CITY OF SAN MATEO
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CITY OF SAN MATEO
Agenda Report
City Hall
330 W. 20th Avenue
San Mateo CA 94403
www.cityofsanmateo.org
Agenda Number: 11 Section Name: {{section.name}} Account Number: 10-2031 File ID: {{item.tracking_number}} TO: City Council
FROM: Alex Khojikian, City Manager
PREPARED BY: Finance Department
MEETING DATE: February 18, 2025
SUBJECT:
2024-25 Mid-Year Update and Budget Amendments – Adoption RECOMMENDATION:
Adopt a Resolution amending the FY 2024-25 General Fund operating budget to reflect the recommended mid-year budget adjustments and receive the FY 2024-25 mid-year budget update.
BACKGROUND:
This agenda report provides a financial update on the City’s major funds: the General Fund and the Sewer Fund. It summarizes the City’s mid-year fiscal status by analyzing anticipated revenues and expenditures based on data through December 2024 and comparing the projections to the FY 2024-25 budget.
The mid-year projections incorporate FY 2023-24 results, year-to-date actuals, and new data which were not available when the budget was originally developed. The focus of this report is on the General Fund, the City's primary operating fund, which accounts for major tax revenues and funds essential city services.
GENERAL FUND
General Fund Revenues
With over half of the fiscal year’s actual transactions analyzed, the City’s General Fund revenues are now projected to exceed the 2024-25 budget by $4.1 million. The adopted budget projected total revenues of $169.8 million. Based on year- to-date results through December 2024, total revenues are now expected to reach $173.9 million.
The favorable budget variance is primarily due to higher-than-expected real property transfer tax, partially offset by a decline in sales tax projection. The following analysis provides insight into the primary contributing factors to the overall revenue forecast.
General Fund Revenues
(in millions)
2024-25
Adopted
Budget
2024-25
Mid-Year
Projection
Change in $ Change in %
Property Tax 84.0$ 84.0$ -$ 0% Sales Tax 30.1 27.9 (2.2) -7%
Real Property Transfer Tax 8.0 14.0 6.0 75%
TOT 4.0 4.0 - 0%
Interest Earnings 4.2 5.2 1.0 24%
All Other 39.5 38.8 (0.7) -2%
TOTAL 169.8$ 173.9$ 4.1$ 2%
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PROPERTY TAX - $84.0M ADOPTED | $84.0M PROJECTED
Property tax is the largest and most stable tax revenue and is expected to meet the $84.0 million budget projection for FY 2024-25. However, two factors could impact future property tax growth:
High-Interest Rates - Over the past 13 years, the City’s real property assessed values (AV) have grown annually with an average 6.7 percent. For FY 2024-25, projected AV growth is 4.8 percent, indicating a slowdown due to high interest rates.
County Assessor’s data confirmed that secured property tax growth will align with the AV growth. However, if high interest rates persist, future property tax growth may be constraint.
Uncertainty Around VLF shortfalls - Property Tax In-Lieu of Vehicle License Fee (VLF) is a major component of the City’s property tax revenue. The County’s VLF shortfall is growing as more school districts shift from non-basic-aid to basic-aid status. This issue created two major challenges:
•No reliable funding for VLF shortfalls – VLF is funded by ERAF and property tax from non-basic-aid school districts. Of the 23 school districts in the San Mateo County, only 5 school districts remain as non-basic-aid schools. This has led to persistent VLF shortfalls that require the County to file an annual claim with the State to backfill the prior fiscal year’s VLF shortfalls, resulting in a two-year delay in the VLF shortfall payments. The main concern is whether the State will backfill the VLF shortfall. If the State refuses to pay its VLF shortfall obligations, currently there is no other funding source available to the County and cities to fill the funding gap. •VLF shortfalls continue to grow - County-wide VLF shortfalls have grown over the years, from $32.4 million in FY 2021-22 to $120.8 million in FY 2024-25. As a result, the City’s share of the County-Wide VLF shortfalls also grew from $1.9 million in FY 2021-22 to $6.6 million in FY 2023-24 and $7.0 million in FY 2024-25.
Fiscal Year County-Wide VFL Shortfall City’s VLF Shortfall City received VLF shortfall (2-Year Delay) FY 2021-22 $32.4 million $1.9 million $2.0 million (FY 2019-20 VFL shortfall) FY 2022-23 $70.0 million $4.1 million $5.7 million (FY 2020-21 VLF shortfall) FY 2023-24 $114.4 million* $6.6 million* $1.9 million (FY 2021-22 VLF shortfall) FY 2024-25 $120.8 million* $7.0 million* $4.1 million (FY 2022-23 VLF shortfall) Source of Information: San Mateo County / City of San Mateo Note *: The State has not yet committed to backfill the FY 2023-24 and 2024-25 VLF shortfalls.
The VLF shortfall is expected to grow as the remaining five school districts transition to basic-aid status. A task force, including City Managers from cities in the County, is working to advocate for a long-term solution to address this issue.
Staff will continue to monitor developments and adjust our budget strategies accordingly.
SALES TAX - $30.1M ADOPTED | $27.9 M PROJECTED
Sales tax, the second largest tax revenue source for the General Fund, is particularly susceptible to economic cycles. At mid-year, sales tax revenue is projected to remain flat at $27.9 million compared to the previous year. At this point, sales tax is projecting to miss the FY 2024-25 budget estimate by $2.2 million.
San Mateo’s sales tax base relies heavily on General Consumer Goods (GCG), Restaurants, and Autos. According to the City’s sales tax consultant, HdL, the following trends have contributed to the decline in sales tax revenue: sales tax from GCG and autos has declined since FY 2023-24, and San Mateo’s decline in GCG is consistent with the County and State trends. Neighboring cities also reported similar trends. In a high-inflation and high-interest rates environment, electronic- appliance, specialty and home furnishing stores were hurt the most when consumers refrained from spending on discretionary items. Autos, especially high-end auto dealerships, have been hindered due to shifting consumer behaviors and persisted high interest rates. Sales tax from fuel and service stations also declined due to lower gas prices and reduced gas consumption. In addition, as online sales tax is first accumulated at the County Pool and then allocated to cities based on local sale tax amounts, declines in sales tax also reduced the City’s allocation from the County Pool.
Staff will continue to monitor the sales tax trends and adjust the forecasts as needed.
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REAL PROPERTY TRANSFER TAX - $8.0M ADOPTED | $14.0M PROJECTED Real property transfer tax (RPTT), the third largest tax revenue for the General Fund, is highly volatile and subject to economic cycles. At mid-year, regular RPTT (0.5 percent) is projected to remain at $8 million, in line with the budget projection. However, Measure CC RPTT, an additional 1 percent RPTT applies to properties sold or transferred with a value of $10 million or more, is outperforming original expectations. At mid-year, the City has already received $4.8 million Measure CC RPTT revenue, and expected to reach $6 million by year end. Total RPTT is projected to be $14.0 million for FY 2024-25.
OTHER GENERAL FUND REVENUES
Other General Fund revenues are on track to stay within budget, except the following:
•Business tax is anticipated to be $0.5 million lower than original budget estimate due to anticipated tax apportionment adjustments.
•Golf fees will see a $0.2 million decrease in FY 2024-25 due to temporary closure of the PAR 3 restaurant from mid-October 2024 until the restaurant reopen in Fall 2025, resulting in no rental income during this period. •Investment earnings are projected to outperform the original budget by $1.0 million due to favorable investment yields in a high-interest rate market.
In summary, VLF shortfalls remain a long-term financial concern; sales tax revenue is underperforming, requiring a $2.2 million budget adjustment; and Measure CC RPTT is outperforming expectations. Overall, General Fund revenues exhibit resilience and are projected to exceed the original budget by $4.1 million in FY 2024-25. Staff recommend increasing the General Fund revenue budget by $4.1 million to align with the mid-year projections.
General Fund Expenditures
The adopted 2024-25 budget included $180.4 million in General Fund total expenditures (including transfers out). Since July 1st, 2024, several budget appropriations have been approved by Council (Pools and Par 3). As such, the current budget stands at $183.9 million. Based on December 2024 year-to-date transactions, total expenditures are projected to be $180.3 million, a favorable budget variance of $4.0 million. The majority of the favorable budget variance stems from vacancy savings, which is spread throughout all departments.
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Since local government expenditure budgets (appropriations) serve as the legal level of budgetary control, it is common that some level of savings will be realized in any fiscal year. Although departmental budgets were analyzed for both underfunded operating needs and anticipated budgetary savings, the focus was on ensuring budget adequacy for General Fund operations for the remainder of the fiscal year.
As such, based on the mid-year review, the following General Fund operating budget adjustments are recommended:
•City Clerk’s Office – Increase election budget by $137,000.
The County’s Elections Office has informed the City that the November 2024 election costs will range between $281,000 and $337,200, exceeding the current budget of $225,000. This original budget included $200,000 for County election costs and $25,000 for anticipated translation, legal advertising, and mailing expenses related to election. Staff proposed to increase the General Fund operating budget by $137,000 to ensure adequate budget for election-related costs.
•Public Works: Re-appropriate $224,000 for the wet weather preparation. $224,000 in unspent funds allocated for wet weather preparation in FY 2023-24. These funds were not utilized due to project delays: Marina Lagoon Diesel Engines repairs - overhaul services were delayed due to the scheduling lead times, and Marina Lagoon’s new rectifier and upgrade to new programming platform – procurement was delayed due to insufficient staff resources. The proposed budget amendment, if approved, will carry forward $224,000 unspent funding to FY 2024-25 to ensure sufficient funding for Public Works to complete the preparation works.
Comparison with Prior Estimates
With the mid-year updates, the General Fund is projected to generate $173.9 million in total revenues and incur $180.3 million in total expenditures (including transfers out), resulting in a $6.4 million deficit for FY 2024-25.
Due to budget savings from operating expenses and improved revenue projection in certain categories, the projected deficit is smaller than the $10.6 million deficit in the adopted budget and the $14.1 million deficit in the current budget.
However, the City faced a $5 million budget shortfall last year, and at mid-year, it is projecting another $6.4 million deficit.
Given the ongoing shortfall, staff are working on a financial sustainability plan to address the structure deficit issue.
Gneral Fund Expenditures
(in millions)
2024-25
Adopted
Budget
2024-25
Current
Budget
2024-25
Mid-Year
Projection
Change in $ Change in %
Salaries and Wages 56.1$ 56.6$ 55.6$ (1.0)$ -1.8% Benefits 23.5 23.5 23.0 (0.5) -2.1%
Pension UAL 13.0 13.0 13.0 - 0.0%
Non-Personnel Operating 40.1 40.6 38.5 (2.1) -5.2%
SMC Fire and legacy cost 36.1 36.1 36.1 - 0.0%
Transfer Out 11.6 14.1 14.1 - 0.0%
TOTAL 180.4$ 183.9$ 180.3$ (3.6)$ -2.0% General Fund
(in millions)
2024-25
Adopted
Budget
2024-25
Current
Budget
2024-25
Mid-Year
Projection
Revenues 169.8$ 169.8$ 173.9$
Expenditures (including
transfers out) 180.4 183.9 180.3
Deficit (10.6)$ (14.1)$ (6.4)$
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General Fund Balance
The General Fund beginning balance was $118.0 million (per audited 2023-24 financial report). The projected General Fund ending balance as of June 30, 2025 is $111.6 million.
A General Fund Reserve Policy Study Session is scheduled for March 2025 to seek Council direction on right-sizing the General Fund reserves and establishing a policy framework for General Fund reserve management, usage, and replenishment, to ensure the City’s financial stability and sustainability.
SEWER FUND
The Sewer Fund has maintained sufficient liquidity to support ongoing operations and critical capital improvement projects. The approved 3 percent annual sewer rate increase (effective FY 2023-24 through FY 2027-28) provide necessary funding to complete the construction of the new wastewater treatment plant, replacing the City’s aging treatment facility, improve the City’s sewer collection system to address regulatory requirements and minimize potential for sanitary sewer overflows, fund ongoing rehabilitation of aging sewer pipelines, and support ongoing operations of the City’s sewer enterprise.
For FY 2024-25, the Sewer Fund budget includes $91.9 million in total revenues, $57.9 million in total expenses, and $28.1 million of new funding added to the Sewer Fund’s capital budget for capital improvement projects (CIP).
Through mid-year review, Sewer Fund revenues are expected to be within budget assumptions, with exception of investment earnings, which are projected to exceed budget estimates. As a result, total Sewer Fund revenues are now projected to be $95.8 million for FY 2024-25. Operating expenses are estimated at $55 million, lower than the current budget largely due to estimated vacancy savings. CIP spending is anticipated to increase as the City nears completion of the Wastewater Treatment Plan expansion project.
BUDGET IMPACT:
If approved, the proposed budget amendments will increase the General Fund revenue budget by $4.1 million and increase the General Fund operating budget by $361,000, with $137,000 to the City Clerk’s Office for election costs and $224,000 to Public Works for wet weather preparation.
ENVIRONMENTAL DETERMINATION:
This mid-year budget update is not a project subject to CEQA, because it is a government fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. (CEQA Guidelines Section 15378(b)(4).)
NOTICE PROVIDED
All meeting noticing requirements were met.
ATTACHMENTS
Att 1 – Proposed Resolution for FY 2024-25 Mid-Year Budget Amendments
STAFF CONTACT
Karen Huang, Finance Director
[email protected]
(650) 522-7110