PSFSS COMMITTEE: 10/20/2022
ITEM: (c)1
TO: PUBLIC SAFETY, FINANCE, AND
STRATEGIC SUPPORT COMMITTEE
FROM: Jim Shannon
SUBJECT: BI-MONTHLY FINANCIAL REPORT
FOR JULY/AUGUST 2022
DATE: October 11, 2022
Approved Date
RECOMMENDATION
Accept the Bi-Monthly Financial Report on actual revenues and expenditures as compared to the 2022-2023 Budget for the two months ending August 2022.
OVERVIEW
The Bi-Monthly Financial Report for July/August 2022 was jointly prepared by the City Manager’s Budget Office and the Finance Department and is presented for the Public Safety, Finance and Strategic Support Committee’s review. The City Manager’s Budget Office has analyzed actual expenditures as compared to the 2022-2023 Modified Budget and the Finance Department has prepared a report that reflects the financial results for the two months ending August 2022.
Through the first two months of the fiscal year, revenues and expenditures were generally tracking within the budgeted estimates in the majority of City funds. The Administration will continue to closely monitor economic conditions and the performance in all City funds, bringing forward budget adjustments to the City Council during the year as appropriate. The following are key highlights of this report:
• While it is very early in the fiscal year and there is minimal data, overall, General Fund revenues appear to be tracking within estimated levels in the General Fund. • Overall, General Fund expenditures tracked within estimated levels through August.
Expenditures will continue to be controlled and monitored to ensure appropriations stay within approved levels.
• As a result of the struggling local real estate market, Construction and Conveyance Tax (C&C) revenue and Real Property Transfer Tax revenues are performing significantly below prior year levels. However, while Real Property Transfer Tax collections are currently anticipated to meet budgeted levels, C&C Tax receipts may fall below budgeted levels. As appropriate, budget adjustments may be brought forward for City Council consideration as part of the 2022- 2023 Mid-Year Budget Review (released on January 31, 2023). 10/12/2022
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OVERVIEW (CONT’D.)
• Building and Structure Construction Tax collections are anticipated to end the year within or above budgeted levels; however, Construction Excise Tax collections are experiencing yearover-year declines and may fall below budgeted levels. Both of these revenue sources are dependent on construction activity, which has grown compared to prior year levels.
• Transient Occupancy Tax activity levels are continuing to experience gains after the complete collapse of hotel room demand during the pandemic. At this early point in the year, it is anticipated to end the year above budgeted levels.
• At this early point in the fiscal year, all Development Fee Programs revenues, with the exception of the Planning Fee Program, are anticipated to meet or exceed budgeted levels by year-end.
• The Norman Y. Mineta San José International Airport (SJC) has enplaned and deplaned 2.2 million passengers through August, an increase of 40.9% from the figures reported through August of the prior year. This year-over-year increase is due to the ongoing recovery of passenger traffic, which was significantly impacted as a result of the pandemic. • Through August 2022, SJCE’s Energy Sales (including encumbrances) totaled $191.3 million, which reflects 64.4% of the total Modified Budget. However, as a significant amount of funds for contracted energy are encumbered early in the year, it is anticipated SJCE will end the year within budgeted levels.
• The Administration will continue to report to the City Council all significant developments through future Bi-Monthly Financial Reports and the 2022-2023 Mid-Year Budget Review.
Economic Environment
Silicon Valley continues to show positive economic performance. The results of the strong local economy are reflected in positive employment figures. The August 2022 employment level in the San José-Sunnyvale-Santa Clara Metropolitan Statistical Area (San José MSA) of 1.18 million was 4.6% above the August
2021 level of 1.12 million.
Between August 2021 and
August 2022, employment
in the San José MSA
increased by 52,200 jobs, or
4.6%. This increase
includes professional and
business services
increasing by 14,200 jobs;
leisure and hospitality jobs
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OVERVIEW (CONT’D.)
expanding by 14,000 jobs; information sector growing by 8,100 jobs; private educational and health services jobs increasing by 7,800; and the manufacturing sector expanding by 5,700 jobs.1 The local unemployment rate increased
slightly in August 2022 (2.4%) from July
2022 (2.2%). However, the rate remains
significantly below the prior year
unemployment rate of 4.7%. Additionally,
in this region, the August 2022
unemployment rate continues to be lower
than the unadjusted unemployment rate for
the State (4.1%) and the nation (3.8%).
Overall construction activity through August
2022 increased 6.7% from prior-year levels,
primarily due to activity for the commercial and
industrial land use categories experiencing yearover-year increases from the prior year, especially for industrial activity. The 2022-2023 Adopted
Budget was developed with the expectation that
development activity would increase slightly from
the levels experienced in 2021-2022. If current
trends continue, construction activity would
moderately outperform the activity projected by the Planning, Building and Code Enforcement Department in the 2023-2027 Five-Year Forecast, which was released in February 2022.
Through August, residential permit valuation has increased 0.9% from prior-year levels ($52.6 million in 2022-2023 from $52.1 million in 2021-2022). Residential activity through August included 325 multi-family units and 95 units of single-family construction for a total of 420 units.
Major projects for July and August include permits for a six-story affordable multi-family residence with 245 units on North 1st Street and a nine-story affordable multi-family residence with 80-units on 21st Street.
Commercial valuation through August 2022 was 1.3% higher than the 2021-2022 level ($105.1 million in 2022-2023 from $103.8 million in 2021-2022). Additions/alterations accounted for 77% of the commercial activity for July and August ($81.0 million). A notable project for July and 1 State of California Employment Development: Labor Market Information Division Press Release, September 16, 2022
Unemployment Rate (Unadjusted)
August
2021
July
2022
August
2022
San Jose
Metropolitan
Statistical Area*
4.7% 2.2% 2.4%
State of California 7.2% 3.9% 4.1%
United States 5.3% 3.8% 3.8%
* San Benito and Santa Clara Counties Source: California Employment Development Department.
** August 2022 estimates are preliminary and may be updated.
Private Sector Construction Activity
(Valuation in $ Million)
August
2021
(YTD)
August
2022
(YTD)
%
Change
Residential $52.1 $52.6 0.9%
Commercial $103.8 $105.1 1.3%
Industrial $84.6 $98.8 16.8%
TOTAL $240.4 $256.4 6.7%
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OVERVIEW (CONT’D.)
August includes a permit for 8,185 square feet of office space on the top floor of an affordable housing project located on 21st Street.
Industrial construction valuation through August was 16.8% higher than prior-year levels, with receipts totaling $98.8 million in 2022-2023 and $84.6 million in 2021-2022. Alterations accounted for all the industrial activity in July and 72% of the activity for July and August.
While construction activity and employment levels are performing positively, an area of concern that will need to be carefully monitored over the next year is the local real estate market. Beginning in mid-2020, the local real estate market performed extremely strong; posting record high median single home prices, very strong sales activity, and properties sold quickly. However, as of December 2021, property sales started to dip, with year-over-year transactions (from the same time period in the prior year) declining most months. Further, in order to combat high inflation rates, the Federal Reserve has indicated they will continue to implement aggressive monetary policies by raising interest rates. As interest rates increase, mortgage rates will follow, which may further negatively impact the number of property sales. So far, though, while property sales have continuously dropped, the median home price for single family homes has remained strong.
According to data from
the Santa Clara County
Association of
Realtors, in August
2022, the median
single-family home
price totaled $1.40
million, which is
slightly (2.7%) below
the August 2022 price
of $1.44 million.
However, homes are
staying on the market
for longer periods of
time before selling.
The average days-onmarket through August
2022 totaled 22 days, which is significantly above the average of 13 days experienced year-to-date through August 2021. In addition, as discussed, property sales activity has been declining.
Property Sales for the first two months of the fiscal year dropped almost 40% compared to the prior-year sales. Local real estate activity will continued to be closely monitored with updates being provided in future bi-monthly financial reports and the 2022-2023 Mid-Year Review, which will be released on January 31, 2023.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OVERVIEW (CONT’D.)
On a national level, after three consecutive months of declines, consumer confidence increased in August. Lynn Franco, Senior Director of Economic Indicators at The Conference Board, stated “Consumer confidence increased in August after falling for three straight months. The Present Situation Index (consumers’ assessment of current business and labor market conditions) recorded a gain for the first time since March. Concerns about inflation continued their retreat but remained elevated. Meanwhile, purchasing intentions increased after a July pullback, and vacation intentions reached an 8-month high. Looking ahead, August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term.”
2 Economic conditions will continue to be closely monitored and will be factored into the assessment of the City’s performance in 2022-2023 as well as the development of the 2024-2028 General Fund Forecast that will be released in February 2023.
GENERAL FUND
REVENUES
General Fund revenues through August 2022 totaled $377.7 million, which represents a decrease of $20.7 million from the August 2021 level of $398.5 million. This decrease is primarily attributable to lower Real Property Transfer Tax proceeds ($13.9 million). Real Property Transfer Tax collections totaled $110.0 million in 2021-2022 due to the large number of high-dollar commercial real estate sales. Due to the tightened real estate market that was previously discussed, Real Property Transfer Tax activity is anticipated to decrease in 2022-2023, which the 2022-2023 Adopted Budget estimate totaling only $65.0 million. Other categories that are experiencing yearover-year declines include Other Revenue ($14.6 million; which is primarily due to the timing of the Tax and Revenue Anticipation Notes proceeds), Licenses and Permits ($2.4 million), Sales Tax ($1.3 million), Fees, Rates and Charges ($1.1 million), and Revenue from the State of California ($1.0 million). These decreases are primarily attributable to the timing of payments.
Offsetting the revenues performing below prior year levels, there are several categories experiencing increases, including, Utility Tax ($6.6 million), Revenue from the Federal Government ($2.1 million), and Overhead, Transfers, and Reimbursements ($3.5 million). These higher collections are due to the timing of payments and higher activity levels.
Based on activity levels through August 2022, several revenue categories are anticipated to exceed budgeted levels, including Property Tax and Transient Occupancy Tax, and Utility Tax. However, it is important to note that only very preliminary information is currently known for all revenue categories. If warranted, budget adjustments to align revenue with revised estimates will be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review, which will be released on January 31, 2023.
2 The Conference Board, Consumer Confidence Survey, August 30, 2022
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
KEY GENERAL FUND REVENUES
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Property Tax $ 427,000,000 $ 0 $ 0
The Property Tax category consists of Secured Property Tax, Unsecured Property Tax, SB 813 Property Tax (retroactive collections back to the point of sale for reassessments of value due to property resale), Aircraft Property Tax, and Homeowner’s Property Tax Relief. Based on the most recent information that has been received from Santa Clara County, Property Tax receipts in 2022- 2023 are estimated at $430.8 million, which is approximately 1% higher than the 2022-2023 budgeted estimate of $427.0 million. Additionally, the estimated revenue reflects overall growth of 4.0% from the 2021-2022 collection level of $414.1 million. This increase is primarily due to higher Secured Property Tax receipts (4.9%) and Aircraft Property Tax (28.3%), partially offset by lower SB 813 (-30.0%) and Unsecured (-5.4%) Property Tax revenues. The Additional information about each of the Property Tax sub-categories is provided on the following pages.
Secured Property
Taxes represent
over 90% of the
revenue in the
Property Tax
category. The
Secured Property
Tax category
includes general
Secured Property
Tax, Successor
Agency to the
Redevelopment
Agency (SARA)
Residual Property
Tax, and
Educational Revenue Augmentation Fund (ERAF) revenues. Based on the most recent information provided by Santa Clara County, Secured Property receipts are anticipated to total $406.9 million in 2022-2023. The estimate is comprised of General Secured Property Tax receipts of $353.4 million, excess ERAF funds of $35.2 million, and SARA Residual Property Tax receipts of $18.3 million. The Secured Property Tax receipt estimate is $2.3 million higher than the Adopted Budget estimate; however, as it is still very early in the year, this estimate will likely change as additional information is known.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
As mentioned above, the general Secured Property Tax estimate totals $353.4 million in 2022- 2023, which assumes growth of approximately 6.8% from the 2021-2022 collection level. This growth primarily reflects an increase in assessed value due to the California Consumer Price Index (CCPI) increase of 2% and increased valuation due to changes in ownership or new construction of 4.8%. Under Proposition 13, assessed values of all real property adjust with the CCPI, with a 2% limit, unless there is a change in ownership, new construction, or a property has received a Proposition 8 adjustment.
As a result of the SARA bond refunding that occurred in December 2017, the City began receiving a residual property tax distribution. In 2022-2023, receipts are estimated at $18.3 million, which is consistent with the 2021-2022 collection level, but is $1.3 million below the 2022-2023 Adopted Budget estimate of $19.6 million.
Beginning in 1992, agencies have been required to reallocate a portion of property tax receipts to the ERAF, which offsets the State’s General Fund contributions to school districts under Proposition 98. Once there are sufficient funds in ERAF to fulfill obligations, the remainder of the funding is returned to the taxing entities that contributed to it, which generally occurs in March of each fiscal year. In 2022-2023, receipts are estimated at $35.2 million, which is slightly higher than the 2022-2023 budget estimate of $35.0 million, but is $3.6 million below the 2021-2022 collection level of $38.9 million.
The Unsecured Property Tax category refers to property that can be relocated and is not real estate. The most common forms of unsecured property include boats, business personal property, and undeveloped land. The 2022-2023 Budget estimate of $14.5 million allows for a drop of approximately 2% from the 2021-2022 collection level of $14.8 million. The preliminary estimate from Santa Clara County for 2022-2023 totals $14.0 million, which is slightly lower than the budgeted estimate.
The SB 813 Property Tax category represents the retroactive taxes reassessed property valuation from the period of resale to the time that the Santa Clara County Assessor formally revalues the property. The 2022-2023 Adopted Budget estimate of $4.0 million is well below the 2021-2022 actual collection level of $7.5 million as collections in this category ended 2021-2022 stronger than anticipated. The preliminary 2022-2023 estimate from Santa Clara County for this category of $5.3 million is approximately $1.3 million above the budgeted estimate.
Aircraft Property Tax receipts are typically received in October of each year. The 2022-2023 Adopted Budget estimate of $3.0 million is consistent with the 2021-2022 receipts but is below the $3.8 million estimate from Santa Clara County.
In the Homeowners Property Tax Relief category, revenues in 2022-2023 are expected to be at the budgeted estimate of $900,000, which is consistent with the 2021-2022 collection level.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Sales Tax $ 331,000,000 $ 8,400,411 $ 9,724,345
The Sales Tax category includes General Sales Taxes, Local Sales Taxes, and Proposition 172 Sales Taxes. The 2022-2023 Budget estimate totals $331.0 million, which is 2.4% above the 2021-2022 receipts of $323.1 million.
Information related to Sales
Tax payments is distributed
from the California
Department of Tax and Fee
Administration (CDTFA)
four times throughout the
year: November
(representing JulySeptember activity),
February (representing
October-December activity),
May (representing JanuaryMarch activity), and August
(representing April-June
activity). The first Sales Tax
payment for 2022-2023 will not be received until November 2022. Once the payment is received and analyzed, additional information will be included in future Bi-Monthly Financial Reports and the 2022-2023 Mid-Year Budget Review. Additional information about each of the Sales Tax subcategories is provided below.
General Sales Tax is the largest driver of the Sales Tax category and accounts for over 80% of all Sales Tax receipts. The 2022-2023 General Sales Tax estimate was built on the assumption that 2021-2022 receipts would total $261.0 million and grow to $268.0 million in 2022-2023. This estimate assumed moderate growth of 3% in 2022-2023. A slower rate of growth for Sales Tax is anticipated in 2022-2023 due to high inflation that is continuing to persist, increased interest rates, and a gradual change in consumer behavior away from taxable goods to non-taxable items such as services and travel. The first quarter collections for General Sales Tax will be received in late November. After analyzing the receipts, updated information will be provided 2022-2023 MidYear Budget Review, which will be released on January 31, 2023.
In 2021-2022 all Sales Tax categories, with the exception of Construction, experienced year-overyear growth, the largest of which included Food Products (27%), Transportation (24%), General Retail (23%; includes apparel stores, department stores, furniture/appliance stores, drug stores, recreation products, and florists/nurseries), and Business-to-Business (14%). In 2022-2023 these categories are anticipated to continue growing; however, at a more moderate pace.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
In addition, the County Pool, which is where the majority of online transactions are captured, has continued to grow (5% increase from 2020-2021 to 2021-2022). This growth is attributable to the pandemic’s sustained impact of redirecting a significant amount of activity to online sales. The recent growth in County Pool receipts has been fueled by online purchases during the pandemic and is facilitated by the South Dakota vs. Wayfair, Inc. Supreme Court decision in 2018, which provided states with the authority to require online retailers to collect sales tax even without a local presence in that State. The County Pool revenue is distributed to all cities within Santa Clara County based on a distribution formula administered by the CDTFA. This formula is based each quarter on each jurisdiction’s total General Sales Tax receipts divided by the Total General Sales Tax receipts for the entire County. The City typically receives between 45% - 50% of the total County Pool. In 2022-2023, it is anticipated the County Pool receipts will continue to remain strong.
In June 2016, San José voters approved a ¼ cent Local Sales Tax, which was implemented in October 2016. Local Sales Tax is generated based on the destination of the purchased product; therefore, all out-of-state online retailers (including marketplace facilitators) sales tax collections are directly distributed to the City of San José, versus the General Sales Tax revenue that is deposited in the County Pool, where the City only receives approximately 45% - 50% of the proceeds. Due to this distinction, Local Sales Tax revenue may not always experience the same growth and decline rates as General Sales Tax receipts.
The 2022-2023 Local Sales Tax estimate was built on the assumption that 2021-2022 receipts would total $52.0 million and grow to $54.0 million in 2022-2023. However, when that estimate was developed, Local Sales Tax receipts for only the first and second quarter had been received (sales tax activity from October-December). However, third quarter and fourth quarter receipts were subsequently received, which had stronger than anticipated growth. As a result, 2021-2022 Local Sales Tax collections totaled $54.9 million; therefore allowing 2022-2023 collections to drop by 1.6% to meet the budgeted estimate. Similar to General Sales Tax, the first quarter collections for Local Sales Tax will be received in late November. After analyzing the receipts, if collections remain strong, a budget adjustment may be brought forward as part of the 2022-2023 Mid-Year Budget Review, which will be released on January 31, 2023.
Proposition 172 Sales Tax collections represents the ½ cent tax that is allocated to counties and cities on an ongoing basis for funding public safety programs. The 2022-2023 budgeted estimate of $9.0 million requires growth of 7.6% from the 2021-2022 collection level of $8.4 million. At this very early point in the fiscal year, it is anticipated that collections will meet or fall slightly below the budgeted estimate by year-end.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Transient Occupancy Tax $ 11,000,000 $ 856,574 $ 550,740 The 2022-2023 budget estimate for the General Fund Transient Occupancy Tax (TOT) allocation (40% of the total tax) is $11.0 million. When the 2022-2023 Adopted Budget was developed, it was anticipated that 2021-2022 collections would total $9.0 million and grow by 22% to $11.0 million in 2022-2023. However, 2021-2022 ended the year at $10.5 million, due to stronger than anticipated year-end hotel activity. As a result, 2022-2023 collections require growth of only 4.6% in 2022-2023 to meet the budgeted estimate. Through August 2022, TOT receipts total $857,000, which is 55.5% above the prior year collection level of $551,000. This growth level is indicative an increase in demand for hotel rooms following the unprecedented impacts from the pandemic.
Based on the preliminary information known at this very early point in the year, receipts are anticipated to meet or exceed the budgeted estimate by year-end.
After the complete
collapse of hotel
demand as a result of
the pandemic, activity
experienced consistent
monthly gains in 2021-
2022 (with typical
seasonal contraction
over the winter
months). The
cumulative average
occupancy peaked in
June 2022 at 58%,
along with the average
room rate of $132.01.
As anticipated, growth is continuing in 2022-2023, with occupancy and room rates reaching
68.81% and $160.77 in August 2022. These rates represent the second highest monthly performance levels since April 2020, only surpassed by June 2022 performance of 72.35% and $162.92. Cumulatively through August 2022, the average occupancy was 68.03%, the room rate was $159.52, and revenue per available room (RevPAR) was $108.52.
Reported gross hotel revenue performance for the first two months of 2022-2023 is continuing the gains experienced in 2021-2022. However, the potential for resurgent impacts from COVID-19 continues to introduce uncertainty into this already volatile revenue source. In partnership with Team San Jose (the City’s operator of convention and cultural facilities, as well as the Convention and Visitors Bureau), the Administration will continue to actively monitor hotel and revenue performance and provide updates in the 2022-2023 Mid-Year Review (released in January 2023) and future Bi-Monthly Financial Reports.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Utility Tax $ 107,450,000 $ 9,846,862 $ 3,219,304
The Utility Tax
category includes the
Electricity Utility
Tax, Gas Utility Tax,
Water Utility Tax,
and the Telephone
Utility Tax. Through
August, Utility Tax
receipts of $6.6
million, which is
significantly higher
than the prior-year
level of $3.2 million.
The year-over-year
increase represents
higher collections in
all Utility Tax
categories. The increase in Electricity, Water, and Gas receipts is primarily attributable to a payment processing timing issue in 2021-2022.
The 2022-2023 Adopted Budget was built on the assumption that 2021-2022 Utility Tax revenue would end the year at $97.7 million and increase to $107.5 million in 2022-2023. After excluding the payment processing timing issue that occurred in 2021-2022, the Adopted Budget assumed growth of 4% in 2022-2023. However, 2021-2022 ended the year at $103.6 million, due to stronger year-end collections. As a result, 2022-2023 collections can drop by 2% in 2022-2023 to meet the budgeted estimate. Based on the preliminary information known at this very early point in the year, receipts are anticipated to exceed the budgeted estimate by year-end.
In the Electricity Utility Tax category, collections through August totaled $6.1 million, which is significantly higher than the $1.9 million received in the prior year. This increase is primarily due to the payment processing timing issue experienced in 2021-2022 ($2.8 million) and higher collection levels. The 2022-2023 Adopted Budget estimate totals $57.0 million. Based on collections through August, receipts are anticipated to exceed the budgeted estimate by year-end.
As it is still very early in the year, receipts will continue to be closely monitored, and if warranted, budget adjustments may be brought forward for City Council consideration as part of the 2022- 2023 Mid-Year Budget Review, which will be related on January 31, 2023.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
In the Gas Utility Tax category, collections through August 2022 totaled $774,000 compared to the prior year level of -$88,000. This increase is primarily due to the payment processing timing issue experienced in 2021-2022 ($830,000). The 2022-2023 Adopted Budget estimate totals $14.0 million. Based on collections through this very early point in the fiscal year, receipts are anticipated to meet the budgeted estimate by year-end.
In the Water Utility Tax category, collections through August 2022 totaled $1.3 million, which is significantly higher than prior year receipts of $160,000. This increase is primarily due to the payment processing timing issue experienced in 2021-2022 ($1.9 million). The 2022-2023 Adopted Budget estimate totals $18.0 million. Based on collections through this very early point in the fiscal year, receipts are anticipated to meet the budgeted estimate by year-end.
Collections in the Telephone Utility Tax category of $1.7 million through August are 32% above the prior-year collections of $1.3 million. The 2022-2023 Adopted Budget estimate of $18.5 million allows for a 4% drop from the 2021-2022 actual collection level of $19.2 million. The Administration is working to better understand the reason for the high collections received through August 2022 and will provide an update during the September/October Bi-Monthly MFR.
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Business Taxes $ 86,000,000 $ 11,813,503 $ 11,646,854
The Business Taxes
category consists of the
Cannabis Business Tax,
Cardroom Tax, Disposal
Facility Tax, and General
Business Tax. Through
August, overall collections
of $11.8 million are 1.4%
above the prior-year
collection levels of $11.6
million. This slight yearover-year growth reflects
higher Cardroom Business
Tax and General Business
Tax collections, partially offset by lower Cannabis Business Tax and Disposal Facility Tax collections. The 2022-2023 Adopted Budget estimate of $86.0 million requires growth of 1% from the 2021-2022 actual collection level. Based on overall Business Taxes performance at this early point in the year, it is anticipated that receipts will meet the overall budgeted level by year end.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
Cannabis Business Tax collections reflect cannabis business tax as well as cannabis business tax compliance revenues. Cannabis Business Tax collections began after San José voters approved Ballot Measure U on November 2, 2010, which allowed the City to tax marijuana businesses.
Further, in November 2016, the California Marijuana Legalization Initiative (Proposition 64) was approved by voters, which legalized recreational marijuana use in California. As a result, the sale of recreational cannabis at the 16 registered businesses in San José began in January 2018.
Through August, receipts of $933,000 are 23.4% below the prior-year level of $1.2 million. When the 2022-2023 Adopted Budget was developed, it was anticipated 2021-2022 collections would total $19.0 million and grow by 5% to $20.0 million in 2022-2023. However, due to declining receipts towards the end of 2021-2022, collections ended the year at $18.1 million. As a result, the 2022-2023 Adopted Budget estimate of $20.0 million requires growth of 10.8% from the 2021- 2022 collection level. Due to the lower than anticipated collections in this category that began in late 2021-2022, a recommendation is included in the 2021-2022 Annual Report (which was released on September 30, 2022 and will be considered by the City Council on October 18, 2022) to decrease the budgeted estimate by $2.0 million, from $20.0 million to $18.0 million. The Administration will continue to monitor collections; if revenue levels continue at significantly lower-than-expected levels, additional downward adjustments may be recommended later in the fiscal year.
Through August, Cardroom Tax receipts totaling $3.3 million have been received, which is
34.1% higher than the prior year level of $2.4 million. When the 2022-2023 Adopted Budget estimate was developed, it was assumed 2021-2022 collections would total $27.0 million remain steady in 2022-2023. However, due to stronger collections in the last few months of the fiscal year, 2021-2022 collections totaled $28.9 million. Therefore, the 2022-2023 Adopted Budget estimate of $27.0 million allows for a 6.5% drop from the prior year collection level. These collections are inclusive of the ballot measure approved by voters in November 2020 that increased taxes on cardroom operators beginning in January 2021. Due to stronger than anticipated Cardroom Tax collections, a recommendation is included in the 2021-2022 Annual Report (which was released on September 30, 2022 and will be considered by the City Council on October 18, 2022) to increase the budgeted estimate by $2.0 million, from $27.0 million to $29.0 million.
Disposal Facility Tax (DFT) are business taxes received based on the tons of solid waste disposed of at landfills within the City. DFT revenue through August totaled $853,000, which is 34.9% below the prior-year collection level of $1.3 million. The 2022-2023 Adopted Budget estimate of $13.0 million requires growth of 2.1% from the 2021-2022 collection level of $12.7 million.
Based on performance through August and historical collection patterns, receipts in this category are anticipated to fall below the budgeted estimate by year-end.
Through August, General Business Tax receipts of $6.8 million are slightly above the prior-year collection level of $6.7 million. The 2022-2023 Adopted Budget estimate of $26.0 million requires growth of 1.1% from the 2021-2022 collection level of $25.7 million. Based on the performance through this very early point in the year, receipts in this category are anticipated to meet the budgeted estimate by year-end.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Real Property Transfer Tax $ 65,000,000 $ 8,837,789 $ 22,748,449 On March 3, 2020, San José voters approved Measure E, the Real Property Transfer Tax. This new tax, which became effective on July 1, 2020, is imposed at a tiered level for property transfers (sales) over $2.0 million. In accordance with City Council Policy 1-18, Section 22, this tax revenue is allocated for the development of new affordable housing, homelessness prevention, and homelessness support programs.
Through August 2022, Real Property Transfer Tax collections total $8.8 million, which is significantly below the prior-year level of $22.7 million. In addition, the City has received the September tax receipts from Santa Clara County, which total $5.9 million. When taking into account total receipts through August and the September remittance, total Real Property Transfer Tax receipts in 2022-2023 total $14.7 million, compared to the prior year level of $25.6 million.
This significant variance is due to several factors. First, due to the timing of when a payment from Santa Clara County was processed, funding of $9.7 million was reflected in 2021-2022 but was attributable to 2020-2021 activity. In addition, due to a more constrained real estate market, a larger amount of high-value property transfers occurred in the prior year. As this decrease in activity was anticipated, the 2022-2023 Adopted Budget estimate of $65.0 million is significantly below the 2021-2022 collection level of $110.0 million. While it is still very early in the year and only preliminary information is known, it is currently anticipated that Real Property Transfer Tax revenue will meet the budgeted level by year-end.
EXPENDITURES
Through August, General Fund expenditures (without encumbrances) of $180.0 million were 5.2% above the prior-year level of $171.1 million. Encumbrances of $79.4 million were 5.9% above the prior-year level of $75.0 million. General Fund expenditures and encumbrances through August of $259.4 billion constitute 11.4% of the total budget including reserves and 13.7% of the budget excluding reserves. Overall, General Fund expenditures are anticipated to end the year within budgeted levels.
Through August, departments are overall performing within estimated levels for personal services expenditures. Expenditures will continue to be controlled and monitored to ensure appropriations stay within approved levels. Following is a discussion of the performance of the Police and Fire Departments, the largest General Fund departments.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
KEY GENERAL FUND EXPENDITURES
Department
2022-2023
Budget
YTD
Actual
Prior YTD
Actual
Police $ 490,488,289 $ 70,940,647 $ 74,519,364
Overall, Police Department expenditures total $70.9 million and are currently expected to remain within budgeted levels. Personal services expenditures of $62.7 million are slightly below the anticipated level for this point of the year (13.94% expended, compared to the par level of 13.96%), though overtime expenditures continue at $6.9 million (26.80% of the total $25.8 million budget).
Year-to-date overtime expenditures are 10.30% above 2021-2022 levels which are primarily attributed to increased overtime usage and increased wages. Overtime hours in the first two months of 2022-2023 increased by approximately 13.0% over the same period in the prior fiscal year (2021-2022), from 73,486 to 83,064. The increased overtime usage is attributed to staffing shortages due to the COVID-19 Omicron variant spike over the summer months, and an increased caseload in the Homicide, Sexual Assault, Robbery and Gang Investigation Units, which is attributable to more community interactions and delayed crime reporting from periods of higher COVID case counts. Discussion on the Department’s steps to reduce overtime expenditures while also maintaining minimum staffing and service levels follows below.
A total of $8.2 million (20.27%) of the Department’s Non-Personal/Equipment budget ($40.5 million, including carry-over encumbrances) has been expended through August. Excluding the remaining balances for centrally-determined details ($15.7 million), which include electricity, gas, and water utilities, as well as vehicle operations, maintenance, and replacement, the Police Department has approximately $16.6 million, or 41% of its Non-Personal/Equipment budget available for the remainder of the fiscal year. Although Non-Personal/Equipment expenditures are tracking high at this point of the fiscal year due to encumbrances of $4.5 million (54.5% of the year-to-date activity), overall expenditures are expected to remain within budget levels as this encumbrance balance is expended for planned activities. The Police Department is committed to maintaining both its Personal Services and Non-Personal/Equipment expenditures within the current overall budgeted levels.
Overtime consists of both overtime expenditures and compensatory time. The Memorandum of Agreement (MOA) with the Police Officer’s Association (POA) limits how much overtime can be earned for pay versus compensatory time. The Police Department continues to diligently work to fill vacancies in both sworn and civilian positions, using vacancy savings and the $7.4 million in one-time funding from the Sworn Hire Ahead Program to pay for Police Academy Recruits as well as to backfill patrol and investigative positions on overtime. While the goal is to fill vacancies and eliminate the need to backfill positions, the normal duration for the academy and field training is approximately 10-12 months, requiring overtime to backfill vacancies in patrol until the new recruits are ready to serve as solo beat officers. Effective vacancy levels, which include vacancies, field training officers, academy recruits, and sworn personnel on disability, modified, or other
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
leaves, reduce the amount of street-ready sworn officers available and are the most significant contributing factor to overtime usage. The effective vacancy rate was 16.5% as of September 2, 2022. Historically, the effective vacancy rate has averaged 20.4% (based on the 5-year period between 2017-2018 and 2021-2022), resulting in the build-up of compensatory time balances for sworn personnel, for which there is a limit of 480 hours after which sworn personnel are paid in overtime for any additional hours worked.
In accordance with the POA MOA, the Police Department is enforcing compensatory time controls by requiring all sworn staff, outside of the Bureau of Field Operations (BFO), to reduce compensatory time balances by the end of the calendar year, or to submit a request for an extension.
On November 22, 2021, the Chief issued an order to reduce compensatory time balances for any sworn staff member who believes they will not be able to take the excess time off before the end of the calendar year. This order requires sworn staff to submit a plan to their immediate supervisor, consistent with MOA section 13.6.5.1, by December 1, 2021, excluding sworn staff assigned to Patrol. Each plan needed to outline how a sworn staff member will reduce their compensatory time by March 31, 2022. These changes are intended to reduce the number of officers reaching the 480- hour limit, which would thereby reduce future overtime expenditures. The plans have been implemented, but due to the needs of the Department (staffing, workload, and specific assignments), there has been limited flexibility in allowing staff to take time off; however, the Department has seen a large majority of individuals taking at least a portion of their excess time off, which has contributed to a reduction in compensatory time hours across the department. The Police Department has implemented additional overtime and compensatory time approvals to slow, and eventually reduce, compensatory time balance growth, including revisions for BFO approvals to the extent possible.
Finally, focus groups have been created in each Bureau of the department. These groups have started meeting to discuss solutions around workload and overtime issues and will bring recommendations to be considered by the Police Chief’s Office and City Manager’s Budget Office.
These actions, as well as the other recommendations included in the Police Staffing, Expenditures, and Workload audit report are intended to address, slow, and reverse the growth of overtime and compensatory time use.
The City Auditor’s March 2021 Police Staffing, Expenditures, and Workload audit report included several recommendations to increase the number of compensatory time-related data that should be included in the Mid-Year Budget Review, Bi-Monthly Financial Reports, and Annual Report. The table below summarizes this data. While compensatory time usage and balances remain high, it is important to note that the Police Department has made meaningful progress in some of these categories when compared to the prior year. This progress can be seen in the short term, as the department reported a sworn compensatory time balance liability of 354,972 hours through August 2021, which has now been reduced to 354,061 as of August 2022. The increase in “YTD Overtime Expenses for Staff at the 480-hour Limit” is attributable to the overall elevated overtime usage in July and August as described above.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
August
2021
August
2022
% Change
from 2021
to 2022
% Change
from 2020
to 2021
# of Sworn Personnel at 480-hour
limit
438 438 0.0% 1.9%
# of Sworn Personnel between 240
and 480 hours
280 289 3.2% 7.7%
Sworn Compensatory Time Balance
Liability (hours)
354,972 354,061 (0.3%) 3.4%
Sworn Compensatory Time Balance
Liability ($)
$27.0 M $27.1 M 0.2% 11.3%
YTD Overtime Expenses for Staff at
480-hour Limit ($)3
$2.7M $3.1M 16.0% (0.4%)
The table below provides a summary of sworn staffing vacancies and street-ready officers. The February 2022 academy graduated 19 officers in September 2022, and the June 2022 academy started with 25 recruits. The October 2022 academy is expected to begin with 26 recruits. As of September 2, 2022, of the 1,153 authorized sworn staff, 75 were in training (6.5%) and 64 were on disability/modified duty/other leaves (5.6%).
2021-2022
(as of 09/10/2021)
2022-2023
(as of 09/02/2022)
Authorized Sworn Positions 1,153 1,1534
(Vacancies)/Overstaff (13) (51)
Filled Sworn Positions5 1,140 1,102
Field Training Officer/Recruits (105) (75)
Street-Ready Sworn Officers Available 1,035 1,027
Disability/Modified Duty/Other Leaves (81) (64)
Street-Ready Sworn Officers Working 954 963
3 The Bi-Monthly Financial Report for July/August 2021 over reported YTD Overtime Expenses for Staff at 480- hour Limit ($) due to the inclusion of an additional pay period from the prior fiscal year (2020-2021). This number has been revised to reflect the correct amount in this report. 4 The amount of authorized sworn positions will increase to 1,173 in October, as the 20.0 new Police Officer positions included in the 2022-2023 Adopted Budget were budgeted to take effect with the October academy. 5 Filled sworn positions and authorized sworn positions may vary due to vacancies or the approval of over-strength (temporary) positions. The Police Department has special authority under the City’s Sworn Hire Ahead Program to overstaff sworn positions to get a head start on training recruits due to retirement and other separation.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
The table below further identifies the length of time that sworn officers have been on leave status, as of September 2, 2022. Although the Department makes every effort to support the health and well-being of all staff members, as well as the safe resumption of duties as quickly as possible, the particularly physical and dangerous nature of the work performed by sworn officers’ results in a higher potential for injury. Of the total sworn officers on leave status, 8 have been on leave for more than one year with most of these sworn officers on modified duty (4). More than half of the sworn officers (33) have been on leave status for less than three months. Over the last five years, between 2017-2018 and 2021-2022, the number of sworn officers on leave ranged from a high of 147 to a low of 51. During this time, the average number of sworn officers on leave was approximately 75 with a standard deviation of approximately eleven sworn officers. The current number of sworn officers on leave (64) is lower than the historical average (75) and within the normal range of variability seen over the last five years. In comparison, the 2021-2022 Annual Report reported 93 sworn officers on leave. There was a substantial decrease (31, from 64 to 33) in sworn officers out on leave in the 0-3 Month category. The main reason for this decrease is due to recovery from COVID-19 illness by those sworn officers.
Department
2022-2023
Budget
YTD
Actual
Prior YTD
Actual
Fire $ 272,639,222 $ 41,685,363 $ 43,482,288
The Fire Department’s budget totals $272.6 million, which is comprised of $260.8 million in personal services and $11.9 million in non-personal/equipment expenditures. Overall, Fire Department expenditures are performing slightly above estimated levels through August 2022.
Personal services expenditures of $38.5 million, or 14.79% of the Adopted Budget, are trending slightly higher than the expected level of 13.96% at this point in the year. The increase in expenditures can be attributed to the demand for frontline personnel to respond to incidents during the active wildland season in 2022, while continuing to maintain the daily minimal staffing levels of deployed resources of 190 personnel. The Department responded to over 26,000 incidents (Priority 1 and Priority 2 type calls) during the first quarter of 2022-2023, compared to 24,000 incidents over the same period in 2021-2022. Additionally, minor costs were incurred for mutual aid and Strike Team deployments that are anticipated to be reimbursed by the State of California’s Office of Emergency Services. The Fire Department’s non-personal/equipment budget of $11.9 Length of Leave Status (as of 09/02/2022)
Type of Leave 0-3 Months 3-6 Months 6-12 Months 1 Year + Total Disability 10 4 5 3 22
Modified Duty 14 6 3 4 27
Other 9 3 2 1 15
Total 33 13 10 8 64
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
GENERAL FUND (CONT’D.)
million was 26.35% expended or encumbered through August 2022. The Department’s nonpersonal/equipment expenditures are above the expected levels of 13.96% primarily due to encumbrances ($2.0 million). At this point in the year, it is expected the Fire Department will remain within budgeted levels.
The average sworn vacancy rate of 6.55% through August 2022 is higher than the vacancy rate of
5.84% experienced at this time last year, and above the budgeted rate of 2.5%. The most recently completed firefighter academy began in November 2021 and concluded in April 2022 with 19 graduates. There are currently two firefighter academies in progress (22-01 & 22-02) which began in June 2022 and September 2022. Academy 22-01 is expected to be completed in November 2022 with 14 graduates and academy 22-02 is expected to be completed in February 2023 with 13 graduates. To help shore up vacancy levels, the 2021-2022 Annual Report (which was released on September 30, 2022 and will be considered by the City Council on October 18, 2022) contains a recommendation to allocate $1.5 million to the Fire Department to conduct an additional academy in early 2023 for up to 30 lateral firefighter/paramedics.
In accordance with the City Council’s approval of a March 2010 report on annual vacancy and absence rates, the Fire Department has committed to limiting administrative assignments for sworn administrative personnel for overtime control purposes. As of the end of August, of the 31 current authorized staffing level, the Fire Department had 31 sworn personnel on administrative assignments.
CONTINGENCY RESERVE
The General Fund Contingency Reserve remained at $41.0 million through August, with no revisions through the first two months of the fiscal year. However, the 2021-2022 Annual Report, which was released on September 30, 2022 and will be brought forth for City Council consideration on October 18, 2022, includes a recommendation to increase the Contingency Reserve by $5.0 million, to $46.0 million. This reserve level complies with Council Policy 1-18, Operating Budget and Capital Improvement Program Policy, which requires the Contingency Reserve to be at a minimum of 3% of the operating budget.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OTHER FUNDS
Airport Funds
On a fiscal year-to-date basis, the Norman Y. Mineta San José International Airport (SJC) has enplaned and deplaned 2.2 million passengers, an increase of 40.9% from the figures reported through August of the prior year. Year-to-date domestic passengers have increased 43.3% while international passengers have decreased 5.2%. The overall increase results from the ongoing recovery of passenger traffic from the COVID-19 pandemic. The chart below depicts the yearover-year change for the month of August and Fiscal Year-to-Date for the last seven years.
Fiscal year-to-date mail, freight and cargo totaled 12.6 million pounds, which represents a 9.8% increase over year-to-date August of 2021. All revenue-generating activities posted increases over the same period of the prior fiscal year: Ground Transportation trips by 59.6%; Landed Weights by 47.4%; Parking exits by 25.7%; Traffic Operations (landings and takeoffs) by 24.2%; and Gallons of Aviation Fuel sold increased by 25.9%.
Year-to-date Airport revenue collections through August reflect just one month of receipts and are tracking within budgeted levels. Airport activity and revenue markers such as passengers, landed weights, parking revenue, and Passenger Facility Charge collections will continue to be closely monitored throughout this fiscal year. Additionally, the Airport has $28.9 million of Federal funding programmed in 2022-2023 to reimburse operating expenses and provide revenue support in the current air travel environment. Due to its unpredictable nature, revenue, as well as expenses, will be closely monitored to determine what, if any, federal funding offset may be needed in the remainder of the year.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OTHER FUNDS (CONT’D.)
Through August, both the Airport Customer Facility and Transportation Fee Fund and Airport Maintenance and Operation Fund expenditures tracked well below budgeted levels. In the Maintenance and Operation Fund, personal service expenditures were 12.7% of budget compared to the benchmark of 15.4%, while non-personal/equipment expenditures (excluding encumbrances) were 5.8% compared to the benchmark of 7.1%. Non-personal/equipment expenditures in the Customer Facility and Transportation Fee Fund were 4.3% compared to the straight-line benchmark of 16.7%. The activity levels, revenues and expenditure status of the Airport Funds will continue to be closely monitored throughout the fiscal year.
San José Clean Energy Fund
The Community Energy Department operates San José Clean Energy (SJCE), supplying residents and businesses of San José with cleaner energy options than PG&E and access to energy efficiency community programs. SJCE’s City Council approved rate package for 2022 set rates for its GreenSource standard service at 8% above PG&E’s rates – inclusive of the Power Charge Indifference Adjustment (PCIA) and Franchise Fee Surcharge – based on a PG&E rate increase of 33% that was approved by the California Public Utilities Commission in February 2022. SJCE also increased the renewable energy content of its products, to 60% for the GreenSource standard service and 40% for its GreenValue service (TotalGreen continued at 100%).
PG&E generation rates and rising PCIA fees are the primary drivers when setting SJCE rates.
There has been much volatility with the PCIA. For example, there were substantial PCIA increases through 2021 (rising over 900% between 2013 and 2021, and 41% from 2020 to 2021) and then a considerable decrease in 2022 (down 75% from 2021). This decrease is the result of a credit applied to the 2022 PCIA to correct for an overpriced PCIA and overcollection of revenue in 2021 (principally because 2021 market prices for brown power were higher than forecast, increasing the value of PG&E generation resources) and anticipated continued high market power prices in 2022.
The increased energy rates combined with lower PCIA fees in 2022 have created a favorable environment for SJCE.
In June 2021, SJCE’s financials projected a cash flow shortage for which the City Council approved a total Commercial Paper Notes authorization of up to $95.0 million. A total of $15.0 million was drawn in June 2021 (2020-2021) and $45.0 million was drawn between July and December 2021 (2021-2022) for a total Commercial Paper draw of $60.0 million. SJCE’s financial outlook has markedly improved since, attributable to the rate increase that went into effect January 2022 and lower PCIA fees. The department tentatively anticipated repaying all outstanding commercial paper debt by the end of 2023-2024.
Through August, Energy Sales totaled $108.7 million, or 26.4% of the budgeted estimate of $411.9 million. Cost of Energy expenditures including encumbrances totaled $191.3 million, or 64.4% of the total Modified Budget. It is typical for SJCE to encumber a significant amount of funds for contracted energy early in the fiscal year. The Community Energy Department monitors energy
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OTHER FUNDS (CONT’D.)
procurement activities closely. The Community Energy Department and the Budget Office will continue to closely monitor this fund.
Construction and Conveyance Tax Funds
Through August 2022,
Construction and
Conveyance (C&C) Tax
receipts totaled $4.2
million, which represents
8.4% of the 2022-2023
Adopted Budget estimate
($50.0 million). This
amount is 44.0% below the
prior year collection level of
$7.5 million. In addition,
the City has received the
September Conveyance
receipts from Santa Clara
County, which total $3.9 million, which is 42.7% below the September 2021 Conveyance collection level of $6.8 million. When taking into account total receipts through August and the estimated September collections, C&C receipts in 2022-2023 total $8.1 million, 16.2% of the 2022-2023 budgeted estimate, and 43.1% below the prior-year collection level of $14.3 million.
The 2022-2023 Adopted Budget estimate of $50.0 million allows for a 22.4% drop from the 2021- 2022 collection level. While it is still very early in the year, it is anticipated C&C collections may fall below the budgeted estimate by year-end. These collections will continue to be closely monitored, and if warranted a budgetary adjustment may be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review, which will be released on January 31, 2023.
Over 99% of the total Construction and Conveyance Taxes are comprised of conveyance receipts, a tax based on the value of property transfers (sales). As discussed in the Economic Environment section of this Bi-Monthly Financial Report, there is concern regarding declines in sales activity in the local real estate market. Since housing statistics are a key driver for the overall C&C collection levels, significant changes in the housing market will drastically affect the C&C Tax receipts. The local market will continue to be closely monitored, with updates provided during 2022-2023 in future Bi-Monthly Financial Reports.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OTHER FUNDS (CONT’D.)
Other Construction-Related Revenues
Construction activities drive revenue collection in several categories, including the Building and Structure Construction Tax and the Construction Excise Tax (which are described in further detail below) that help fund the City’s Traffic Capital Program, and are an indicator of future activity for several other categories, such as storm and sanitary sewer system fees. Based on the very preliminary information known for the first two months of the year, Capital Fund revenues associated with construction activity are anticipated to meet budgeted levels overall. However, Building and Structure Construction Tax collections may exceed the budget and Construction Excise Tax collections may fall below the budgeted estimate.
Through August, the Building and
Structure Construction Tax collection
level of $4.0 million represents 21.0%
of the budgeted estimate of $19.0
million, and is 34.1% above 2021-
2022 receipts of $3.0 million. The
year-over-year increase is primarily
attributable to higher construction
permit valuation for commercial and
industrial categories, especially for
industrial activity. When the 2022-
2023 Adopted Capital Budget was
developed, it was anticipated that
2021-2022 Building and Structure Construction Tax receipts would total $19.0 million, and remain flat in 2022-2023. However, since 2021-2022 receipts ended the year at $21.2 million, the 2022- 2023 budgeted estimate allows for a 10.4% decline from the prior-year level. At this very early point in the year, it is anticipated that Building and Structure Construction Tax Revenue will meet or exceed the budgeted estimate by year-end.
Through August, the Construction Excise Tax collection level of $1.7 million represents 10.9% of the budgeted estimate of $16.0 million, and is 30.5% below the 2021-2022 receipts of $2.5 million.
Typically, these collections trend in-line with construction permit valuation; however, through August, commercial and residential permit activity has increased year-over-year while tax receipts have declined. The Administration is investigating the cause of the discrepancy; however, the two primary drivers may be higher commercial office construction in 2022-2023 (which is taxed at a lower rate than general commercial projects) and a larger quantity of additions/alterations in 2022- 2023 (which the tax is applied to a percentage of the valuation unlike most new construction where the full valuation is used). When the 2022-2023 Adopted Capital Budget was developed it was anticipated 2021-2022 Construction Excise Tax receipts would total $15.0 million, then increase by approximately 7.0% to 16.0 million in 2022-2023. However, since 2021-2022 receipts ended the year at $16.2 million, the 2022-2023 budgeted estimate allows for a 1.4% decline from the prior-year collection level. At this very early point in the year, it is anticipated Construction Excise Tax Revenue will meet or fall below the budgeted estimate by year-end.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OTHER FUNDS (CONT’D.)
Development Fee Program Funds
Development Fee Programs include the Building Development Fee Program, Citywide Planning Fee Program, Fire Development Fee Program, Planning Development Fee Program, and Public Works Development Fee Program Fund. Based on performance through August, all Development Fee Programs, with the exception of the Planning Development Fee Program, are anticipated to meet or exceed the budgeted estimates. Additional information about each of the Development Fee Program Funds is provided below.
The Building Development Fee Program issues building permits and oversees construction on private property. Building Permit revenues of $7.3 million through August 2022 are 24.7% higher than the 2021-2022 collection level for the same period. The 2022-2023 Adopted Budget estimate of $33.6 million allows for a 7.4% drop from the 2021-2022 collection level of $36.3 million.
Based on current collection trends at this early point in the year, Building Fee revenues are anticipated to meet or exceed the budgeted estimate by year-end.
The Citywide Planning Fee Program provides funding for the City’s long-range planning projects, such as developing and updating the City’s General Plan, to match the City’s planning goals. The Citywide Planning Fee is an 11.97% fee applied to Entitlement, Building Permit Fees, and Building Plan Check Fee Categories. Through August 2022, Citywide Planning Fee revenues of $708,000 are 33.7% above the prior-year collection level of $530,000. The 2022-2023 Adopted Budget estimate of $3.3 million allows for a 3.0% decrease from the 2021-2022 actual collection level of $3.4 million. Based on current collection trends at this early point in the year, Citywide Planning Fee revenues are anticipated to meet or exceed the budgeted estimate by year-end.
The Fire Development Fee Program provides operational and construction permits and inspections to ensure that development within San José meets the City’s fire codes. Developmentrelated receipts through August of $1.6 million are $555,000 (51.2%) higher than prior year collections. The 2022-2023 Adopted Budget estimate of $7.9 million, requires growth of 16% from the actual 2021-2022 collection level of $6.8 million. Based on current collection trends, Fire Development Fee revenue is anticipated to exceed the 2022-2023 budgeted revenue estimate, mostly driven by higher than anticipated revenue from Fire Code Plan Inspections.
The Planning Development Fee Program processes land development applications for planning permits and services, such as zoning review, to match the City’s planning goals. Through August 2022, Planning Fee revenues of $1.46 million are 1.8% below the prior-year collection level of $1.49 million. The 2022-2023 Adopted Budget estimate of $8.3 million requires a 1.4% increase from the 2021-2022 actual collection level of $8.2 million. Based on current collection trends at this early point in the year, Planning Development Fee revenues are anticipated to meet or fall short of the budgeted estimate by year-end.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE October 11, 2022
Subject: Bi-Monthly Financial Report for July/August 2022
OTHER FUNDS (CONT’D.)
The Public Works Development Fee Program ensures that developments comply with regulations and provide appropriate public infrastructure, such as sidewalks, traffic signals, and streetlights. Revenues through August 2022 of $1.7 million decreased 2.9% from the prior-year level of $1.7 million. The Public Works Development Fee Program total revenue collections are comprised of $1.1 million from the Development Services Fee Program, $552,000 from the Utility Fee Program, and approximately $3,000 of interest earnings. The 2022-2023 Adopted Budget estimate of $19.9 million allows for an 8.1% decrease from the 2021-2022 actual collection level of $21.6 million. Based on activity through August, revenue collections in the Public Works Development Fee Program are projected to meet budgeted levels by year-end.
CONCLUSION
The City ended the 2021-2022 fiscal year in solid position as the starting point for 2022-2023.
However, although economic conditions remain positive, persistent high inflation rates, high gas prices, and rising interest rates may negatively impact sectors of the economy, including local real estate.
While it is still very early in the fiscal year, overall General Fund and other City funds revenues and expenditures are tracking within anticipated levels. Additionally, several revenue categories are currently projected to end the year above budgeted levels, including Property Tax, Transient Occupancy Tax, and Utility Tax. Conversely, Construction and Conveyance Tax revenue is performing below anticipated levels. If warranted, budget adjustments to align revenue with revised estimates will be brought forward for City Council consideration as part of the 2022- 2023 Mid-Year Budget Review, which will be released on January 31, 2023. However, since only very preliminary information is currently known for all categories, revenues and expenditures will continue to be closely monitored.
The Administration will follow and report on economic indicators and revenues in 2022-2023 through future Bi-Monthly Financial Reports and the Mid-Year Budget Review process, and return to the Mayor and City Council with recommendations for any revisions, if necessary.
As always, staff will continue to report to the City Council significant developments through this and other budget reporting processes.
JIM SHANNON
Budget Director
Attachment: Finance Department Monthly Financial Report
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE April 13, 2022
Subject: Bi-Monthly Financial Report for January/February 2022