PSFSS COMMITTEE: 12/15/2022
ITEM: (c)1
TO: PUBLIC SAFETY, FINANCE, AND
STRATEGIC SUPPORT COMMITTEE
FROM: Jim Shannon
SUBJECT: BI-MONTHLY FINANCIAL REPORT
FOR SEPTEMBER/OCTOBER 2022
DATE: December 2, 2022
Approved Date
RECOMMENDATION
Accept the Bi-Monthly Financial Report on actual revenues and expenditures as compared to the 2022-2023 Budget for the four months ending October 2022.
OVERVIEW
The Bi-Monthly Financial Report for September/October 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 four months ending October 2022.
Through the first four 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, with several significant categories on pace to exceed the budgeted amount, including Business Taxes, Property Tax, Transient Occupancy Tax, and Utility Tax. • Overall, General Fund expenditures tracked within estimated levels through October.
Expenditures will continue to be controlled and monitored to ensure appropriations stay within approved levels.
• 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. 12/5/2022
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
OVERVIEW (CONT’D.)
• 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). • Transient Occupancy Tax activity levels are continuing to experience gains after the complete collapse of hotel room demand during the pandemic. Based on information known at this time, this category is anticipated to end the year above budgeted levels. • Based on performance through October, 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 4.3 million passengers through October, an increase of 39.4% from the figures reported through October 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 October 2022, SJCE’s Cost of Energy (including encumbrances) totaled $203.9 million, which reflects 68.6% of the 2022-2023 Modified Budget; Energy Sales totaled $188.7 million, or 45.8% of the budgeted estimate of $411.9 million. Actions to increase Cost of Energy (expenditures) and Energy Sales (revenue) will be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review. • 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 robust
employment figures. The
October 2022
employment level in the
San José-SunnyvaleSanta Clara Metropolitan
Statistical Area (San José
MSA) of 1.19 million was 5.1% above the October 2021 level of 1.14 million. Between October
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
OVERVIEW (CONT’D.)
2021 and October 2022, employment in the San José MSA increased by 57,600 jobs. This increase includes professional and business services increasing by 15,000 jobs; leisure and hospitality jobs expanding by 12,800 jobs; private educational and health services jobs increasing by 10,100; the manufacturing sector expanding by 5,500 jobs, and the information sector growing by 5,400 jobs. 1 The local unemployment rate for October
2022 was 2.2%, which is consistent with
the September 2022 rate and is
significantly below the prior year
unemployment rate of 3.7%. Additionally,
the October 2022 San José Metropolitan
Statistical Area unemployment rate
continues to be lower than the unadjusted
unemployment rate for the State (3.8%)
and the nation (3.4%).
Overall construction activity through October 2022 increased 16.3% from prior-year levels primarily due to activity for the commercial and industrial land use categories experiencing increases from the prior year, especially for commercial 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 October, residential permit valuation
has decreased 29.5% from prior-year levels
($81.2 million in 2022-2023 from $115.1
million in 2021-2022). Residential activity
through October included 325 multi-family
units and 165 units of single-family
construction for a total of 490 units.
Commercial valuation through October 2022
was 52.8% higher than the 2021-2022 level
($230.6 million in 2022-2023 from $150.9
million in 2021-2022). Additions and
alterations accounted for 93% of the commercial activity for September and October ($117.1 million). A notable project for September and October includes a permit for finished interior work on 23,150 square foot of office space located on Park Avenue. 1 State of California Employment Development: Labor Market Information Division Press Release, November 18, 2022
Unemployment Rate (Unadjusted)
October
2021
Sept.
2022
October
2022**
San José
Metropolitan
Statistical Area*
3.7% 2.2% 2.2%
State of California 5.8% 3.7% 3.8%
United States 4.3% 3.3% 3.4%
* San Benito and Santa Clara Counties Source: California Employment Development Department.
** October 2022 estimates are preliminary and may be updated.
Private Sector Construction Activity
(Valuation in $ Million)
October
2021
(YTD)
October
2022
(YTD)
%
Change
Residential $115.1 $81.2 (29.5%)
Commercial $150.9 $230.6 52.8%
Industrial $112.9 $129.0 14.2%
TOTAL $378.9 $440.8 16.3%
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
OVERVIEW (CONT’D.)
Industrial construction valuation through October was 14.2% higher than prior-year levels, with receipts totaling $129.0 million in 2022-2023 and $112.9 million in 2021-2022. Alterations accounted for all the industrial activity in October and 70% of the activity for September and October. A notable project for September and October includes a permit for a four-story selfstorage project located on South Winchester Boulevard.
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, beginning in 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 significantly raised interest rates over the past year, and they have indicated they will continue to implement aggressive monetary policies until inflation begins to moderate. As interest rates increase, so have mortgage rates, which are expected to continue to 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
October 2022, the
median singlefamily home price
totaled $1.43
million, which is
slightly (0.35%)
above the October
2021 price of
$1.42 million.
However, homes
are staying on the
market for longer
periods of time before selling. The average days-on-market through October 2022 totaled 22 days, which is significantly above the average of 15 days experienced year-to-date through October 2021. In addition, as discussed, property sales activity has been declining. Property Sales for the first four months of the fiscal year dropped over 26% compared to the prior-year sales. Local real estate activity will continued to be closely monitored with updates being provided in future bimonthly financial reports and the 2022-2023 Mid-Year Review, which will be released on January 31, 2023.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
OVERVIEW (CONT’D.)
On a national level, after back-to-back monthly gains, consumer confidence decreased in October.
Lynn Franco, Senior Director of Economic Indicators at The Conference Board, stated “Consumer confidence retreated in October, after advancing in August and September. The Present Situation Index (consumers’ assessment of current business and labor market conditions) fell sharply, suggesting economic growth slowed to start Q4. Consumers’ expectations regarding the shortterm outlook remained dismall. Notably, concerns about inflation – which has been receding since July – picked up again, with both gas and food prices serving as main drivers. Vacation intentions cooled; however, intentions to purchase homes, automobiles, and big ticket appliances all rose.
Looking ahead, inflationary pressures will continue to pose strong headwinds to consumer confidence and spending, which could result in a challenging holiday season for retailers.” 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 at the end of February 2023.
GENERAL FUND
REVENUES
General Fund revenues through October 2022 totaled $554.4 million, which represents a decrease of $49.8 million from the October 2021 level of $554.4 million. This decrease is primarily attributable to a transfer that occurred in 2021-2022 from the American Rescue Plan Fund ($45.0 million) and lower Real Property Transfer Tax proceeds ($22.9 million), partially offset by higher Utility Tax revenue ($20.4 million). In 2021-2022, General Fund revenues included a one-time transfer of $45.0 million from the American Rescue Plan Fund to partially reimburse the the City for revenue losses resulting from the pandemic. Additionally, Real Property Transfer Tax collections totaled $110.0 million in 2021-2022 due to the large number of high-dollar commercial real estate sales. However, due to the tightened real estate market that was previously discussed, Real Property Transfer Tax activity is anticipated to decrease in 2022-2023 (2022-2023 Adopted Budget estimate totals $65.0 million). Partially offsetting these significinat year-over-year declines is increased revenue from Utility Tax. Through October 2022, Utility Tax revenue is $20.4 million above the amount received through October 2021, due to higher activity levels and the timing of payments.
Other categories that are experiencing year-over-year declines include Other Revenue ($11.5 million), which is primarily attributable to the timing of the Tax and Revenue Anticipation Notes (TRANs) proceeds and payments, and Licenses and Permits ($3.0 million). However, offsetting these declines are several categories experiencing increases, including, Business Taxes ($2.1 million), Revenue from Use of Money/Property ($2.0 million), Revenue from Federal Government ($1.9 million), Franchise Fees ($1.8 million), and Property Tax ($1.8 million). These higher collections are due to the timing of payments and higher activity levels. 2 The Conference Board, Consumer Confidence Survey, October 25, 2022
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
Based on activity levels through October 2022, several revenue categories are anticipated to exceed budgeted levels, including Business Taxes, Property Tax, Transient Occupancy Tax, and Utility Tax. However, it is important to note that only 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.
KEY GENERAL FUND REVENUES
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Property Tax $ 427,000,000 $ 18,968,343 $ 17,163,544
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 $437.2 million, which is 2.4% higher than the 2022-2023 budgeted estimate of $427.0 million. Additionally, the estimated revenue reflects overall growth of 5.6% from the 2021-2022 collection level of $414.1 million. This increase is primarily due to higher Secured Property Tax receipts (5.9%) and Aircraft Property Tax (28.3%), partially offset by lower Unsecured (5.4%) and SB 813 (2.1%) Property Tax revenues. An increase in the Property Tax budgeted estimate may be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review, which will be released at the end of January 2023. 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 $411.0 million in 2022-2023. The estimate is comprised of General Secured Property Tax receipts of $354.6 million, excess ERAF funds of $35.2 million, and SARA Residual Property Tax receipts of $21.2 million. The Secured Property Tax receipt estimate is $6.4 million higher than the Adopted Budget estimate; however, as it is still early in the year, this estimate will likely change as additional information is known.
As mentioned above, the general Secured Property Tax estimate totals $354.6 million in 2022- 2023, which assumes growth of approximately 7.2% 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 5.2%. 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.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
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 $21.2
million, which is higher
than the 2022-2023
Adopted Budget estimate
of $19.6 million and the
2021-2022 collection
level of $18.3 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 2022-2023 estimate from Santa Clara County for this category of $7.5 million is approximately $3.5 million above the budgeted estimate.
Aircraft Property Tax receipts are primarily received in October of each year. Revenue in 2022- 2023 are anticipated to total $3.8 million, which is slightly above the 2022-2023 Adopted Budget estimate ($3.0 million) and 2021-2022 actual receipts ($3.0 million).
In the Homeowners Property Tax Relief category, revenue 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 December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Sales Tax $ 331,000,000 $ 63,308,380 $ 63,025,255
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 OctoberDecember activity), May
(representing January-March
activity), and August
(representing April-June
activity). The first Sales Tax
payment for 2022-2023 was recenty received and appear to reflect growth of approximately 10% from the prior year. However, receipts are currently being fully analyzed, therefore, additional information will be included in the 2022-2023 Mid-Year Budget Review, which will be released at the end of January 2023. Additional information about each of the Sales Tax sub-categories is provided on the following pages.
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 that will limit economic growth, and a gradual change in consumer behavior away from taxable goods to non-taxable items such as services and travel. As mentioned above, the first Sales Tax payment was received from the CDTFA in November 2022 and appear to reflect growth of approximately 10% from the prior year. However, receipts are currently being fully analyzed, therefore, additional information will be included in the 2022-2023 Mid-Year 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
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
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.
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. 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. As mentioned above, the first Sales Tax payment was received from CDTFA in November 2022 and appear to reflect growth of approximately 10% from the first quarter payment in the prior year. Receipts are currently being analyzed, and additional information will be included in 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 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 December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Transient Occupancy Tax $ 11,000,000 $ 3,267,054 $ 1,965,710 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 conservatively estimated growth of 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 October 2022, TOT receipts total $3.3 million, which is 66.2% above the prior year collection level of $2.0 million. 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 early point in the year, receipts are anticipated to meet or exceed the budgeted estimate by yearend.
After the collapse of
demand as a result of the
pandemic, hotel activity
has exhibited consistent
monthly gains through
2021-2022 (with typical
seasonal contraction over
the winter months).
Cumulative average
occupancy through June
2022 climbed to 58%, with
the average room rate of
$132.01. Growth is
continuing in 2022-2023 as
anticipated, with occupancy and room rates of 68.17% and $160.77 in October 2022. These rates represent the third highest monthly performance levels since April 2020, only surpassed by performance in June 2022 (72.35% and $162.92) and August 2022 (68.81% and $160.77).
Cumulatively through October 2022, average occupancy was 67.55%, the room rate was $161.47, and revenue per available room (RevPAR) was $109.08.
Reported hotel performance through October 2022 suggests continuing growth into 2022-2023, with revenues likely to exceed the current forecast. 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 December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Utility Tax $ 107,450,000 $ 30,950,395 $ 10,523,616
The Utility Tax
category includes
the Electricity
Utility Tax, Gas
Utility Tax, Water
Utility Tax, and the
Telephone Utility
Tax. Through
October, Utility
Tax receipts of
$31.0 million,
which is
significantly higher
than the prior-year
level of $10.5
million. The yearover-year increase represents higher collections in all Utility Tax categories. The increase in Electricity, Water, and Gas receipts is primarily attributable to the timing of when payments are received and booked in the City’s financial system, though increased rates and activity levels are also driving revenue growth.
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 historical collection trends and performance through October, receipts are anticipated to exceed the budgeted estimate by year-end.
In the Electricity Utility Tax category, collections through October totaled $19.4 million, which is significantly higher than the $5.1 million received in the prior year. This increase is primarily due to the timing of when payments are received and booked in the City’s financial system. The 2022-2023 Adopted Budget estimate totals $57.0 million. Based on collections through October, receipts are anticipated to exceed the budgeted estimate by year-end. Electricity Utility Tax collections will continue to be closely monitored, and if warranted, an increase to the 2022-2023 budgeted estimate may be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review that will be released on January 31, 2023.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
In the Gas Utility Tax category, collections through October totaled $2.3 million, which is significantly higher than the prior year receipts of $60,000. This increase is primarily due to the timing of when payments are received and booked in the City’s financial system. The 2022-2023 Adopted Budget estimate totals $14.0 million. Based on collections through October, receipts are anticipated to exceed the budgeted estimate by year-end. Gas Utility Tax collections will continue to be closely monitored, and if warranted, an increase to the 2022-2023 budgeted estimate may be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review that will be released on January 31, 2023.
In the Water Utility Tax category, collections through October totaled $4.7 million, which is significantly higher than prior year receipts of $939,000. This increase is primarily due to the timing of when payments are received and booked in the City’s financial system. The 2022-2023 Adopted Budget estimate totals $18.0 million. Based on collections through October, receipts are anticipated to exceed the budgeted estimate by year-end. Water Utility Tax collections will continue to be closely monitored, and if warranted, an increase to the 2022-2023 budgeted estimate may be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review that will be released on January 31, 2023.
Collections in the Telephone Utility Tax category of $4.6 million through October are 3.1% above the prior-year collections of $4.4 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. Based on collections through October, receipts are anticipated to slightly exceed the budgeted estimate by year-end.
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Business Taxes $ 86,000,000 $ 27,202,905 $ 25,139,096
The Business Taxes
category consists of the
Cannabis Business Tax,
Cardroom Tax, Disposal
Facility Tax, and General
Business Tax. Through
October, overall
collections of $27.2
million are 8.2% above
the prior-year collection
levels of $25.1 million.
This year-over-year
growth reflects higher
Cardroom
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
Business Tax, General Business Tax and Disposal Facility Tax collections, partially offset by lower Cannabis Business 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 through October, it is anticipated that receipts will exceed the overall budgeted level by year end, primarily due to higher Cardroom Business Tax collections.
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 October, receipts of $3.6 million are 15.2% below the prior-year collection level of $4.3 million. The 2022-2023 Modified Budget estimate for Cannabis Business Tax revenue totals $18.0 million, which is consistent with the 2021-2022 collection level. However, based on performance levels through October, receipts may end the year below budgeted levels. Cannabis Business Tax collections will continue to be closely monitored, and if warranted, a decrease the 2022-2023 budgeted estimate may be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review that will be released on January 31, 2023.
Through October Cardroom Business Tax receipts totaling $9.3 million have been received, which is 36.1% higher than the prior year level of $6.8 million. These collections are inclusive of the ballot measure approved by voters in November 2020 that increased taxes on cardroom operators beginning in January 2021. The 2022-2023 Modified Budget estimate for Cardroom Tax revenue totals $29.0 million, which is consistent with the 2021-2022 actual collection level.
Based on performance through October, receipts may end the year above budgeted levels.
Cardroom Business Tax collections will continue to be closely monitored, and if warranted, an increase to the 2022-2023 budgeted estimate may be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review that will be released on January 31, 2023.
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 October totaled $2.9 million, which is 4.7% above the prior-year collection level of $2.7 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 October and historical collection patterns, receipts in this category are anticipated to meet or slightly exceed the budgeted estimate by year-end.
Through October, General Business Tax receipts of $11.4 million are slightly above the prioryear collection level of $11.3 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 December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
Revenue
2022-2023
Budget Estimate
YTD
Actual
Prior YTD
Collections
Real Property Transfer Tax $ 65,000,000 $ 19,430,539 $ 42,329,351 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 October 2022, Real Property Transfer Tax collections totaled $19.4 million, which is significantly below the prior-year level of $42.3 million. In addition, the City has received the November tax receipts from Santa Clara County, which total $9.0 million. When taking into account total receipts through October and the November remittance, total Real Property Transfer Tax receipts in 2022-2023 total $28.5 million, compared to the prior year level of $38.4 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 early in the year and only four months of data is known, it is currently anticipated that Real Property Transfer Tax revenue will meet the budgeted level by year-end.
EXPENDITURES
Through October, General Fund expenditures (without encumbrances) of $378.1 million were
3.1% above the prior-year level of $366.7 million. Encumbrances of $83.8 million were 9.0% above the prior-year level of $76.9 million. General Fund expenditures and encumbrances through October of $462.0 million constitute 19.8% of the total budget including reserves and 23.8% of the budget excluding reserves. Overall, General Fund expenditures are anticipated to end the year within budgeted levels.
Through October, 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, and the Public Works Department, as they are currently tracking above estimated levels through October.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
KEY GENERAL FUND EXPENDITURES
Department
2022-2023
Budget
YTD
Actual
Prior YTD
Actual
Police $ 493,665,268 $ 143,240,218 $ 149,385,744
Overall, Police Department expenditures total $143.2 million and are currently expected to remain within budgeted levels. Personal services expenditures of $131.0 million are slightly below the anticipated level for this point of the year (29.12% expended, compared to the par level of 29.31%), though overtime expenditures continue to track high at $15.2 million (58.8% of the total $25.8 million budget). Despite the high overtime usage, the Police Department is tracking to have overall personal services savings due to vacancies. Year-to-date overtime expenditures are 14.8% above 2021-2022 levels which are primarily attributed to increased overtime usage and increased wages.
Overtime hours in the first four months of 2022-2023 increased by approximately 15.7% over the same period in the prior fiscal year. 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 $12.2 million (27.98%) of the Department’s Non-Personal/Equipment budget ($43.8 million, including carry-over encumbrances) has been expended through October. Excluding the remaining balances for centrally-determined details ($13.9 million), which include electricity, gas, and water utilities, as well as vehicle operations, maintenance, and replacement, the Police Department has approximately $17.6 million, or 40.3% of its Non-Personal/Equipment budget available for the remainder of the fiscal year. Non-Personal/Equipment expenditures are slightly below estimated levels (27.98% expended, compared to the par level of 29.31%) and are anticipated to end the year within budgeted levels. 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,
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
field training officers, academy recruits, and sworn personnel on disability, modified, or other 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 18.8% as of October 28, 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 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 356,811 hours through October 2021, which has now been reduced to 354,179 as of October 2022. The increase in “YTD Overtime Expenses for Staff at the 480-hour Limit” is attributable to the overall elevated overtime usage through October as described above.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
October
20213
October
2022
% Change
from 2021
to 2022
% Change
from 2020
to 2021
# of Sworn Personnel at 480-hour
limit
449 464 3.34% 0.45%
# of Sworn Personnel between 240
and 480 hours
275 262 (4.73%) 11.79%
Sworn Compensatory Time Balance
Liability (hours)
356,811 354,179 (0.74%) 1.52%
Sworn Compensatory Time Balance
Liability ($)
$27.2 M $27.1 M (0.48%) 9.78%
YTD Overtime Expenses for Staff at
480-hour Limit ($)4
$6.3 M $7.5 M 18.08% (1.76%)
The table below provides a summary of sworn staffing vacancies and street-ready officers. The June 2022 and October 2022 academies started with 25 and 26 recruits, respectively. The Department is anticipating that the February 2023 and June 2023 academies will draw 30 and 45 recruits, respectively. As of October 28, 2022, of the 1,173 authorized sworn staff, 90 were in training (7.7%) and 67 were on disability/modified duty/other leaves (5.7%). 2021-2022
(as of 10/29/2021)
2022-2023
(as of 10/28/2022)
Authorized Sworn Positions 1,153 1,1735
(Vacancies)/Overstaff 11 (64)
Filled Sworn Positions6 1,164 1,109
Field Training Officer/Recruits (115) (90)
Street-Ready Sworn Officers Available 1,049 1,019
Disability/Modified Duty/Other Leaves (79) (67)
Street-Ready Sworn Officers Working 970 952
3 The Bi-Monthly Financial Report for September/October 2021 was under reported due to the omission of the final pay period of October 2021. All data categories have been revised in this column to include the missing pay period. 4 The Bi-Monthly Financial Report for September/October 2021 over reported YTD Overtime Expenses for Staff at 480-hour limit ($) 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. 5 The amount of authorized sworn positions has increased to 1,173, as 20.0 new Police Officer positions included in the 2022-2023 Adopted Budget took effect starting with the October academy. 6 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 December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
The table below further identifies the length of time that sworn officers have been on leave status, as of October 28, 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. 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 11 sworn officers. The current number of sworn officers on leave (67) is lower than the historical average (75) and within the normal range of variability seen over the last five years.
In comparison, the Bi-Monthly Financial Report for July/August 2022 reported 64 sworn officers on leave.
Department
2022-2023
Budget
YTD
Actual
Prior YTD
Actual
Fire $ 274,383,762 $ 84,773,109 $ 90,172,703
The Fire Department’s budget totals $274.4 million, which is comprised of $262.0 million in personal services and $12.4 million in non-personal/equipment expenditures. Overall, Fire Department expenditures are performing slightly above estimated levels through October 2022.
Personal services expenditures of $79.8 million, or 30.4% of the Adopted Budget, are trending slightly higher than the expected level of 29.3% 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 wildland season in 2022 (which are anticipated to be reimbursed by the State of California’s Office of Emergency Services), while continuing to maintain the daily minimal staffing levels of deployed resources of 190 personnel. The Department responded to over 34,000 incidents (Priority 1 and Priority 2 type calls) through October 2022, compared to 32,000 incidents over the same period in 2021-2022. The Fire Department’s non-personal/equipment budget of $12.4 million was 40.4% expended or encumbered through October 2022. The Department’s nonpersonal/equipment expenditures are above the expected levels of 29.31% primarily due to encumbrances ($2.9 million). At this point in the year, it is expected the Fire Department will remain within budgeted levels.
Length of Leave Status (as of 10/28/2022)
Type of Leave 0-3 Months 3-6 Months 6-12 Months 1 Year + Total Disability 6 6 3 3 18
Modified Duty 12 10 2 6 30
Other 10 2 5 2 19
Total 28 18 10 11 67
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
The average sworn vacancy rate of 8.2% through October 2022 (64 sworn positions are currently vacant) is higher than the vacancy rate of 7.4% experienced at this time last year. 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 will be completed in November 2022 with 14 graduates and Academy 22-02 is expected to be completed in February 2023 with 13 graduates.
As part of the approval of the 2021-2022 Annual Report, the City Council authorized $1.5 million in seed funding to implement the Fire Department’s Lateral Firefighter/Paramedic academy anticipated to occur in winter 2023 to help mitigate impacts from a nationwide shortage of paramedics. To extend their reach for recruitment and to pull from a larger, diverse audience, the Department will advance their outreach efforts through their partnerships with local, regional, and nationwide public safety agencies. It is anticipated that recruitment will be conducted in November 2022 with a tentative academy start date in winter 2023. The Department intends to maintain the ongoing efforts to address paramedic recruitment challenges and will continue to recruit, hire, and train personnel to address vacancies and keep pace with staffing attrition.
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 October, of the 31 current authorized staffing level, the Fire Department had 31 sworn personnel on administrative assignments.
Department
2022-2023
Budget
YTD
Actual
Prior YTD
Actual
Public Works $ 44,430,660 $ 17,735,802 $ 14,156,641
The Public Works Department expenditures are above estimated levels through October, which is due to both higher personal services and non-personal/equipment costs. Personal services expenditures of $8.0 million are above the anticipated level for this point of the year (31.4% expended, compared to the par level of 29.3%). Non-personal/equipment expenditures of $9.7 million (includes $4.3 million in encumbrances) are also above anticipated levels with 51.5% of the Modified Budget expended through October.
Through October, personal services expenditures are above expected levels primarily due to higher than anticipated expenditures for Facilities Maintenance and Operations. Overall, overtime expenditures totaled $537,937 compared to the budgeted amount of $840,682 (64.0%, compared to the par level of 29.3%) and temporary staffing expenditures totaled $715,068 compared to the budgeted amount of $1.5 million (47.2%, compared to the par level of 29.3%), through October.
Currently, the Personal Services budget is tracking to exceed by approximately $1.7 million - $1.9 million; however the projected overage is anticipated to significantly decrease over the course of the fiscal year. The current elevated costs with Facilities Maintenance and Operations are mostly attributable to: a focus on maintenance work in the summer and fall months that is not expected to
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
GENERAL FUND (CONT’D.)
continue at the same pace in winter and spring; and capital project costs there were temporarily charged to the Personal Services appropriation and have not yet been reallocated to the specific caital project budget. As maintenance works slows somewhat in the second half of the fiscal year and charges are reallocated to individual capital project budgets, the projected overage amount is expected to drop. The Department will continue to actively monitor expenditures to remain within budgeted levels, though budget adjustment actions may be brough forward as part of a future budget action.
Non-personal/equipment expenditures, including encumbrances, are also well above budgeted levels at 51.5% expended through October. This is primarily due to the encumbrances of consultant contracts for facilities repairs and maintenance as well as the janitorial contracts that are managed by the Department. Overall, non-personal/equipment expenditures are expected to end the year within budgeted levels.
CONTINGENCY RESERVE
The General Fund Contingency Reserve was amended as part of the 2021-2022 Annual Report, increasing the reserve by $5.0 million, from $41.0 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.
OTHER FUNDS
Airport Funds
On a fiscal year-to-date basis, the Norman Y. Mineta San José International Airport (SJC) has enplaned and deplaned 4.3 million passengers, an increase of 39.4% from the figures reported through October of the prior year. The chart below depicts the year-over-year change for the month of October and Fiscal Year-to-Date for the last six years.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
OTHER FUNDS (CONT’D.)
Fiscal year-to-date mail, freight and cargo totaled 25.6 million pounds, which represents a 9.6% increase over year-to-date October of 2021. All revenue-generating activities posted increases over the same period of the prior fiscal year: Ground Transportation by 59.0%, Landed Weights by 36.6%, Gallons of Aviation Fuel sold by 20.9%, Parking Exits by 29.1%, and Traffic Operations (landings and takeoffs) by 20.0%.
Year-to-date Airport revenue through October tracked 11% above estimated levels. Airport revenue categories experienced strong performance through this period and primarily tracked above their benchmark levels: Terminal Concessions (+36%), Parking & Roadway (+22%), General and Non-Aviation (+17%), Landing Fees (+4%), and Airfield revenues (+2%), while Terminal Rentals (-3%) tracked slightly below budgeted estimates. The strong performance when compared to budgeted levels can be attributed to the increase in passengers that have continued beyond the busy summer months; October is the sixth consecutive month with over one million passengers. Additionally, the Airport continues to reopen concessions that were temporarily closed throughout the pandemic. Airport revenues will continue to be closely monitored through the end of the fiscal year.
Through October, both the Airport Customer Facility and Transportation Fee Fund and Airport Maintenance and Operation Fund expenditures tracked below budgeted levels. In the Maintenance and Operation Fund, personal service expenditures were 26.6% of budget compared to the benchmark of 30.8%, while non-personal/equipment expenditures (excluding encumbrances) were
15.4% compared to the benchmark of 21.9%. Non-personal/Equipment expenditures in the Customer Facility and Transportation Fee Fund were 11.3% compared to the straight-line benchmark of 33.3%. The activity levels, revenues, and expenditure status of the Airport Funds will continue to be closely monitored throughout the fiscal year.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
OTHER FUNDS (CONT’D.)
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 anticipates repaying all outstanding commercial paper debt of $60.0 million by the end of 2023-2024.
Through October, Energy Sales totaled $188.7 million, or 45.8% of the budgeted estimate of $411.9 million. Cost of Energy expenditures including encumbrances totaled $203.9 million, or
68.6% 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 Department monitors energy procurement activities closely. The Department estimates Energy Sales will end the year at approximately $498.3 million, or 21.0% above the current Modified Budget estimate of $411.9 million.
Similarly, total Cost of Energy is estimated to end the year at $344.0 million or 17.3% above the current Modified Budget of $293.3 million. The unrestricted Ending Fund Balance for San José Clean Energy Fund is estimated to end the year at $204.9 million. Budget actions to increase Energy Sales and Cost of Energy allocations will be brought forward for City Council consideration as part of the 2022-2023 Mid-Year Budget Review.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
OTHER FUNDS (CONT’D.)
Construction and Conveyance Tax Funds
Through October
2022, Construction
and Conveyance
(C&C) Tax receipts
totaled $11.9
million, which
represents 23.8% of
the 2022-2023
Adopted Budget
estimate ($50.0
million). This
amount is 39.5%
below the prior year
collection level of
$19.7 million. In
addition, the City
has received the November Conveyance receipts from Santa Clara County, which total $4.4 million and 11.0% below the November 2021 Conveyance collection level of $4.9 million. When taking into account total receipts through October and the estimated November collections, C&C receipts in 2022-2023 total $16.3 million, 32.7% of the 2022-2023 budgeted estimate, and 33.8% below the prior-year collection level of $24.7 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 early in the year, it is anticipated C&C collections may fall below the budgeted estimate by yearend. 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 MidYear 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.
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
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
OTHER FUNDS (CONT’D.)
several other categories, such as storm and sanitary sewer system fees. Based on preliminary information known for the first four 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 October, the
Building and Structure
Construction Tax
collection level of $6.7
million represents
35.2% of the budgeted
estimate of $19.0
million, and is 38.4%
above 2021-2022
receipts of $4.8
million. The year-overyear increase is
primarily attributable to
higher construction
permit valuation for
commercial and
industrial categories. 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. Based on collections through October, it is anticipated that Building and Structure Construction Tax Revenue will meet or exceed the budgeted estimate by year-end.
Through October, the Construction Excise Tax collection level of $3.4 million represents 21.0% of the budgeted estimate of $16.0 million, and is 17.3% below the 2021-2022 receipts of $4.1 million. Construction Excise taxes are applied to residential and commercial permit activity.
Residential permit valuation has decreased year-over-year, which is consistent with the decrease in tax receipts. However, total commercial activity has increased from the same period last year.
Commercial activity could be contributing to the lower tax receipts, though, due potentially higher office-general business and/or office-research and development activity in 2022-2023 (which is taxed at a lower rate than general commercial projects). 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. Based on collections through October, 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 December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 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 $13.0 million through October are 10.1% 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 point in the year, Building Fee revenues are anticipated to meet or exceed the budgeted estimate by year-end. It should be noted that effective January 2023, the City of San José building and fire codes will be amended to meet the State of California code standards, resulting in a surge of activity among developers and contractors to obtain project approvals under the current building codes. Overall activity levels are expected to stabilize once the new building codes are effective.
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 October, Citywide Planning Fee revenues of $1.2 million are 9.4% above the prior-year collection level of $1.1 million. The 2022-2023 Adopted Budget estimate of $3.3 million anticipates a 3.0% decrease from the 2021-2022 actual collection level of $3.4 million. Based on current collection trends at this point in the year, Citywide Planning Fee revenues are anticipated to meet or exceed the budgeted revenue 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 October of $2.9 million are $805,000 (38.1%) 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 meet or exceed the 2022-2023 budgeted revenue estimate. As mentioned above, effective January 2023, the City of San José building and fire codes will be amended to meet the State of California code standards, resulting in a surge of activity among developers and contractors to obtain project approvals under the current building codes.
Overall activity levels are expected to stabilize once the new building codes are effective.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
OTHER FUNDS (CONT’D.)
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 October, Planning Fee revenues of $2.4 million are 22.5% below the prior-year collection level of $3.1 million. The 2022-2023 Adopted Budget estimate of $8.3 million requires a 1.4% increase from the 2022-2023 actual collection level of $8.2 million. Based on current collection trends at this point in the year, Planning Fee revenues are anticipated to end the year below the budgeted revenue estimate.
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 October 2022 of $3.9 million decreased 8.7% from the prior-year level of $4.3 million. The Public Works Development Fee Program total revenue collections are comprised of $2.4 million from the Development Services Fee Program, $1.5 million from the Utility Fee Program, and approximately $15,000 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 October, revenue collections in the Public Works Development Fee Program are projected to meet or fall slightly below budgeted levels by year-end.
CONCLUSION
Although economic conditions remain positive on an overall basis at this point of the fiscal year, persistent high inflation rates, high gas prices, and rising interest rates have begun to negatively impact several sectors of the economy, most notably the real estate market.
While it is still 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 Business Taxes, 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 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.
PUBLIC SAFETY, FINANCE, AND STRATEGIC SUPPORT COMMITTEE December 2, 2022
Subject: Bi-Monthly Financial Report for September/October 2022
CONCLUSION (CONT’D.)
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