Item 03 2024-00632 Fiscal Year (FY) 2024/25 Budget Development Update — Budget and Audit Committee, March 26, 2024

City of Sacramento
Budget and Audit Committee Report
915 I Street Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2024-00632 3/26/2024 Discussion Item 3.

Fiscal Year (FY) 2024/25 Budget Development Update
File ID: 2024-00632
Location: Citywide
Recommendation: Receive and file.

Contact: Peter Coletto, Finance Director, (916) 808-5416, [email protected]; Mirthala Santizo, Budget Manager, (916) 808-5078, [email protected], Department of Finance Presenter: Peter Coletto, Finance Director, (916) 808-5416, [email protected]; Mirthala Santizo, Budget Manager, [email protected], (916) 808-5078, Department of Finance Attachments:
1-Description/Analysis
2-Citywide Fees and Charges Policy
Description/Analysis
Issue Detail: As the City prepares for the release of the FY2024/25 Proposed Budget, staff are providing any additional information available and responses to questions asked at prior meetings and regular updates on the budget development process to the Budget and Audit Committee.

Vacancy Analysis
Staff conducted a four-year analysis of the impact of vacancies to the City’s overall budget. Due to the use of overtime to provide staffing for programs and services resulting from vacant positions in several departments (mainly Public Safety), the vacancy analysis was conducted on remaining labor dollars at the end of the fiscal year instead of the cost of the vacant positions. This approach provided staff with a more realistic analysis of the impact of vacancies and the actual value of vacancy savings. Comparing the Amended Budget vs. year-end actuals from FY2018/19, FY2019/20, FY2020/21 and FY2021/22, the average savings related to vacant positions was 3% of the total budget.

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File ID: 2024-00632 3/26/2024 Discussion Item 3.

Department
Average
Vacancy
Savings
Community Response 5.4%
Fire -0.8%
Police 0.3%
Total Safety 0%
City Attorney 3.1%
City Auditor -3.1%
City Clerk 11.2%
City Manager 15.1%
City Treasurer 23.5%
Community Development 10.2%
Convention & Cultural Services 5.8%
Finance 1.2%
Human Resources 16.0%
Information Technology 12.0%
Mayor/Council -4.3%
Parks & Recreation 26.0%
Public Works* -4.7%
Utilities 42.1%
Total Non-Safety 13%
Total City 3%
* Net of reimbursements cost is negative
FY2024/25 Homeless Housing, Assistance and Prevention (HHAP) Funding The City’s HHAP 5 allocation is $27.1 million. Of the $27.1 million, 80% is allocated by formula set by the State to sheltering and related services ($21.7 million) and $20% to homelessness prevention, permanent housing, and other services ($5.4 million). All HHAP 5 funding is currently programmed for FY2024/25 programs.

Budget Balancing Strategy
In an effort to address the structural imbalance currently projected in the City’s General/ Measure U (G/MU) Fund for FY2024/25, the City Manager directed departments under the purview of the City Manager to prepare a reduction plan of up to 15 percent of the departments’ net G/MU Fund reliance in the FY2023/24 Approved Budget. It is important to note that instead of conducting a reduction across the board, the City Manager wanted to be strategic in order to preserve mandated programs and core services. As such, departments were instructed to submit reduction types with ongoing savings in the following priority order: (1) Revenue Enhancement or Discretionary Program Reduction, (2) Mandated Program Delivery Change and (3) Mandated Program Reduction. The

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File ID: 2024-00632 3/26/2024 Discussion Item 3.
reduction types were defined as the following:

Reduction Type
Revenue Enhancement Increase projected department revenues with no corresponding increase in the department expenditure
budget.

Discretionary Program Reduction Decrease spending on programs that are not core City services.

Mandated Program Delivery Change Decrease spending on programs that are core City services while maintaining the same level of service.
(example: contracting out services)
Mandated Program Reduction Decrease spending on programs that are core City services by reducing service levels.

Departments submitted 250 reduction proposals. The City Manager’s Executive Team reviewed proposals in several ways. Expenditure reductions were categorized between one through four (1-4) based on the impact to both City services and the community. An impact score of 1 meant that a proposal was of low impact and a score of 4 was severe impact. The City Manager’s Executive Team also reviewed whether expenditure reductions that had position reductions were filled or vacant.

Finally, expenditure reductions were reviewed to determine if there was an impact to the Measure L baseline.

Revenue increase proposals were reviewed to ensure that they were in compliance with Propositions 218 and 26. The City Manager also wanted to determine whether the proposal would achieve full cost recovery. Finally, any revenue increase proposals that were related to an expenditure in the Measure L baseline was also reviewed to determine impact. In addition to what the departments submitted, the City Manager requested that departments submit proposals to increase all eligible fees in accordance with the Citywide Fees and Charges Policy (Attachment 2) by the biennially CPI factor (10.7% for the previous two years).

Below is the breakdown of the submitted department proposals:

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File ID: 2024-00632 3/26/2024 Discussion Item 3.

Proposal Type/Category Submittals Amount (in
millions)
Vacant
FTEs*
Filled
FTEs
Total FTEs
Revenue Increases 131 $15.1 0.00 0.00 0.00
Level 1 - Low Impact 41 16.9 (24.17) (4.00) (28.17)
Level 2 - Moderate Impact 34 11.2 (40.35) (13.20) (53.55) Level 3 - High Impact 12 5.6 (50.57) (11.00) (61.57)
Level 4 - Severe Impact 32 36.5 (109.95) (116.00) (225.95) Total 250 $85.3 (225.04) (145.20) (369.24)
^ FTE is Full-time Equivalent
Citywide Strategies
In addition to the department reduction proposals, staff are also reviewing City support of current programs and projects to identify potential reductions. Projects with prior-year savings were also reviewed. This included ARPA-framework funded projects, capital projects, Innovation & Growth fund projects, and various multi-year operating projects.

Policy Considerations: This report is consistent with Council’s direction to keep the Council informed on the fiscal condition of the City.

Economic Impacts: None.

Environmental Considerations:

California Environmental Quality Act (CEQA): This report concerns administrative activities and government fiscal activities that do not constitute a “project” as defined by the CEQA Guidelines sections 15378 and California Public Resources Code section 21080 and are not subject to the provisions of CEQA (CEQA Guidelines section 15060(c)(3)). CEQA review for any project, which utilizes funds allocated in this report, has been or will be performed in conjunction with planning, design, and approval of each specific project as appropriate.

Sustainability: Not applicable.

Rationale for Recommendation: This report is for informational purposes. It provides the Budget and Audit Committee with additional information on the vacancy analysis and HHAP 5 funding. It also provides an update on the process to close the budget gap in FY2024/25.

Financial Considerations: The process to close the budget gap will help balance the FY2024/25 Proposed Budget.

Local Business Enterprise (LBE): No goods or services are being purchased under this report.

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FY2023/24 Approved Budget
P
Fees and Charges Policy
Scope: CITYWIDE
Administrative Entity
Department of Finance
(916) 808-5845
[email protected]
Table of Contents

1. Purpose

2. Policy

3. Proposition 26
Related Regulatory References
May 8, 2014
Resolution 2014-0111
Effective Date: July 1, 2015
Attachment 2
FY2023/24 Approved Budget

Fees and Charges Policy

1. PURPOSE
The City of Sacramento has the ability to determine the extent to which fees should be used to fund City facilities, infrastructure and services.

There are five main categories of fees that the City currently implements:
2  Impact/development fees are typically one-time charges levied by the City against new development to generate revenue for the construction of infrastructure and capital facilities needed to offset the effects of the new development.

 Service fees are charges imposed on pers ons or property that are designed to offset the cost of prov iding a government service. Sometimes these services are elective, such as fees for processing voluntary development permit applications, or providing service/recreation programs, while other service fees are not, such as mandatory service fees for trash or utility services. Such fees are typica lly reasonably related to the cost of providing the service for which the f ee is imposed. Otherwise, the fee may constitute a special tax for which voter approval is required by Propositions 13, 62, and 218.

 Regulatory fees are imposed to offset the cost of a regulatory program, such as business regulatory fees, or to mitigate the past, present, or future adverse impact of a fee payer’s operations. While payment of a regulatory fee does not necessarily provide any direct benefit from payment of the fee, there must be a "nexus" between the activity and the adverse consequences addressed by the fee. Common examples of regulatory fees include inspection fees and business license fees designed to reimburse a local agency for the cost of moni toring the business and enforcing compliance with City code.

 Rental fees are charged for the rental of public property and include the rental of real property, parking spaces in a public parking lot, or the rental of community facilities such as a recr eation or community room or picnic area. Rental fees are not subject to the general rule that the fee must bear a direct relationship to the reasonable cost of providing the service for which the fee is charged however, rental fees must be fair and reasonable.

 Penalties/Fines are payment required for non- compliance or failure to adhere to specific rules and/or requirements.

2 League of California Cities Website: Spring Meeting May 13-15, 1998Laurence S. Wiener, Esq.City Attorney of Beverly Hills and Westlake Village THE CITY ATTORNEY'S ROLE IN EVALUATING FEE STUDIES.

FY2023/24 Approved Budget

This document sets forth guidelines for:

 Establishing cost recovery goals;
 Determining the categories of cost recovery levels in which to categorize/organize fees;
 Methods for determining which ca tegory a fee falls under; and  Establishment and modification of fees and charges.

2. POLICY

A. Cost Recovery Goals
In setting user fees and cost recovery levels, the following factors will be considered:
3 1) The amount of a fee s hould not exceed the overal l cost of providing the

facility, infrastructure, or service for which the fee is imposed. In calculating that cost, direct and indirect costs may be included. That is:
 Costs which are directly related to the provision of the service; and  Support costs which are more gener al in nature but provide support for the provision of the service. For example, service fees can include reimbursement for the administrative costs of providing the service.

Development fees can include the cost of administering the program to construct public facilities th at are necessary to serve new development.

2) The method of assessing and collecting fees should be as simple as possible in order to reduce the administrative cost of collection.

3) Fees should be sensitive to the “market” for similar services.

In addition, in setting enterprise fund fees and cost recovery levels, the following factors will be considered:

4) The City will set fees and rates at levels which fully cover the total direct and indirect costs, including operations, capital outlay and debt service of the enterprise programs.

5) The City will review and adjust enter prise fees and rate structures as required to ensure that they remain appropriate and equitable.

B. Categories of Cost Recovery Levels in Which to Categorize/Organize Fees

There are five categories of cost recovery levels in which to classify fees:

3 Government Finance Officers Association Website, Best Practices in Public Budgeting, City of San Luis Obispo: User Fee Cost Recovery Goals, 2005.

FY2023/24 Approved Budget

1) Enterprise: Full direct and indirect cost recovery (100% of total costs) for enterprise services such as water, se wer, and solid waste, as well as impact/development fees.
2) High: Full direct cost recovery (81-100% of total costs). 3) Medium: Recovery between 41-80% of direct costs.
4) Low: Recovery between 0-40% of direct costs.
5) Other: Fees based on market, geography, assessment, project specific, legal limits, or specific Council policy.

The City may choose, for policy reasons, to set fees at less than full recovery.

For example, fees based on market, geography, assessment, project specific, statutory/legal limits, or s pecific Council policy. In some cases, the City will acknowledge that a subsidy is accept able, or even necessary to ensure program access and viability.

C. Methods for Determining Which Category a Fee Falls Under

Implementation of higher cost recovery levels is appropriate under the following conditions (up to 100% of the cost of the service or program):
 The service is regulatory in nature (e.g., building permits, plan check fees);  The service is similar to services provided through the private sector;  Other private or public sector alternativ es could or do exist for the delivery of the service;
 Over-use of the service is specifical ly discouraged (e.g., police responses to disturbances or false alarms might fall into this category); and  Over-use of the service or facility is a specialized use that could be provided at a lower cost if not for specific nature or service (e.g., lighted fields).

Lower cost recovery levels are appropriate under the following conditions:
 There is no intended relationship bet ween the amount paid and the benefit received. (It is likely that some recreation and human service programs fall into this category as it is expected that these programs will be subsidized by funds);
 Collecting fees is not cost-effectiv e or will significantly affects the accessibility to the service;
 The service is non-recurring, gener ally delivered on a peak demand or emergency basis, cannot be planned for and is not readily available from a private sector source (e.g., public safety services); and  Collecting fees would discourage co mpliance with regulatory requirements and adherence is primarily se lf-identified, and as su ch, failure to comply would not be readily detected by the City.

FY2023/24 Approved Budget

Other:
 Market pricing requires that there be a direct relationship between the amount paid and the level and cost of the service received or a direct relationship to actual prices being c harged for the service in the current market.
 Legal specifications and/or limitations to the amount that is charged.  Adopted Council Policy setting specific fee.

Factors to Consider
The extent to which the tota l cost of service should be recovered through fees depends upon the following factors:
 The nature of the facilities, infrastructure or services;  The nature and extent of t he benefit to the fee payer;  The effect of pricing on the demand for services; and  The feasibility of collection and recovery.

The chart below reflects these factors and the potential options for higher or lower cost recovery:4
The Nature of the
Facilities,
Infrastructure or
Services
The Nature and
Extent of the Benefit
to The Fee Payers
Effect of Pricing on
the Demand for
Services
Feasibility of
Collection and
Recovery
Higher Cost Recovery
In the case of fees for
facilities, infrastructure
and proprietary
services5, total cost
recovery may be
warranted.

When a particular facility
or service results in
substantial, immediate
and direct benefit to fee
payers, a higher
percentage of the cost
of providing the facility
or service should be
recovered by the fee.

Because the pricing of
services can
significantly affect
demand, full cost
recovery for services is
more appropriate when
the market for the
services is strong and
will support a high level
of cost recovery.

In the case of impact
fees, which can be
collected at the time
of issuance of a
building permit, ease
of collection is
generally not a factor.

Lower Cost Recovery
In the case of
governmental services6,
it may be appropriate for
a substantial portion of
the cost of such
services to be borne by
the City’s taxpayers,
rather than the
individual users of such
services.

When a particular facility
or service benefits not
only the fee payer but
also a substantial
segment of the
community, lower cost
recovery is warranted.

If high levels of cost
recovery affect
accessibility to or
negatively affect the
delivery of services to
lower income groups,
this should be
considered based on
the overall goals of the
program being
implemented.

Some fees may prove
to be impractical for
the City to utilize if
they are too costly to
administer.

4 Government Finance Officers Association Website, Best Practices in Public Budgeting, City of Fort Collins, CO: User Fee Policies, 2005.
5 Proprietary services are those which are provided for the benefit and enjoyment of the residents of the City 6 Governmental services are those which are provided by the City for the public good such as regulating land use, maintaining streets, and providing police and fire protection.

FY2023/24 Approved Budget

D. Establishment and Modification of Fees and Charges
Fees will be reviewed and updated on an ongoing basis as part of the annual budget process to ensure that they keep pace with changes in the cost-of-living as well as changes in methods or levels of service delivery. At the beginning of the budget process each department will submit a list of proposed adjustments to their section of the master fee sched ule. Each service must be assigned a target cost recovery level as defined above.

Maintaining competitive status and compar ability with other cities should be considered when determining new fee levels. Those fees that are proposed for adjustment should be be nchmarked against neighb oring jurisdiction fee schedules or appropriate service markets. The benchmark analysis should be taken into consideration when making final pricing decisions.

However, the City may choose, for policy re asons, to set fees at less than full recovery. (for example, fees based on market, geography, assessment, project specific, statutory/legal limits or specif ic Council policy). As stated above, in some cases, the City will ac knowledge that a subsidy is acceptable, or even necessary to ensure program access and viability. Where appropriate, fees that have not been increased in some time shou ld have increases phased in over several years to avoid ‘sticker shock’ increases.

If a particular fee is not adjusted in the budget process, to the extent feasible and/or appropriate, it should be increased biennially by a CPI factor to keep pace with inflation. Beginning in FY2014/15 the City will use the State of California Department of Industrial Relations Consumer Price Index (CPI) which is the same index used by the County As sessor to adjust the annual property tax roll for inflation.

Biennially, the Finance Department shall determine the percentage change in this index and apply the increase or dec rease to the master fee schedule, rounding up to the nearest whole dollar. Certain fees are exempt from an index adjustment, such as fees set by the State of California, percentage-based fees or those that have been identified as inappropriate for indexed fee increases (e.g., feasibility or fees that are based on market for services). Exempt fees are noted in the master fee sch edule. Council may consider fee issues outside of the annual budget process on a case-by-case basis.

The City should conduct a comprehensive cost of service analysis every five to seven years to ensure fees and charges are set appropriately. Generally, fees may be adjusted based on supplemental analysis whenever there have been significant changes in the method, level or cost of service delivery. For example, changes in processes and technology change the staff time required to provide services to the public. A cost-of-service study will identify and quantify these changes.

FY2023/24 Approved Budget

3. Proposition 26

Proposition 26, the “Stop Hidden Taxes Init iative,” was passed by the voters on November 2, 2010, to amend Article XIII C of the State Constitution. According to the ballot measure, the int ent of the measure is to ensure the effectiveness of Propositions 13 and 218 by prov iding a definition of a “t ax” for state and local purposes “so that neither the Legislature nor local governments can circumvent these restrictions on increasing taxes by simply defining new or expanded taxes as ‘fees.” Accordingly, under Proposition 26 a tax has been very broadly defined.

Tax Defined:
“Tax” now means “any levy, charge, or exaction of any kind imposed by a local government, except for the following seven categories of charges:

Exception 1 – Benefit Conferred or Privilege Granted
A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.

Examples:
o Residential parking permit fees
o Professional licenses
o Business improvement assessments
Exception 2 – Government Service or Product
A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.

Examples:
o User fees for park and recreation programs
o Weed abatement fees
o Sidewalk curb repairs
Exception 3 – Licenses and Permits
A charge imposed for the reasonable regu latory costs to a local government for issuing licenses and permits , performing investigations, inspections, and audits, enforcing agricultural mark eting orders, and the admin istrative enforcement and adjudication thereof.

Examples:
o Building inspections
o Cardroom license
o Business licenses

FY2023/24 Approved Budget

Exception 4 – Use of City property
A charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.

Examples:
o City-owned parking lots
o Swimming pools
o Convention Center rentals
o Golf green fees
Exception 5 – Fines and Penalties
A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government as a result of a violation of law.

Examples:
o City Code fines and pena lties (e.g., 1.28.020)
o Parking fines
Exception 6 – Property Development Charges
A charge imposed as a condition of property development.

Example:
o Development impact fees
Exception 7 – Proposition 218 Fees
Assessments and property related fees imposed in accordance with the provisions of Proposition 218, Article XIII D.

Examples:
o Utility fees for water, sewe r, drainage, and solid waste o Street lighting assessments
Burden of Proof:

The paragraph following the seven enumerated exceptions states:
“The local government bears the burden of proving by a preponderance of the evidence [1] that a levy, charge, or other exaction is not a tax, [2] that the amount is no more than necessary to cover the reasonable costs of the government activity, and [3] that the manner in which those costs are allocated to a payor bears a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.” The latter two requ irements only apply to the first three exceptions.

Thus, with the burden of proof now shifted to the City, that requires each department to take into consideration how it aims to prove that a proposed fee or fee increase is not a tax. The following analytical framework can assist in this regard.

FY2023/24 Approved Budget

Burden of Proof: A 3-step Analysis

1. The City must make a threshol d determination whether one of the exceptions applies.
o If none apply, it is a tax subject to voter approval.

2. If Exceptions 1, 2, or 3 apply, the City must also show that the fee revenue will not exceed the reasonable costs of providing the related governmental activity (at the aggregate level).

3. Finally, the City must show that the costs are fairly allocated to the individual payors.

FY2023/24 Approved Budget

Budget and Audit CommitteeMarch 26, 2024

Budget and Audit Committee
March 26, 2024