DATE: FEBRUARY 25, 2025
DEPARTMENT: FINANCE
FROM: RENE MENDEZ, CITY MANAGER SELINA ANDREWS, FINANCE DIRECTOR TITLE: FISCAL YEAR 2024-25 mid-year BUDGET review & SUPPLEMENTAL APPROPRIATION REQUESTS RECOMMENDED MOTION:
Approve a Resolution receiving the FY 2024-25 Mid-Year budget performance review; and authorize budget adjustments as recommended in the budget performance review.
EXECUTIVE SUMMARY:
The Fiscal Year (FY) 2024-2025 Adopted Operating and Capital Budgets for the City of Salinas totaled $259.7 million. With this funding, the City continues delivering a wide range of services to Salinas’ residents and businesses. The Adopted Budgets focused spending on critical community services and maintained existing services levels, enhanced service delivery in limited areas, and invested in the City’s infrastructure.
The Administration is closely monitoring the City’s budget across over 150 funds to ensure that the current year revenues and expenditures meet expectations, which is necessary to maintain budget stability and avoid service disruptions in any given year. Through the first six months of FY 2024-25, economic conditions and many revenue categories are performing generally at or slightly above expectations, and overall expenditures are tracking at authorized levels.
BACKGROUND:
The City’s Fiscal Year 2024-25 operating and capital budgets were adopted on June 11, 2024. After budget adoption each year, the City reviews and analyzes its revenues and expenditures compared to the adopted budget and reports its findings to the City Council. The FY 2024-25 budget was adopted by balancing revenues with expenditures, however through Council actions, additional expenditures have been appropriated.
The annual Adopted Budget is a financial plan predicated on the best information available at the time it is prepared. As with any budget, however, changing conditions create the need to modify the original plan. City Administration has designated mid-year as the appropriate time to perform a comprehensive review of the current year’s budget, and the Mid-Year Budget Review as the appropriate vehicle for consideration of any revisions to the budget. This Mid-Year Budget Review Report contains a comprehensive review of the status of the City’s FY 2024-25 Operating Budget as modified through December 2024.
DISCUSSION:
Financial Forecasting Model
The financial forecast model includes revenues and expenditure projections based on the most current information available, considering historical trends, current-year performance through mid-year, projected development activity, and scheduled changes in various fees and rates. Additionally, the forecast model indicates a conservative revenue estimate from the Amazon Fulfillment Center beginning FY 2026-27. The Amazon project is currently underway and while this revenue is yet to materialize, it remains important to reflect any estimated revenues. However, there is a need to be cautious and not adjust spending too early in anticipation of this revenue source is critical. It is also important to including this estimate to highlight the need for generating additional revenue sources (see below) or increasing existing revenues via a robust economic development program and effort. For example, as can be seen in the model, if the Amazon revenue does not materialize the projected deficit increases significantly beginning in FY 2026-27.
It is important to note that Measure G is set to expire in 2030. Measure G revenue is reflected in the forecast model illustrating projected revenue and net impact in 2030 with and without this revenue. One column represents general fund revenue with Measure G and the column farthest to the right represents general fund revenue without Measure G. This is illustrated in the forecast model to signal that work on renewing/extending this revenue source needs to begin early to be ready for the 2026 Primary Election.
The FY 2025-26 and subsequent year expenditure projections include estimated citywide savings and adjustments to reflect labor agreements, CalPERS pension contributions, retiree healthcare contributions, scheduled debt service payments, and contractual obligations. It is important to note that the City’s labor agreements are not scheduled to expire concurrently and therefore will expire at different years. Compensation increases for Police Manager’s Association, Department Directors, Confidential Management, and Confidential Non-Management have been assumed in the FY 2025-26 and FY 2026-27 expenditure projections. It is also important to note that no compensation increases are projected for those labor agreements that have not been negotiated.
As this forecast is preliminary, the expenditures shown on the table represent a “base budget” that delivers the existing level of services with no assumed staffing increases. These expenditure levels may increase as the FY 2025-26 Proposed Operating Budget is developed with the benefit of additional information, including any recommendations for service level enhancements.
Importance of Fiscal Models
As was mentioned above, financial models are based on the best information available at a specific point in time and conservative assumptions which can change rapidly. For example, we still don’t have a good handle on what will be the economic impact, whether positive or negative, because of changes in Federal Policies. Nevertheless, carefully monitoring revenue and/or cost changes will allow us to proactively adjust the model and work with the Council to react early if needed.
Revenue Enhancement Opportunities
California cities have several options to provide or increase the financial resources available to address community services and needs. In addition to the financial forecast, staff are reviewing new revenue and revenue enhancement opportunities. A list of certain revenue types is provided below.
Type
Current Salinas Rate
Who is taxed?
Fiscal Impact
Transient Occupancy Tax (TOT)
10%
Hotel guest
Low
Sales Tax (Measure G)
9.250%
Purchaser
High
Property Transfer
$1.65 per $1,000
Property seller
High
Utility Users Tax (UUT)
Telecom & Video 5%
Gas, Electricity & Water 6%
Telecom, electricity, gas & water ratepayer
Moderate
Business License Tax
Employee-based &
Gross receipts
Business owner
Moderate
Community Facilities District
N/A
Property owners
High
General Funds Summary - Revenue Analysis
Overall, General Funds revenues are trending at 53.3% of the budgeted amount through December 31, 2024. This includes December projections for the Sales and Use Tax revenues as those will be received at the end of February. The Other Revenues category includes investment earnings and is currently overstated due to timing, as the full amount recorded in the general fund needs to be disbursed to all funds on a pro-rated share basis. A revenue summary of the General Funds is provided below.
Discussion of Major General Funds Revenue Types
Sales and Use Tax (General, Measures E and G)
Sales and use tax is the largest revenue source for the City’s General Funds, accounting for 52% of the budgeted General Funds projected revenues for FY 2024-25. The City currently receives 2.5% of every 9.25% of sales tax paid per dollar on retail sales and taxable services transacted within Salinas, which includes Measures E and G. Measure E accounts for half percent (0.5%) and was extended with no ending date on November 6, 2012, while Measure G accounts for one percent (1.0%) and was approved on November 4, 2014 for 15 years.
Sales tax estimates are based on actual sales tax data and annual sales tax estimates for five years are provided by the City’s consultant, Hinderliter, de Llamas & Associates (HdL). In addition to the brick-and-mortar sales tax generation, HdL estimates include several online sales tax projections. The 2018 Wayfair Decision resulted in e-commerce vendors utilizing the Amazon platform to collect sales tax based on destination; however, items shipped directly from Amazon fulfillment centers are collecting sales tax based on the point of distribution. Regular sales tax collected through online transactions are distributed through the Monterey County pool for which the City receives a pro rata share of the sales tax generated in the County for that particular quarter. Total annual sales tax estimates include $39.4 million in proceeds from regular sales tax and $34.4 million in proceeds from Measure G (one cent) and $17.2 million from Measure E (one-half cent). Actual receipts net of administrative fees collected by the State will be confirmed at the close of the fiscal year. Based on current projections, staff do not recommend a change in budgeted Sales & Use Tax collections.
Property Tax and Motor Vehicle in Lieu Fee (VLF)
Property tax and VLF are the second largest revenue source for the City and comprise approximately 23% of total City General Funds estimated revenues for FY 2024-25. Property and VLF tax estimates are based on property tax data provided by HdL. Property tax is levied by the Monterey County Assessor’s Office at 1% of a property’s assessed value, of which the City receives approximately $0.1466 cents per dollar paid on property located within the municipal limits of Salinas. In compliance with Proposition 13, the assessed value of real property is based on the 1975/76 assessment roll value, adjusted by a 2% inflation factor thereafter. However, when property changes hands or new construction occurs, property is then reassessed at its current market value.
Monterey County provides property tax collection updates and projections throughout the year. The current amount received for the first six months of the year is slightly ahead of pace compared to the adopted budget. This includes Redevelopment Agency (RDA) Residual Apportionment, VLF allocation, secured property tax estimates, property transfer tax, and the Educational Revenue Augmentation Fund (ERAF) estimates.
The City has been monitoring ongoing developments regarding the distribution of excess ERAF funds. A portion of property tax revenue goes to the ERAF to support local school districts. When the amount contributed to ERAF is more than the minimum cost of funding local schools, excess funds have traditionally been returned to the county, cities, and special districts.
Property tax distributions are largely received in the second and fourth quarters. Second quarter receipts are trending slightly higher than those received during the second quarter of the previous fiscal year. Based on current County projections, staff do not expect a change in the budgeted General Property Tax and Vehicle in Lieu Fee.
Franchise Fees
Franchise fees are collected by the City for the privilege of operating a utility service within Salinas, and as a fee in lieu of a business license tax. Franchise fees are currently received for gas, electric services, recycling, solid waste collection, and video services. Franchise fees represent 6% of projected General Funds revenues in FY 2024-25.
Historically, franchise payments are not remitted equally throughout the fiscal year; therefore, second quarter receipts are not necessarily predictive of future receipts. Total franchise fee revenues are trending slightly lower than the prior year. Due to the remittance timing, staff do not recommend a change to this revenue source at this time.
Transient Occupancy Tax (TOT)
TOT is an important revenue source for the City and comprises approximately 2% of total City estimated revenues, amounting to $3.3 million for FY 2024-25. The City levies a 10% transient occupancy tax (TOT) on all hotel and motel rooms within the municipal limits of Salinas.
While the City was slower to rebound in leisure “staycation” travel and had not experienced improvements in business travel at the same pace as other cities, it is now experiencing a modest increase in TOT revenues during the current year.
Charges for Services
City Service revenues consist primarily of planning, building, inspections, and engineering fees assessed on local building and development activity. Development fees and charges are assessed based on cost recovery formulas, which reflect approximate costs of providing these regulatory services.
Charges for Services are trending higher than in the second quarter compared to the previous fiscal year, but still behind the adopted budget pace. Typically, development fees are collected in advance for projects and recognized as revenue in the fiscal year the work is performed. Additionally, administrative fees for services are not included in the current year’s amount due to timing. Staff do not recommend a change to this revenue source at this time.
Utility User Tax (UUT)
UUT are utility taxes which cities may impose on users’ consumption of certain utility services and consists of 7% of the City’s General Funds revenue. Salinas voters passed Measure H in the November 4, 2014, election to reduce the tax on telecommunications and video users from 6% to 5% and modernized the ordinance to include wireless and other technologies. Salinas’ population has a direct correlation with UUT as it’s tied to utility usage. While FY 2024-25 second quarter receipts are trending higher, staff does not recommend a budget adjustment at this time.
Other Revenues
“Other Revenues” comprises all other general fund revenues not specifically identified in the above, including investment earnings, business licenses, and permitting fees. This revenue accounts for 8% of the City’s total General Funds revenue. Total Other Revenues appear ahead of budgeted pace at this point in the fiscal year, mainly due to the timing of investment earnings allocation as explained earlier in this staff report. Therefore, staff do not recommend a budget adjustment at this time.
General Funds Summary - Expenditure Analysis
For FY 2024-25, General Funds Operating expenditures (not including transfers out) are programmed at $151.9 million. The delivery of City services is highly dependent on personnel which comprises 77% of budgeted General Funds expenditures for FY 2024-25. During the fiscal year, the City Council approved several budget adjustments, which are tracked against the Adopted Budget. The net effect is an Amended Budget. Most General Funds expenditure totals are trending in accordance with or below the Amended Budget, with total operational expenditures at the end of the second quarter at approximately 50% of the Amended Budget. With six months of data now available, staff expect that the next six months of expenditures will need to be amended as identified in this Mid-Year review. If additional unexpected costs occur, they will require future Council action.
As with most municipalities, services are provided directly by employees to the City’s residents, businesses, and visitors. As a service delivery enterprise, the cost of salaries and benefits are a significant portion of the budget. Mid-year actual salaries and benefits are trending at 53% of the adopted budget amount for personnel costs. However, this includes the City prepaying the CalPERS unfunded UAL in July, totaling $17.3M in the general funds. This action was necessary for the City to achieve significant cost savings but does inflate the percentage spent through the first half of the fiscal year. Non-Departmental expenditures, including debt service, are ahead of pace due to principal and interest payments paid in the first half of the year and only interest in the second half. Two expenditure tables of the General Funds are provided below. One consists of Citywide salaries & benefits and supplies & services; the second identifies how each department is trending compared to budgeted amounts.
Discussion of Selected General Funds Departments
Police
The Department ensures public safety by providing law enforcement services, building community partnerships, and engaging the community in problem solving.
Staffing levels remain a challenge for the Police Department with dedicated ongoing recruitment for open positions. Whenever feasible, open positions are filled with temporary employees until positions are filled. The Department expenditure is trending at 53%, mostly due to the CalPERS UAL prepayment, as discussed earlier. Staff are requesting a supplemental appropriation of $32,000 to fund a full-time Forensic Specialist position for the remainder of the fiscal year. It is important to note that the increase in FTE will result in additional ongoing expenditures.
Fire
The Salinas Fire Department provides 24-hour prevention, response, mitigation, and recovery efforts for fires, hazardous materials, emergency medical services, traffic collisions, aircraft emergencies, and all other emergency and non-emergency service requests within the City of Salinas corporate limits. The primary goal of the Fire Department is the protection of life, property, and the environment for those that live, work, and visit the City of Salinas. All divisions of the fire department; Administration, Prevention, Training/Special Operations, Disaster Preparedness, Vehicle Maintenance, Emergency Medical Services, Hazardous Materials Response, and Suppression and Rescue, work together to support this goal. The Department expenditure is trending at 53%, again due to the CalPERS UAL prepayment. Staff are requesting an additional appropriation of $154,000 for City Hall West Wing furniture needs, anticipated increase in plan check activity, fire hydrant repairs, and vehicle maintenance.
Public Works
The Public Works Department constructs and maintains the City’s facilities, roadways, right-of-way, and other infrastructure with the goal of ensuring they are safe, functional, and well maintained. Department expenditures are trending at 47%, however, the remaining funds have been identified and programmed by the department for various needs. Staff are requesting an additional appropriation of $363,000 for compost material to meet SB1383 Organic Waste Product procurement requirements issued by the state, Republic audit charges, and to extend the urban forestry contract.
Non-Departmental
The Non-Departmental budget supports community programs, the City's repayment of outstanding bond issues, the cost of elections, the cost of operating the 65 West Alisal Street facility, and various operating costs that are not directly charged to a specific departmental Operating budget. Within the Non-Departmental budget are also community programs that support certain youth activities, families, prevention and education as well as the Intermodal Transportation Center (ITC). Department expenditure is trending at 57% due to paying a larger portion of both the City-wide Emergency Services Contract (911) and the Animal Services Contract in the first half of the fiscal year. Per standard process, staff is requesting an additional appropriation of $178,000 for unanticipated or emergency expenditures City-Wide through the end of the fiscal year.
FY 2024-25 Recommended Budget Adjustments
Budget adjustments are recommended for expenditures identified in Exhibit A.
CEQA CONSIDERATION:
Not a Project. The City of Salinas has determined that the proposed action is not a project as defined by the California Environmental Quality Act (CEQA) (CEQA Guidelines Section 15378).
CALIFORNIA GOVERNMENT CODE §84308 APPLIES:
No.
STRATEGIC PLAN INITIATIVE:
Monitoring the growth of revenues and expenditures, including determining when supplemental appropriations are necessary, supports the City of Salinas Strategic Plan 2022-2025 goal of Effective and Culturally Responsive Government.
DEPARTMENTAL COORDINATION:
This staff report was coordinated by Finance and the City Manager’s Office.
FISCAL AND SUSTAINABILITY IMPACT:
If approved, the budget adjustments requested would increase the City’s combined general funds appropriations by $727,000 within the General Funds identified in the table below. Staff are not requesting an increase in revenue appropriations therefore, fund balance will be used to cover the increase in appropriations.
Fund
Appropriation
Appropriation
Name
Total Appropriation
Amount for recommendation
FY 24-25 Operating Budget Page
Last Budget Action (Date, Resolution)
1000
General Fund
various
$0
$482,000
N/A
N/A
1200
Measure G
various
$0
$245,000
N/A
N/A
ATTACHMENTS:
Resolution – Fiscal Year 2024-25 Mid-Year Budget Adjustments Exhibit A – Fiscal Year 2024-25 Supplemental Appropriation Requests Fiscal Year 2024-25 Mid-Year Budget PowerPoint Presentation Page | 3
Page | 1
CITY OF SALINASCOUNCIL STAFF REPORTCITY OF SALINASCOUNCIL STAFF REPORT
CITY OF SALINAS
COUNCIL STAFF REPORT
CITY OF SALINAS
COUNCIL STAFF REPORT