals 5,450 - 5,450 - 5,450
Expense Total $ 4,748,659 $ 196,084 $ 4,944,742 $ 7,250 $ 4,951,992 Grand Total $ 369,364 $ 196,084 $ 565,448 $ 7,250 $ 572,698 The last Solid Waste Rate study was done in 2019 and proposed rate increases of 4.9% each fiscal year from FY 2019/20 through FY 2023/24.
Estimated expenditures of $4.9 million are about $200,000 more than the adopted budget primarily due to carry over amounts from prior fiscal years. However, the underspending of expenditures is normal and expected as not all budgeted expenditures are spent and will be carried forward to future fiscal years.
Sewer Fund
This fund accounts for all financial transactions relating to the City’s wastewater collection and treatment. The city provides wastewater service to approximately 6,800 customers, on a user charge basis. The majority are single family residents, and approximately 595 customers in Diablo Grande. The city owns, operates, and maintains its own wastewater system which includes a treatment plant, three lift stations, and a collection system.
A comparison of mid-year estimated amounts to budget for the Sewer Fund follows (dollars in thousands):
• Adjusted Budget includes staff Mid-year Budget recommendations previously approved by the City Manager or through prior Council action.
Sewer Fund
Account Type Adopted
Budget
Prior Budget
Adjustments
Adjusted
Budget
Mid-Year
Requests
Budget
Estimate
Revenue
Licenses & Permits $ (3,200) $ - $ (3,200) $ - $ (3,200) Charges for Services (5,591,822) - (5,591,822) - (5,591,822) Fines & Forfeitures (3,000) - (3,000) - (3,000)
Investment Earnings (6,603) - (6,603) - (6,603)
Other Revenues (698,353) - (698,353) (1,600) (699,953)
Transfers In (10,879,885) - (10,879,885) - (10,879,885) Revenue Total $ (17,182,863) $ - $ (17,182,863) $ (1,600) $ (17,184,463) Expense
Salaries & Wages $ 2,171,891 $ - $ 2,171,891 $ 58,202 $ 2,230,093 Benefits 1,096,890 - 1,096,890 - 1,096,890
Professional & Contracted Svcs 978,287 48,838 1,027,125 50,000 1,077,125 Repair & Maintenance 198,700 (7,158) 191,542 1,000 192,542 Materials & Supplies 254,450 36,110 290,560 1,600 292,160 Other Services & Charges 227,388 - 227,388 - 227,388
Capital Outlay 10,760,802 307,268 11,068,070 105,700 11,173,770 Debt Service 628,386 - 628,386 - 628,386
Transfers Out 2,646,567 - 2,646,567 - 2,646,567
Rentals 41,700 19,109 60,809 - 60,809
Expense Total $ 19,005,061 $ 404,167 $ 19,409,228 $ 216,502 $ 19,625,730 Grand Total $ 1,822,198 $ 404,167 $ 2,226,365 $ 214,902 $ 2,441,267 The 2020 Sewer Rate study proposed rate increases of 6% each year. The first increase was effective January 1, 2022, subsequent rates are effective each July 1 through July 1, 2025. Total revenues are estimated to only slightly change from the originally adopted budget of $17.1 million, and estimated expenditures of $19.6 million are approximately $620,000 more that the originally adopted budget primarily due to carry over amounts from prior fiscal years. However, the underspending of expenditures is normal and expected as not all budgeted expenditures are spent and will be carried forward to future fiscal years.
Water Fund
This fund accounts for all financial transactions relating to the City’s water service. Services are on a user charge basis to residents and business owners in Patterson. The city owns and operates its own water system and provides service to approximately 7,100 customers. Groundwater wells are the City’s sole source of water supply. The city operates nine wells and three water storage facilities. The city continues to invest in expanding its water infrastructure to meet the demands of rapid population growth.
Comparison of mid-year estimated amounts to budget for the Water Fund follows (dollars in thousands):
• Adjusted Budget includes staff Mid-year Budget recommendations previously approved by the City Manager or through prior Council action.
Water Fund
Account Type Adopted
Budget
Prior Budget
Adjustments
Adjusted
Budget
Mid-Year
Requests
Budget
Estimate
Revenue
Charges for Services $ (6,798,821) $ - $ (6,798,821) $ (50,000) $ (6,848,821) Investment Earnings (27,068) - (27,068) - (27,068)
Other Revenues (1,984,100) - (1,984,100) - (1,984,100)
Transfers In (6,021,932) - (6,021,932) - (6,021,932)
Revenue Total $ (14,831,921) $ - $ (14,831,921) $ (50,000) $ (14,881,921) Expense
Salaries & Wages $ 2,158,443 $ - $ 2,158,443 $ 9,290 $ 2,167,733 Benefits 981,941 - 981,941 - 981,941
Professional & Contracted Serv 535,233 28,088 563,321 - 563,321 Repair & Maintenance 107,155 2,510 109,665 16,000 125,665 Materials & Supplies 250,867 10,713 261,580 64,000 325,580 Other Services & Charges 577,995 - 577,995 - 577,995
Capital Outlay 3,624,046 3,723,598 7,347,644 621,000 7,968,644 Debt Service 1,203,673 - 1,203,673 - 1,203,673
Transfers Out 5,865,555 - 5,865,555 - 5,865,555
Rentals 13,400 - 13,400 - 13,400
Expense Total $ 15,318,307 $ 3,764,909 $ 19,083,216 $ 710,290 $ 19,793,506 Grand Total $ 486,385 $ 3,764,909 $ 4,251,295 $ 660,290 $ 4,911,585 Total revenues are estimated at $14.8 million, slightly higher than originally budgeted due to an increase for meter installations of $50,000. The latest water rate study was completed in 2022 and recommended overall rate increases of 2.0% each year over the next five years. Rate increases are proposed to be effective January 1 of each year. In the rate study, a survey was conducted comparing the typical water bills of regional agencies. Based on the survey performed, Patterson’s typical monthly residential water bill is in the middle range in the region.
Total expenditures are estimated at $19.7 million, $660,290 higher than the Adjusted Budget primarily due to increases in capital outlay budget primarily due to carry over amounts from prior fiscal years. However, the underspending of expenditures is normal and expected as not all budgeted expenditures are spent and will be carried forward to future fiscal years.
III. RECOMMENDED MID-YEAR BUDGET ADJUSTMENTS
The mid-year budget review provides an opportunity for the city to adjust the budget to recognize unanticipated revenues and costs and to propose expenditures to address high-priority community and operational needs. Any proposed adjustments are made with consideration of the resources needed to provide services to the public and the fiscal capacity to fund this level of resources. Each department continuously reviews its programs and operations, as well as changing economic conditions and emerging community needs.
A complete listing of all recommended increases is included as an attachment.