City of Piedmont
COUNCIL AGENDA REPORT
DATE: June 6, 2022
TO: Mayor and Council
FROM: Sara Lillevand, City Administrator
SUBJECT: Public Hearing on the Proposed 2022-23 Budget, Proposed Levy for the Municipal Services Special Tax, and Proposed Levy for the Special Municipal Sewer Tax and Receipt of a Report from the Budget Advisory and Financial Planning Committee
RECOMMENDATION
Conduct the first public hearing on the proposed 2022-23 Budget, proposed levy of the Municipal Services Special Tax, and the proposed levy of the Special Municipal Sewer Tax.
BACKGROUND
The City Charter requires that a public hearing be held prior to adoption of the budget, the levy of the Municipal Services Special Tax, and the proposed levy for the Special Municipal Sewer Tax. This is the first of two scheduled public hearings, with the second hearing to be held on June 20, 2022.
DISCUSSION
GENERAL FUND REVENUES
The City is proposing General Fund revenues in 2022-23 of $33,953,000 compared to the current 2021-22 projection of $34,912,000. Revenue by category is shown in the table on the following page.
The major sources of revenue in each category are as follows:
Property Related Taxes
Property-related taxes are the City’s primary revenue source and account for $24,247,000 or 71% of General Fund revenues. This amount is a decrease of $739,280 over the 2021-22 projected actual. The 2022-23 Proposed Budget consists of:
• Property Tax revenues, which consists of tax on secured and unsecured property, is budgeted at $16,875,000, an increase of $885,000 or 5.5% as compared to the 2021-22 projection. The increase is due to the following:
o High volume of home sales at record high prices which increased the assessed valuation of those homes approximately 120%.
o Properties not subject to an assessment step-up via a change of ownership returned to a maximum increase of 2.0%. This increase was lowered to 1.036% last year due to the economic strain caused by the pandemic. • Real Property Transfer Tax revenue is budgeted at $3,200,000. Staff is budgeting this cautiously due to its volatility and the high rate of home sales experienced in the last two fiscal years, which may indicate a peak and negatively affect future sales. In addition, the current trend of rising interest rates and high inflation may weaken the real estate market. • Parcel Tax revenue, based on the measure approved by 83% of voters in March 2020, is estimated at $2,522,000, an increase of $97,000 or 4.0% over the 2021-22 projection. The tax was approved for four years, and future annual increases are limited to the lower of CPI or 4%.
• Property Tax in lieu of Motor Vehicle License Fee (MVLF) is budgeted at $1,570,000, a
5.1% increase over the prior year.
Proposed % of % of
Category Budget Budget Projected Total $ Change %
Property Related
Taxes $ 24,247,000 71% 24,986, $ 000 72% (739,000) $ -3% Recreation Related $ 3,184,000 9% $ 2,908,000 8% 276,000 $ 9% UUT & Franchise Fees 1,728,000 5% 1,768,000 5% (40,000) -2% Other Agencies 1,557,000 5% 1,338,000 4% 219,000 16%
Building Permits &
Planning Fees 1,462,000 4% 1,667,000 5% (205,000) -12%
Buisness and Sales
Taxes 840,000 2% 825,000 2% 15,000 2%
Other 935,000 3% 1,420,000 4% (485,000) -34%
Total $ 33,953,000 100% $ 34,912,000 100% (959,000) $ -3% 2022-23 2021-22
Agenda Report Page 2
In 2004, the State Legislature permanently reduced the MVLF rate from two percent to 0.65 percent and compensated cities and counties for their revenue loss with a like amount of property taxes, dollar-for-dollar. Typically, the annual change in this tax corresponds with the change in property tax.
The housing market continues to be strong and is a key factor in maintaining the stability of City revenues. There is no assurance this trend will continue as the overall economy faces serious headwinds with rising interest rates and inflation. Real Property Transfer Tax receipts have been higher than budget through the first nine months of the fiscal year and are trending to surpass the budget by approximately $2.2 million. Below is a table which summarizes the volatility of the housing market over the last several years.
Annual Statistics Related to Real Property Transfer Tax Revenue Recreation Related Revenue
Recreation related revenue consists of revenues generated from recreation programs and facility rentals and is budgeted at $3,184,000 in 2022-23, an increase of $276,000 from the prior year.
The major components are:
Agenda Report Page 3
• Recreation Programs – Revenue is budgeted at $2,024,000, an increase of $31,000 over 2021-22 projection. Recreation program revenue has returned to a normal (pre-pandemic) state after being severely impacted by cancelled programs and reduced capacity in varying degrees between March 2020 and June 2021 due to COVID-19. Recreation staff did an outstanding job in navigating the fluctuating rules and guidelines issued by County and State Health officials. The FY 2022-23 budget assumes recreation programs will not be affected by COVID-19.
• Pre-School Program Revenue is budgeted at $590,000, an increase of approximately $165,000 over 2021-22 projection. Although programming was increased from 4-day to 5-day programs, revenue suffered as proposed holiday breaks programs were not offered and class sizes were reduced due to COVID-19 concerns. Next school year’s programs are currently at full class size and staff expects this to continue throughout FY 2022-23.
• Facility Rentals – City facilities re-opened at the very end of FY 2020-21 and have remained open throughout FY 2021-22. Staff has budgeted $570,000 for FY 2022-23 which assumes the facilities will be open the entire year. This is $80,000 higher than the FY 2021-22 projection. Included in the proposed budget is $45,000 in rentals for 801 Magnolia Avenue.
Utility User Taxes & Franchise Fees
Utility User Taxes are taxes collected from residents for the use of electric, gas, water, and telephone. Franchise Fees are contractual obligations collected from PG & E, Republic Services, and Comcast for the right to operate in the City.
• Utility User Taxes are budgeted at $1,150,000 which is slightly less (4 %) than the current year projection. Staff expects this revenue stream to be challenged as utility usage declines along with the number of residents working from home as the effects of the pandemic subside.
• Franchise Fees are budgeted at $578,000 which is relatively flat to FY 2021-22.
Building Permits and Planning Fees
This category consists of the following construction related activities: Building Permits, Planning Fees, Plan Check Fees, General Plan Maintenance Fee, and Records Management Fees.
Proposed Revenue for FY 2022-23 is proposed at $1,462,000 compared to a projection of $1,667,000 for the current fiscal year.
• This category continues to surprise as the construction & remodel market has exceeded all expectations. FY 2020-21 was a record year, increasing $1,600,000 or 28%, over the prior year. The strength has continued into FY 2021-22 and staff is projecting to exceed the annual budget by $200,000 (17%).
Agenda Report Page 4
• Consistent with the City’s overall budget philosophy, staff is budgeting for declines in revenue in all areas of this category as staff does not expect the high level of activity to continue as the city faces mounting economic uncertainty.
Business and Sales Taxes
Business taxes consist of Business License and Real Estate Rental taxes. Business Licenses have been relatively stable over the past several years while Rental taxes were increasing approximately 6% per year until leveling off in FY 2020-21. Sales taxes have fluctuated between $200,000 and $250,000 over the past five years.
Staff is budgeting $840,000, an increase of $15,000 or 2%, from the current year for this category.
Other Revenue
The major components of Other Revenue consist of these miscellaneous items: Ambulance Service Charges, Mutual Aid Assistance, Other Services and Lease Revenue.
Staff is budgeting $935,000 for FY 2022-23 compared to a projection of $1,420,000 in the current fiscal year, a decrease of $485,000. The primary reason for the variance is the City earned $510,000 in mutual aid revenue for the City’s assistance in battling California wildfires in FY 2021-22. Due to the unpredictable nature of this revenue stream, staff does not budget for this item.
GENERAL FUND EXPENDITURES
The City is budgeting $33,864,402 in General Fund expenditures, an increase of 7% from last years projected expenditures. In developing the Proposed Budget, the City continues efforts to control and contain operating costs in all departments. The following is a summary by cost categories.
Agenda Report Page 5
General Fund Budget by Expenditure Category
Personnel Costs
Personnel related costs, which includes salaries & wages, benefits, and retirement costs, is the largest overall expenditure in the General Fund at $21,755,543, which is $1,026,233 (5%) higher than the prior year projection. Such costs make up 64% of the total FY 2022-23 General Fund budget.
The tables below summarize projected personnel costs by department and by type:
Personnel Budget by Department
Proposed % of % of
Category Budget Budget Projected Total $ Change %
Personnel Costs
$ 21,755,543 64% 20, $ 729,310 66% 1,026,233 $ 5%
Maintenance &
Operations 8,603,388 25% 7,674,934 24% 928,454 12%
Non-Departmental
3,505,471 10% 3,211,471 10% 294,000 9%
Total $ 33,864,402 100% 31, $ 615,715 100% 2,248,687 $ 7% 2022-23 2021-22
Agenda Report Page 6
Personnel Budget by Type
In FY 2020-21 during the height of pandemic uncertainty, the City negotiated a one-year contract extension with the Fire and Police unions, agreeing to a 3% salary increase and all cost sharing agreements remained intact.
In FY 2021-22 the City entered into four-year labor agreements with all City employees including its four unions as well as all unrepresented employees. With the goal of containing costs and setting total employee compensation to within -3 % of the median of Piedmont’s comparator cities, the City agreed to the following major terms:
• Salary increases in each of the next four years as follows: 3%, 3%, 3.25% 3.25% • Continue medical benefit cost sharing but reset base to FY 2020-21 level. • Freeze employee cost sharing percentage for CalPERS at FY 2020-21 levels.
Salaries expense for FY 2022-23 is budgeted at $14,862,826 which is a 2% increase compared to the FY 2021-22 projection. The increase is due to an assumed 3% across the board wage increase, one new full-time position (Communications Manager – approved in FY 2021-22 budget but not yet filled), two temporary part time employees in Planning and Building, and the assumption of full staffing. These factors are being offset by a decline in budgeted overtime, primarily in the Fire Department. Overtime in the Fire Department is budgeted at $700,000 compared to $1,037,000 projected in FY 2021-22, which included approximately $350,000 of overtime related to strike team mutual aid. Strike team mutual aid is not included in the budget as it is unpredictable and is offset by mutual aid revenue.
In addition, as compared to the prior year projection, the most significant changes in personnel costs are as follows:
• Health Insurance – The proposed budget reflects an increase of $232,632 over last year.
The increase is primarily due to an assumed 6.0% increase in premium rates and the assumption of full staffing.
Agenda Report Page 7
• Retirement - Employee retirement costs are projected to increase $425,905 over last year.
In FY 2018-19 CalPERS began phasing in the lowering of its discount rate from 7.5% to
7.0%. The full impact of this phase in will be completed in FY 2024-25. As a result, pension expense is expected to rise significantly during this period. In FY 2022-23, staff is projecting that the City’s employer contribution and unfunded liability payments will increase by 12%, from $3,572,406 (24.6% of salaries) in 2021-22 to $3,998,311 (26.9% of salaries) in 2022-23.
Maintenance and Operations
Maintenance and operations costs are budgeted at $8,603,388, amounting to 24% of the FY 2022-23 General Fund budget, and is an increase of $928,454 as compared to the FY 2021-22 projection.
This category includes the following major expenses:
• Employee related – Conferences, travel, training, and memberships. • Supplies – Department supplies
• Equipment – Vehicle maintenance and repair, fuel, and rentals. • Contract Services – Third party recreational activity providers, legal, consulting, crossing guards.
• IT related – Computer Courage contract, Software licenses and Strategic Planning. • Other – Public works services (including street patching, landscaping, and tree pruning) • Utilities
The information on the following pages summarizes maintenance and operations costs by department.
Agenda Report Page 8
Operations and Maintenance Budget by Department
The most significant increases in Maintenance and Operations costs in the FY 2022-23 Proposed Budget as compared to the FY 2021-22 projection are as follows:
• Planning and Building – Staff is budgeting an increase of $306,800, which is primarily due to an expansion of the Supplemental Planning Services and records management needs:
o Supplemental Planning Services ($214,000)
o Third party permit inspection fees related to the Community Pool project ($100,000)
o Convert the residential property-based records from paper based to digital ($91,000)
o Environmental review required by the California Environmental Quality Act (CEQA) related to the Housing Element and Safety Element, and LHMP updates. ($50,000)
o Update of the General Plan Housing Element ($39,000)
Offset by:
o Lower City Engineer costs ($250,000) as temporary part time help has been hired to replace the need for Coastland’s permit processing and inspection support utilized in FY 2021-22 to address the backlog of permit applications. • Administration – Expenses are projected to be $262,390 (14%) higher year over year.
The increase is primarily due to:
o Diversity\Equity\Inclusion related expenses ($75,000). o IT related expenses – Increase in Strategic Plan initiatives ($70,000) and Computer Courage staffing ($29,000).
o Election expenses (58,000)
Proposed % of % of
Category Budget Budget Projected Total $ Change %
Administration $ 2,136,250 25% 1,873,860 $ 24% 262,390 $ 14% Public Works 2,249,749 26% 2,093,500 27% 156,249 7%
Planning & Building 1,318,300 15% 1,011,500 13% 306,800 30% Recreation 1,236,500 14% 1,167,863 15% 68,637 6%
Police 1,026,689 12% 982,257 13% 44,432 5%
Fire 635,900 7% 545,954 7% 89,946 16%
Total $ 8,603,388 100% 7,674,934 $ 100% 928,454 $ 12%
2022-23 2021-22
Agenda Report Page 9
o Audit fees, due to bi-annual requirement to perform complete valuations of the City’s OPEB and Police & Fire Pension plans and the need to perform Single Audit procedures due to receipt of ARPA funds. ($25,000). • Fire – Staff is projecting an increase of $89,946 over last year primarily due to Emergency Preparedness related expenses.
Non Departmental
Non-Departmental costs are budgeted at $3,505,471, comprising 10% of the FY 2022-23 General Fund budget. The following costs are included:
• Insurance costs, which include General Liability and Workers Compensation, comprise $2,235,000 and is a $179,000 increase from the estimated 2021-22 expense. The increase is primarily due to higher premiums caused by increased payroll and overall actuarial adjustments to the risk pool. In FY 2022-23, the City will increase its General Liability self-insured retention from $10,000 to $25,000 per claim, which reduced the premium increase from 20% to 15% year over year.
• Retiree Medical Premiums - Premiums are budgeted at $900,000 compared to $770,000 last year. The increase is due to six retirements in FY 2021-22, a 6% budgeted increase in premium costs, and an estimated 4 retirements in FY 2022-23. • Library services – $350,471 is budgeted as a contribution to the City of Oakland, unchanged from prior years.
• Unemployment – The City is self-insured for unemployment costs. Staff is estimating the City will incur approximately $20,000 in expense in FY 2022-23. This cost has returned to normal levels as the increased unemployment periods mandated during the pandemic expired in FY 2021-22.
Agenda Report Page 10
GENERAL FUND BALANCE
The 2022-23 Proposed Budget projects an Operating Net Income of approximately $966,000.
Capital transfers are proposed for essential capital needs as follows:
• $1,332,000 - Capital Improvements (ARPA Funds)
• $1,300,000 - Facilities Maintenance, including sidewalk replacement\repair • $ 72,000 - Equipment Replacement Fund
After these transfers, the General Fund ending balance will be approximately $5.7 million, or 17% of Operating Expenses. No further transfers are recommended at this time as the City’s goal is to maintain a General Fund reserve of approximately 18% of Operating Expenses.
OTHER FUNDS
In addition to the General Fund, the City maintains several major funds to provide for the longterm capital needs of the organization.
Recreation Department \ Schoolmates \ Aquatics
While the Recreation Department is a component of the General Fund, two programs under its purview, Schoolmates and Aquatics, are accounted for in separate funds. On the following page is a recap of the proposed 2022-23 budget and the prior four years.
Agenda Report Page 11
Staff has historically targeted the Recreation Department to be cost neutral. In 2021-22, staff is projecting 102% total department cost recovery after historic pandemic lows of 56% and 73% in 2019-20 and 2020-21 respectively. The primary driver of this substantial improvement is the Agenda Report Page 12
reopening of rental facilities and the closure of the Community Pool which had been operating at a loss prior to closure.
Recreation Department Staffing Adjustments: Schoolmates assistant site leads (3) and the lead facilities attendant will remain part-time positions but will work more than 1,000 hours in a fiscal year. As a result, the staff will be enrolled in CalPERS, eligible to enroll in the City’s medical insurance plan and be offered the PEMHCA minimum payment for medical benefits as required by law.
In 2022-23, staff is projecting Schoolmates cost recovery to be 101%. In 2021-22, staff is projecting 145% cost recovery. This cost recovery figure well above the target of just over 100% was due to the delay of Schoolmates related maintenance projects until FY 2022-23.
In the Aquatics Fund, Staff has included $20,000 of expense to cover utilities and other maintenance expenses for the permanently closed Community Pool facility.
Street Infrastructure Maintenance & Replacement
The City’s FY2022-23 budget for street infrastructure maintenance and replacement, including sidewalk repair, is $1.6 million. Funding sources include Gas Tax, SB1, Measure BB, and Measure F. These sources are funded by Sales and Gasoline taxes. The budget is based on estimates received from the County. The majority of available funding is dedicated to street resurfacing, with the balance dedicated to important sub-categories such as the implementation of projects prioritized by the approved Pedestrian & Bicycle Master Plan, and those related to the Complete Streets program.
The PCI (Pavement Condition Index) for the streets within the City of Piedmont will be 65 after the completion of the 2021 pavement project. This is down from the 67 reported to the City Council in July of 2020 and up slightly from the 64 reported in 2017.
This keeps the City’s overall average within the “Good” range.
In order to maintain a PCI of 67 over the next 5 years, approximately $1.5 million in funding for maintenance and repairs would be needed annually. To increase the PCI to 72 over the next 5 years, approximately $2.2 million in funding for maintenance and repairs would be needed annually.
Agenda Report Page 13
In addition to $100,000 from Gas Tax revenue sources, staff is requesting a General Fund appropriation of $700,000 for sidewalk repair. Piedmont’s sidewalks have become increasingly in disrepair. It is very important to repair sidewalks as soon as possible to reduce the liability associated with accidents caused by unsafe sidewalks. The City currently does not have the tools to adequately track the required maintenance of sidewalks. Staff has included in the IT plan over the next two years, funds for the purchase and implementation of a software program to satisfy this and other maintenance related needs.
Below is a recap of the proposed 2022-23 budget and the prior three years of activity within the street related funds.
Facilities Maintenance Fund
The City Council established the Facilities Maintenance Fund in 2013 to provide a long-term plan for addressing City-owned facilities. In 2014, responsibility for facilities was transferred from the Recreation Department to the Public Works Department. Since that time staff has been working to develop a thorough and well-documented plan that addresses deferred maintenance, on-going maintenance, and repair, and, importantly, the desire to build reserves to address longterm, life-cycle maintenance and replacement costs. The plan will continue to evolve and improve as staff closely monitors City needs.
Agenda Report Page 14
In 2019-20, staff removed janitorial type expenses from this fund and are now accounting for them in the General Fund. Further, in order to allow us to better identify and quantify long term capital needs as opposed to ongoing maintenance costs, beginning in FY 2022-23 staff is splitting this fund into two separate funds:
• Facilities Maintenance Fund (111) – Repairs and maintenance, and scheduled maintenance, and sidewalk replacement\repair will be funded annually by transfers from the General Fund as needed. Maintenance of Schoolmates facilities will be funded by the Schoolmates fund.
• Facilities Capital Projects (112) – Capital projects for all city facilities including parks.
Funding will be determined each year based on budget surplus, if any.
The following schedule summarizes the current Facilities Maintenance Fund plan. It is a roll up of scheduled maintenance and estimated repairs and maintenance for each City facility, as well as sidewalk replacement\repair.
The following schedule summarizes the current Facilities Capital Fund plan. It is a roll up of capital projects for all city facilities, including parks. Supporting schedules which details each project are included in the Facility Maintenance plan documents.
FY FY FY FY FY
2021-22 2022-23 2023-24 2024-25 2025-26
FACILITIES MAINTENANCE
Beginning Balance $ 839,708 $ 357,304 $ 276,097 $ 214,608 $ 172,183 General Fund Subsidy $ 600,000 $ 1,300,000 $ 1,500,000 $ 1,100,000 $ 1,000,000 Schoolmates Subsidy 87,500 $ 64,450 $ 126,923 $ 30,419 $ 30,940 Other Funding (ARPA)
Interest 21,596 $ 24,243 $ 1,584 $ 1,227 $ 967
Total Revenue $ 709,096 $ 1,388,693 $ 1,628,506 $ 1,131,645 $ 1,031,907 Expenditures:
Sidewalks $ (900,000) $ (700,000) $ (600,000) $ (600,000) $ (600,000) Annual Maintenance (181,000) (191,900) (201,495) (211,570) (222,148) Scheduled Maintenance (110,500) (578,000) (888,500) (362,500) (270,500) Total Expenditures $ (1,191,500) $ (1,469,900) $ (1,689,995) $ (1,174,070) $ (1,092,648) Ending Balance $ 357,304 $ 276,097 $ 214,608 $ 172,183 $ 111,441 Agenda Report Page 15
The Facilities Capital Fund is estimated to have a Fund balance of approximately $8.975 million as of June 30, 2022. Funding will be primarily from the General and Schoolmates Funds, when available. American Rescue Plan Act (ARPA) funds are being allocated here for use on the Police Dispatch project in accordance with City Council direction.
Annual funding is determined based on available funds in the General Fund after consideration of the needs of the equipment replacement fund, facilities maintenance fund, and maintaining a General Fund reserve of approximately 18%. Due to escalating pension, retiree medical and insurance expenses, staff is not proposing any General Fund transfers for FY 2021-22 and FY 2022-23.
The Facilities Capital Fund includes major capital improvements currently being evaluated by the City in the column “FY 2025 & Beyond”. High-level assessments of the Police Department and Fire Department reveal significant deficiencies is these Essential Services Buildings which must be addressed. As prioritized use of American Rescue Plan Act (ARPA) funds, we are currently working on options and costs associated with relocation of the dispatch center to be followed by a master planning effort for the entire Police/Veterans/Fire/City Hall area.
Beyond the Essential Services Buildings, City staff believes the renovation of the City Hall basement and Recreation Center are critical as well due to the accessibility and fire/life safety issues of these facilities which need to be addressed. Major improvements to Linda Beach and Coaches Field have also been evaluated. The total cost of all these projects may be upward of FY FY FY FY FY 2025
2021-22 2022-23 2023-24 2024-25 & Beyond
FACILITIES CAPITAL PROJECTS
Beginning Balance $ 8,500,000 $ 8,975,000 $ 6,291,864 $ 3,721,864 $ 973,864 General Fund Subsidy $ -
Schoolmates Subsidy - 60,000 - - -
ARPA Funding 1,050,000 1,331,864
Contributions \ Other Funding
Interest
Total Revenue $ 1,050,000 $ 1,391,864 $ - $ - $ -
Expenditures:
Facilities $ (200,000) $ (2,660,000) $ (1,000,000) $ (320,000) $ (52,085,425) Parks (75,000) (1,065,000) (370,000) (2,058,000) (13,659,000) Park Pathways (25,000) (100,000) (100,000) (100,000) (100,000) Tennis Courts (125,000) - (270,000) (270,000) (540,000) Sustainability (150,000) (250,000) (830,000) - -
Green Infrastructure - - - - (1,300,000)
Total Expenditures $ (575,000) $ (4,075,000) $ (2,570,000) $ (2,748,000) $ (67,684,425) Ending Balance $ 8,975,000 $ 6,291,864 $ 3,721,864 $ 973,864 $ (66,710,561) Agenda Report Page 16
$65 million and is reflected in the column “FY 2025 & Beyond”. Based on ten-year projections for the General Fund, the City does not have adequate funding for any of these projects nor the recreation related conceptual plans developed in recent years. A master planning effort to understand opportunities, challenges and funding strategies for our City facilities will be a high priority for staff in FY 22-23.
Capital Improvement Projects Fund
The Capital Improvement Fund is used to account for resources that are restricted and committed to expenditures for capital outlays, including the acquisition or construction of capital facilities and other capital assets. Previously, prior to creation of the Facilities Maintenance Fund and the Equipment Replacement Fund, the Capital Improvement Projects Fund was used to account for a very wide range of projects and activities.
Historically, appropriation of resources to this Fund are typically considered following a receipt of a report on projects recommended by the Capital Improvement Projects Review Committee.
The Committee, on an annual basis, initiated a process to solicit community input, conduct site visits, analyze the merits of potential projects, and make recommendations to the City Council as to which projects should be funded. The Capital Improvement Projects Review Committee suspended its activity due to COVID-19. Staff is working to create a timeline and framework to reimagine and re-engage this important committee in support of substantial capital project needs.
Equipment Replacement Fund
The Equipment Replacement Fund sets aside funds in anticipation of the orderly replacement of City vehicles, heavy equipment, general equipment, as well as IT infrastructure. A replacement schedule has been developed detailing all equipment including the estimated year of replacement and estimated replacement cost.
Proposed expenditures for FY 2022-23 are $2,279,100. This is higher than anticipated as the replacement of all radios for both Fire and Police has been accelerated due to the pending discontinuation of maintenance on existing equipment ($560,000) and the delay of the upgrade of KCOM equipment ($400,000). In addition, staff adjusted all purchase prices due to inflationary pressures.
The following is the detail of proposed Equipment Replacement expenditures for 2022-23 of $2,279,100:
Agenda Report Page 17
Equipment Replacement Fund Expenditures
Sewer Fund
The Sewer Fund is used to account for costs related to the inspection, maintenance, repair, and replacement of the sanitary sewer and storm sewer system in the City. In July 2014, the City and other East Bay jurisdictions entered into a Consent Decree (CD) mandated by the U.S.
Environmental Protection Agency (EPA) which requires the City to complete a rehabilitation of the sewer system and to establish a comprehensive monitoring of system performance. With the CD finalized, and all the mandated improvement measures identified, the City has moved forward with definitive plans to achieve full compliance.
Agenda Report Page 18
To this end, the City Council previously approved loans totaling $800,000 to the Sewer Fund from the Equipment Replacement Fund and the Facilities Maintenance Fund. These loans made the need for increasing the Sewer Tax or Real Property Transfer Tax unnecessary and provided the resources needed to initiate the next phase of required sewer rehabilitation.
With the approval of a low-interest loan by the State Water Resources Control Board (SWRCB), construction of Phase V of the sewer rehabilitation project began in 2017-18 and was completed in the first quarter of FY 2018-19. Thereafter, Phase VI design work began in FY 2018-19 with construction anticipated to begin in FY 22-23. All phases of rehabilitation are projected to be completed over the next decade, ahead of the schedule established under the CD.
A significant benchmark affirming Piedmont’s strategy for compliance to the EPA Consent Decree was reinforced in April of 2018. After the first EPA performance review of all participants, it was determined that Piedmont was complying and would not be assessed any stipulated penalties.
Sewer Fund Recap
In addition to the construction of rehabilitation projects, the Sewer Fund reimburses the General Fund for sewer related expenses charged to the General Fund. Public Works and Finance have refined expense estimates and capture actual costs related to personnel, supplies and services.
Based on the data collected, the proposed transfer for 2022-23 is projected at $837,000, an increase of $37,000 over last fiscal year.
Agenda Report Page 19
Pension Rate Stabilization Fund
In 2017-18, the City established a Pension Rate Stabilization Fund. The City partnered with the Public Agency Retirement Services (PARS) to establish a Section 115 Trust. The trust will allow us to smooth the effect of rising pension costs which are expected to more than double over the next ten years. Through the deposit of funds into the Section 115 Trust Program, the City could expect to earn a rate of return greater than what would be attained through the City’s investment with the State of California Local Agency Investment Fund (LAIF). The higher return is made possible because the Section 115 Trust Program is not prohibited by the State law from making purchases of higher yield equities.
In May 2018, the City transferred $2.0 million from the General Fund into the Pension Rate Stabilization Fund and an additional transfer of $750,000 in November 2018. In February 2021, the City engaged actuarial firm Bartel & Associates to refresh the City’s ten-year pension expense projections. The projections increased approximately $3.0 million as compared to the long-range plan. The increase is due to CalPERS lower than expected investment results in FY 2019-20 and the effect of the changes in its amortization policy. Amortization periods for the Unfunded Accrued Liability have been shortened from 30 years to 20 years, which lowers overall liability, but increases annual payments. Due to this, an additional $1.0 million was transferred to PARS in October 2021.
CalPERS portfolio performance rebounded in FY 2020-21 with a 21.7% increase. This triggered its “Funding Risk Mitigation Policy”. This policy requires CalPERS to reassess the portfolio’s asset allocation to lower its risk and to decrease the discount rate. Accordingly, CalPERS realigned its asset allocation to decrease volatility and lowered the discount rate from 7.0% to
6.8%. This will lower employer costs by 1% - 2% beginning in FY 2023-24. However, it should be noted that financial markets have been weak this fiscal year which will most likely adversely impact pension costs after FY 2023-24.
The City’s long-term plan now indicates that the City may need to draw down on the PARS fund as early as FY 2023-24 in order to pay annual pension payments and maintain a reasonable General Fund reserve (18%).
MUNICIPAL SERVICES SPECIAL TAX
On March 3, 2020, Piedmont voters approved Measure T (Municipal Services Special Tax), authorizing the City Council to levy a parcel tax for a four-year period beginning with FY 2021-
22. The rate for Fiscal Year 2021-2022 was set by the voters when they passed the tax.
Commencing with FY 2022-23, the rate for Measure T may be adjusted by the lower of 4.0% or the annual percentage change in the Consumer Price Index for all Urban Consumers for San Francisco-Oakland-San Jose, California (December) as published by the United States Department of Labor, Bureau of Labor Statistics. The change in the index for the annual period ending December 2021 was 4.2%. Accordingly, the proposed rate increase for FY 2022-23 is
4.0%. After applying this rate adjustment, the proposed rate was rounded down to the nearest whole dollar for ease of assessment.
Agenda Report Page 20
Municipal Services Special Tax Rate Schedule
SPECIAL MUNICIPAL SEWER TAX
The proposed Sewer Fund budget assumes that revenues increase based on changes in the CPI that are needed to maintain sewer services and rehabilitation of the sewer system. The City Council is authorized (Municipal Code Chapter 20, Section 20E.3) to adjust the rate based upon changes in the Consumer Price Index (CPI) for All Urban Consumers for the San FranciscoOakland-San Jose, California (December) as published by the United States Department of labor, Bureau of Labor Statistics. Based upon the change in this index, the proposed rate adjustment for FY 2022-23 is 4.2%. After applying this rate adjustment, the proposed rate was rounded down to the nearest whole dollar for ease of assessment.
Adopted Rate Proposed
Rate
2021-22 2022-23
Single Family Residences
0 to 4,999 $ 551 $ 573
5,000 to 9,999 $ 620 $ 644
10,000 to 14,999 $ 715 $ 743
15,000 to 20,000 $ 817 $ 849
Over 20,000 $ 930 $ 967
Commercial Properties
0 to 10,000 $ 930 $ 967
Over 10,000 $ 1,395 $ 1,450
Multi-Family Residential: per unit $ 383 $ 398
Dual Jurisdiction Parcels: per unit $ 565 $ 587
Estimated Revenue $ 2,422,000 $ 2,518,000
Agenda Report Page 21
Special Municipal Sewer Tax Rate Schedule
By: Michael Szczech, Finance Director
Adopted Rate Proposed Rate
2021-22 2022-23
Single Family Residences
0 to 4,999 $ 625 $ 651
5,000 to 9,999 $ 712 $ 741
10,000 to 14,999 $ 821 $ 855
15,000 to 20,000 $ 957 $ 997
Over 20,000 $ 1,127 $ 1,174
Commercial Properties
0 to 10,000 $ 1,127 $ 1,174
Over 10,000 $ 1,554 $ 1,619
Multi-Family Residential: per unit $ 521 $ 542
Dual Jurisdiction Parcels: per unit $ 625 $ 651
Estimated Revenue $ 2,802,000 $ 2,919,000
Agenda Report Page 22
Piedmont Budget Advisory and Financial Planning Committee 1 May 26, 2022
Ms. Mayor and City Council,
As part of our annual efforts, the Budget Advisory and Financial Planning Committee (the “Committee”) has completed its brief review of financial projections in the city budget and whether they provide for the long-term financial future of the City. The Committee reviewed the most recent revised fiscal year 22-23 budget and projections, as prepared by Finance Director Michael Szczech and his staff under the guidance of City Administrator Sara Lillevand, and as presented to the Committee on May 10, 2022.
The City’s understanding of its financial position, as in previous years, is very thorough. The presentation from the Finance Director addressed all material revenue sources and expense categories, and discussed potential revenue risks, projected pension costs in detail, Other Post-Employment Benefits (OPEB) funding, equipment replacement, facilities maintenance and capital projects. Overall, we believe the assumptions used, and the results presented, to be reasonable and consistent with past practices.
As we emerge from the Covid-19 pandemic, the City has weathered its financial impacts admirably and maintains a strong financial condition. Property tax related revenue, which makes up over three-quarters of the City’s revenue, has been bolstered by the strong real estate market during the pandemic. In addition, recreation and facility rental revenues have rebounded to nearly pre-pandemic levels. The higher than expected revenues helped the City achieve a projected budget surplus for FY21-22.
The proposed budget for FY22-23 reflects the City’s continued commitment to conservative budgeting and financial discipline. This approach – employed for over a decade –ensures that the City can continue to provide high quality public services, replace aging equipment, and address infrastructure repairs, while retaining a strong general fund. Further, the City has established reserves to handle potential increases in pension and retiree health care liabilities and can accommodate those costs without impacting services.
As the Council is aware, quantifying and planning for the future costs associated with the City’s facilities, streets, and sidewalks – broadly, its infrastructure – has been and continues to be a focus of this Committee. This Committee has urged the City to continue to comprehensively quantify and understand these needs, and City staff has responded with a commendable job. While work remains to be done, this budget and long range plan continues to be a step in the right direction, both in terms of quantifying such costs, and allocating funding. As the Finance Director’s Agenda Report Page 23
Piedmont Budget Advisory and Financial Planning Committee 2 budget report notes, the Facilities Maintenance Fund is now separated into two funds: one focused on regular repairs and maintenance (Facilities Maintenance Fund), and the other for major capital projects and improvements (Facilities Capital Fund). Due primarily to the increased transfer tax revenue in the current and prior year, and the growth in assessed property values, the City is now able to fund its facilities maintenance costs over the term of the projections. This is in contrast to prior years, in which contributions to the Facilities Maintenance Fund were generally not budgeted, and transfers would only be made to that Fund if and when budget surpluses were achieved.
The new Facilities Capital Fund projections include estimates for major capital projects to address the necessary replacement or renovation of aging buildings to meet current standards and to improve operating capacity and efficiency. Although the timing of these projects is uncertain, and more work remains to be done to more comprehensively detail capital needs, it is clear that the cost of such infrastructure needs is beyond the City’s current funding capacity. The Committee continues to believe that further quantification and planning for these capital projects is a very high priority given the high cost for some of these projects as well as the long lead time to fund and implement these initiatives.
As you know, the Committee believes the objective of long term financial planning for the City is to take steps to ensure that current services are being paid for in the current year, to the extent possible, and that funds for known future requirements (including infrastructure needs) are set aside on a current basis. In short, current citizens should pay for the current costs of running the City and not defer those costs to future citizens. Over the past decade, the City has done an excellent job planning for and controlling future costs of retirement commitments and equipment replacement, and the Committee recommends that the same level of attention should now be given to quantifying and planning for the future costs associated with the City’s infrastructure.
In reviewing the City’s long term projections and considering the current economic situation, the Committee reminds the Council of several things:
The financial projections seek to maintain, over the long term, an 18% General Fund balance (which, the Committee thinks is prudent).
Achieving this target in the long term projections, however, requires that the City eliminate transfers to the Facilities Capital Fund after the FY 22- 23 budget year and the long term projections indicate the Facilities Capital Fund will be depleted during FY 25-26. While certain major capital projects may be funded through debt financing, similar to the pool, this will not be feasible for all capital projects and the Facilities Capital Fund is therefore inadequately capitalized for the duration of the 10-year projections. This underfunding is not sustainable since it will severely affect necessary replacement expenditures beginning in the next several years.
Agenda Report Page 24
Piedmont Budget Advisory and Financial Planning Committee • The Committee supports the conservative approach used to establish the budget for transfer tax revenues given their historic volatility. The Committee also supports the modest increase in projected transfer tax revenue, from the $2.8 million consistently used in the recent past, to $3.2 million in FY23 and to $3.4 million beyond. This increased budget amount could still be attained with a recessionary pace of sales and/ or drop in sales prices given substantial gains in Piedmont home values over the past decade. The Committee recommends that to the extent actual transfer tax revenue exceeds the conservative estimate, such funds be used to fund the Facilities Capital Fund.
• Pension expenses are projected to increase substantially over the next decade, as has been anticipated. While these increased expenses are fully met in the long range projections (due to the City's active management and prior funding of the of the Public Agency Retirement Services Fund), the extreme volatility of the financial markets still presents risks to the extent that investment returns fail to achieve expected returns in the long run. • As in prior years, the projections continue to show that the long term financial health of the City is dependent on property-related taxes 1 especially the continuation of the Municipal Services Parcel Tax. The projections assume that the MSPT continues with a standard CPI adjustment each year, and the Committee supports this approach. • The City continues to benefit from a robust economic recovery and rising Bay Area housing prices. Given the uncertainty as to how long such favorable economic conditions will persist, it is important to continue with conservative property tax and transfer tax assumptions.
The Committee appreciates the opportunity to serve the City and is especially appreciative of the work of the Finance Director in providing such a complete and thorough long term financial plan. The Committee believes the City is wellpositioned to address the years to come. Please let us know if you have any questions or would like any additional analysis.
Thank you,
Budget Advisory and Financial Planning Committee
Deborah Leland, Chair
Andrew Flynn
Cathie Geddeis
Robert McBain
Paul Raskin
Frank Ryan
Vanessa Washington
Alice Cho (alternate)
3 Agenda Report Page 25