December 6, 2022
Finance Department
DATE: December 6, 2022
TO: Mayor Butt and Members of the City Council
FROM: Shasa Curl, City Manager
Nickie Mastay, Deputy City Manager
Delmy Cuellar, Director of Finance
Mubeen Qader, Budget Administrator
SUBJECT: Fiscal Year 2021-2022 Year-End Clean-Up
FINANCIAL IMPACT: The financial impact to the General Fund under Option 1 is $6,668,816 and Non-General Funds is $4,825,437.
Financial impact under option 2 to the General Fund is
$7,636,868 and Non-General Fund is $1,111,363.
PREVIOUS COUNCIL
ACTION:
June 29, 2021, October 26, 2021, January 25, 2022,
February 1, 2022, February 15, 2022, March 1, 2022,
March 22, 2022, October 18, 2022
STATEMENT OF THE
ISSUE:
As part of the FY 2021-2022 fiscal close, City Council
approval is requested before using the Operating Surplus to clear the historic negative cash in non-general fund accounts.
RECOMMENDED ACTION:
DISCUSS and DIRECT City staff about the use of the
estimated Operating Surplus to clear the negative cash
and other administrative budget adjustments listed in the attached resolution – Finance Department (Shasa
Curl/Nickie Mastay/Delmy Cuellar 510-620-6790).
Disclaimer: The amounts in this staff report are preliminary estimates and are subject to change. The goal of this staff report is to inform the City Council regarding the year-end activities and receive approval for the year-end actions to better position the City of Richmond financially.
AGENDA
REPORT
December 6, 2022
BACKGROUND:
On October 18, 2022, City staff proposed clearing of negative cash from Fund 1051- Engineering Cost Recovery, Fund 4006-Stormwater, Fund 6999-Payroll Liabilities, and transfer to Fund 4501-Richmond Housing Authority (RHA) Administration from the estimated FY 2021-22 General Fund operating surplus. City staff also proposed to transfer 50 percent of the remaining surplus into Other Post-Employment Benefits (OPEB) 115 trust totaling $6,102,459. In addition, City staff presented several administrative budget adjustments in the proposed resolution and the release of General Fund commitments and assignments to the Unassigned Fund Balance. After discussion during the City Council meeting, the proposed resolution was amended to only approve the $6,102,459 transfer into the OPEB 115 trust and release of commitments and assignments. The City Council directed City staff to provide analysis before the City Council could decide about clearing the negative cash from the General Fund operating surplus. This agenda item provides additional detail regarding the funds with negative cash balances and proposes two options to clear those fund balances.
DISCUSSION:
In conjunction with the annual audit, the year-end clean-up is the process of making necessary adjustments to the budget, actual revenues and actual expenditures, and changes to the fund balance prior to the official closing of the fiscal year and issuance of the Annual Comprehensive Financial Report (ACFR). Adjustments are determined by thorough analysis of the budget and actual activity that has occurred over the fiscal year. This is to ensure that year-end financial results are accurately represented in the ACFR and City Council approval is acquired before using Operating Surplus to clear the historic negative cash in non-general funds.
The staff report also discusses several negative cash clearing items which accumulated over many years. City staff have initiated a detailed Quarterly Budget Review process with each department to monitor all funds’ revenue and expenditures. City staff believe that the current review process will address any potential negative funds proactively and the chances of having similar situation of accumulated negative cash fund balances are slim in future given the additional due diligence in progress.
General Fund: Revenues & Expenditure
The FY 2021-22 General Fund is estimated to have an operating surplus of $27,041,113 due to revenues exceeding the estimated projections and expenditures coming in lower than budgeted. Total revenues are estimated to exceed earlier projections by 6 percent due to better-than-expected property taxes, sales and use tax, utility user tax, and other taxes. Total expenditures are below budget by 10 percent.
Major source of the positive variance are salary and benefits, professional services, and operating transfers out. Table 1 below shows unaudited preliminary FY2021-22 revenue and expenditure amounts (subject to change). Table 1: FY 2021-22 Revenue and Expenditure (Unaudited Preliminary Amounts, Subject to Change).
December 6, 2022
Negative Cash
There are several funds with negative cash balances; however, many funds are expected to recover from the negative cash balances in future years, while other fund balances are not expected to recover. As mentioned above, the General Fund is estimated to end FY 2021-2022 with an operating surplus of $27,041,113. This is an
December 6, 2022
opportunity to cure some of historic negative cash balances in other funds and to make budgetary adjustments. The City staff is requesting to use part of the estimated General Fund surplus balance from FY 2021-2022 to clear out negative cash balances in the funds below:
Fund 1051-Engineering Cost Recovery: This fund is currently inactive, but incurred deficit spending between the years of 2014 through 2019, which totaled $3,489,599. The major revenue source for the fund was Charge for Services which captured reimbursement of staff costs from capital projects and grants.
Another source of revenue were receipts from licenses, permits, and fees. These two revenue sources were never able to cover the operating expenditures in the fund which resulted in negative cash. Effective FY 2020-2021, the City Council approved a reclass of this activity to be tracked in the General Fund. There has not been any activity in the fund in the last two fiscal years. Table 2 shows revenue and expenditures for Fund 1051 from FY 2015 through FY 2022.
Table 2: Fund 1051-Engineering Cost Recovery History
Fund 4006-Stormwater: The fund has significant liability due to an advance payment from the Risk Management Reserve Fund (Fund 5003) for $2,654,027.
Richmond’s stormwater tax rate has not been sufficient to cover the operating expenditures in the program and a rate increase requires voter approval. The advance payment liability has been growing annually due to interest accrual per the original agreement. Although Fund 4006 has been gradually improving due to a strict control on expenditures, it is not likely that the fund will be able to pay-off the loan from the Risk Management fund. Another possible solution is to have a stormwater rate increase which would require voter approval and will take years to implement. City Public Works staff are preparing a request for proposal to 2015 2016 2017 2018 2019 2020 2021 2022 Cumulative
Beginning Cash Balance (1,388,382) (2,002,925) (2,069,399) (2,212,446) (2,298,974) (2,959,041) (2,980,633) (2,910,905) 1,584,835 Character Code Description
LICENSES PRMITS&FEES 470,879 59,457 74,424 20,632 21,920 7,036 - - 1,213,130 USE OF MONEY&PROPRTY - - - - - - - - 3,417 CHARGES FOR SERVICES 457,798 603,336 156,802 189,400 278,021 388,687 - - 3,147,250 OTHER REVENUE 5,950 4,664 - 45,357 - - - - 71,527 SALARIES AND WAGES (790,304) (521,255) (347,725) (422,700) (420,499) (346,123) - - (3,810,502) PYRLL/FRINGE BENEFIT (389,099) (239,157) (290,201) (247,461) (274,561) (231,998) - - (2,114,159) PROF & ADMIN (49,423) (61,515) (118,723) (148,046) (150,801) (89,564) - - (673,057) OTHER OPERATING (7,442) (3,986) (4,558) (34,535) 31,346 (45,598) - - (76,957) UTILITIES (4,349) (3,661) (2,699) (2,599) (5,269) (6,380) - - (31,292) EQPT & CONTRACT SVCS (1,594) - - - (35,040) - - - (62,529) COST POOL (1,745,823) (1,220,576) (931,392) (639,272) (793,735) (742,934) - - (7,859,824) ASSET/CAPITAL OUTLAY - - (27) (1,250) - - - - 22,750 OPER XFERS IN 1,408,129 1,320,576 1,272,049 1,084,897 756,583 1,028,209 - - 7,653,942 OPER XFERS OUT - - - (1,968,161) Revenues over (under) expenditures (645,278) (62,117) (192,050) (155,577) (592,035) (38,664) - - (4,484,467) Change in receivables (collections) 2,375 18,835 (1,025) 33,037 (33,537) 40,936 360 500 60,250 Change in payables and deposits
(disbursements) 28,360 (23,192) 50,028 36,013 (34,496) (23,864) 69,368 55,408 (15,615) Sewer bonds/customer deposits (634,603)
Ending Cash Balance (2,002,925) (2,069,399) (2,212,446) (2,298,974) (2,959,041) (2,980,633) (2,910,905) (2,854,997) (3,489,599)
December 6, 2022
commence with the analysis and community engagement required for a potential Stormwater rate increase. A Professional Services item will be brought to the City Council for discussion in early 2023.
Fund 4501-Richmond Housing Authority (RHA) Administration: The City acquired a building on 360 S. 27th Street from RHA and as part of the repayment agreement dated January 25, 2022 (Resolution 21-53), the City has agreed to transfer $307,650 equivalent to fair market value for the building to RHA.
Fund 6999-Payroll Liabilities: Payroll related charges are tracked in this fund.
When the City was administering flexible spending account in-house, the activity was tracked in this fund between the FY 2009-2010 and FY 2013-2014. The balance is the remaining charges that could not be cleared when the program was outsourced to a provider. The charges belong to many different funds; however, about half the total amount is due to General Fund related payroll amounts. City staff members recommend reclassing the entire balance of $104,908 to General Fund. The table 3 below shows the breakdown of the activity adding up to $104,908.10.
Table 3: Payroll Liabilities Recommended to be Cleared
Options for Clearing Negative Fund Balances
Based on the information provided above, City staff propose the following two options for clearing the negative fund balances:
Option 1 (City Staff Recommendation): Clear all the four line-items (Funds 1051, 4006, 4501 and 6999) in the total amount of $6,556,184 and avoid a potential audit finding. This is the most prudent option.
Description Amount
FSA Claim ( Medical and Dependent Care) reimbursements that were not directly charged to the Employee Department (Note: This is during the time the City Administered the flexible spending program) 123,106.39 Long Term Disability (LTD) employer expenses that were not directly charged to the Employee Department 129.78
PERS employer expenses that were not charged directly to the Employee Department 924.52 Miscellaneous adjustments to balance AP liability (699-202101) with AP Invoice List 100.76 Military Leave Adjustments that were not reclassified to the Employee Department (19,353.35) Grand Total 104,908.10
December 6, 2022
Table 4: Negative Cash Clearing Option 1
Option 2: Spread the clearing of Fund 1051- Engineering Cost Recovery and Fund 4006-Stormwater over three years. This option may still affect the auditor’s opinion about the financials and has economic risk. The potential loss of revenues due to upcoming economic recession may impact the City’s ability to fulfill the proposed payment plan. Also, additional payment into the OPEB trust of $1,940,874 will be required since the operating surplus will be larger than surplus available under Option 1.
Table 5: Negative Cash Clearing Option 2
Year-End Clean-Up Administrative Budget Adjustments
As part of the year-end fiscal close, the City staff identified several General Fund and Non-General Fund budget adjustments. A complete list of the budget adjustments is listed in the attached Resolution (Attachment 1). Under option 1, total General Fund adjustments including the negative cash write-off, OPEB trust contribution, and administrative adjustments equate to $6,668,816. The Non-General Fund adjustments total $4,825,437. Under option 2, total General Fund adjustments including the negative cash write-off, OPEB Trust contribution, and administrative adjustments equate to $4,585,638. The Non-General Fund adjustments total $1,111,363.
Reserve Level
According to Government Finance Officers Association (GFOA), to determine an adequate reserve level, an agency should review and analyze the unique circumstances that can impact its funding sources. For example, governments that may be vulnerable to natural disasters, more dependent on a volatile revenue source, or potentially subject Line Item FY2021-22
Fund-1051 Engineering Cost Recovery 3,489,599
Fund-4006 Stormwater fund 2,654,027
Fund 4501 Richmond Housing Authority Debt Reduction 307,650 Fund 6999 Payroll Liabilities Reclass 104,908
Total 6,556,184
Line Item FY2021-22 FY2022-23 FY2023-24 Total
Fund-1051 Engineering Cost Recovery 1,163,200 1,163,200 1,163,200 3,489,599 Fund-4006 Stormwater fund (4% interest rate) 956,375 956,375 956,375 2,869,124 Fund 4501 Richmond Housing Authority Debt Reduction 307,650 307,650 Fund 6999 Payroll Liabilities Reclass 104,908 104,908 *Additional Payment to OPEB Trust 1,940,874
Total 4,473,006 2,119,574 2,119,574 8,712,155
*This is additional OPEB Trust trasnfer to $6,102,459 approved on October 18, 2022
December 6, 2022
to cuts in state aid and/or federal grants may need to maintain a higher than minimum of two months (17%) of the General Fund operating expenditures as a reserve. City of Richmond’s analysis around its unique circumstances is continuously being monitored; however, on September 20, 2022, the Council approved an increase to the General Fund minimum required for the reserve level from fifteen percent (15%) to a range of fifteen percent to twenty percent (15%-20%) of the next year’s budgeted total expenditures, including transfers out, which is above the GFOA minimum required of 17 percent.
According to the FY 2021-2022 approved Other Post-Employment Benefits (OPEB) Policy, the City needs to place half of year-end operating surplus after meeting the City’s Minimum Reserve Policy into the OPEB Trust. The City Council approved transfer of $6,102,459 from its General Fund to the OPEB trust on October 18, 2022. If the City Council approves the proposed option 2 (Table 5), the City will be required to make an additional payment of $1,940,874 into the OPEB trust. The option 2 will bring the total FY 2021-22 OPEB transfer to $8,043,333. Table 6 below shows the additional OPEB contribution under the Option 2.
Table 6: Additional OPEB Trust Contribution
Under option 1, after all the adjustments (i.e., clearing negative cash balances and transfer to the OPEB trust), Table 7 shows a preliminary estimated reserve level of about $47,428,915, which is about 22.95% of the originally adopted FY 2022-2023 General Fund expenditure budget of $206,632,248. Under option 2, with negative cash clearing payment plan and additional OPEB trust payment, Table 8 shows a preliminary estimated reserve level of $49,369,788, which is about 23.89% of the of the originally adopted FY 2022-2023 General Fund expenditure budget of $206,632,248.
10/18/2022 11/22/2022 Variance
OPEB Trust Contribution 6,102,459 8,043,333 1,940,874
December 6, 2022
Table 7: Option 1: General Fund Estimated Reserve as of June 30, 2022 (Unaudited Preliminary Amounts, Subject to Change)
Table 8: Option 2: General Fund Estimated Reserve as of June 30, 2022 (Unaudited Preliminary Amounts, Subject to Change)
Technicalities around Reserve Calculation:
The calculation of reserve depends on the balance in Unassigned category of the General Fund Fund-Balance, and the balance is dependent on several accounting technicalities, rules, and regulations. It is important to keep in mind that the exact balance in each fund-balance category is an estimated amount as the annual audit is in the process, all the amounts in each fund-balance category are subject to change. In some cases, it may impact the Unassigned fund-balance and may have a domino impact on the OPEB trust contribution calculation. The staff report is primarily to attain the City Council’s approval for the negative cash clearing and other administrative adjustments. Final amounts in the fund-balance and the transfer to OPEB trust will be General Fund Reserve Amounts
General Fund Operating Surplus
Operating General Fund Surplus 27,041,113
Remaining Operating Surplus 20,938,654
1051-Engineering Cost Recovery (3,489,599)
4006-Stormwater Fund Advance Write-off (2,654,027)
RHA Debt Reduction in lieu of Admin Building (307,650)
Historic Payroll Liability Correction (104,908)
FY2021-22 Net Operating Surplus 14,382,470
General Fund Unassigned Fund Balance (Reserve)
Beginning Unassigned Fund Balance (Reserve) 22,285,626
Released Commitments and Assignments 4,201,968
Adjustments to other Fund Balance Categories 6,558,851
FY2021-22 Net Operating Surplus 14,382,470
Transfer to OPEB Trust (approved on 10/18/22) (6,102,459) Ending Unassigned Fund Balance (Reserve 22.95%) 47,428,915 General Fund Reserve Amounts
General Fund Operating Surplus 27,041,113
Remaining Operating Surplus 27,041,113
1051-Engineering Cost Recovery (1,163,200)
4006-Stormwater Fund Advance Write-off (956,375)
RHA Debt Reduction in lieu of Admin Building (307,650)
Historic Payroll Liability Correction (104,908)
Total Transfer to OPEB(Inlcuding $6,102,459 approved on 10/18/2022)(8,043,333) FY2021-22 Net Operating Surplus 16,465,648
General Fund Unassigned Fund Balance (Reserve)
Beginning Unassigned Fund Balance (Reserve) 22,285,626
Released Commitments and Assignments 4,201,968
Adjustments to other Fund Balance Categories 6,416,547
FY2021-22 Net Operating Surplus 16,465,648
Ending Unassigned Fund Balance (Reserve 23.89%) 49,369,788
December 6, 2022
presented to the City Council once Annual Comprehensive Financial Report (ACFR) is published.
Next Step
City staff are continuing to prepare for financial headwinds, which include but are not limited to rising inflation, significant interest rate increases, and real estate market corrections. During the last recession, the City of Richmond experienced significant property tax assessment reductions. As such, City staff recommend that the City Council begin preparing for potential property tax decreases. In addition, since the City of Richmond was incorporated in 1905, there are unprecedented built environment needs City-wide that require additional major investments (i.e., buildings, sidewalks, streets, lighting, and parks). Therefore, it is important that we remain strategic regarding spending and saving to ensure we can address essential current and future City needs.
City staff will continue to work on the Annual Audit and prepare an Annual Certified Financial Report (ACFR) and present to the City Council in January/February 2023.
City staff will also perform analysis around an adequate reserve level considering the risk factors shown below under the GFOA Fund Balance Guidelines for General Fund and bring back a recommendation for the City Council in the coming months. The risk factors are:
The predictability of its revenues and the volatility of its expenditures Its perceived exposure to significant one-time outlays (e.g., disasters, immediate capital needs, state budget cuts)
The potential drain upon general fund resources from other funds, as well as the availability of resources in other funds
The potential impact on the entity’s bond ratings and the corresponding increased cost of borrowed funds
Commitments and assignments (i.e., governments may wish to maintain higher levels of unrestricted fund balance to compensate for any portion of unrestricted fund balance already committed or assigned by the government for a specific purpose).
DOCUMENTS ATTACHED:
Attachment 1 – Resolution