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City of South San Francisco
Legislation Text
File#: 22-431 Agenda Date: 5/23/2022
Version: 1 Item #: 2
Report regarding the City of South San Francisco Operating Budget for Fiscal Year 2022-23. (Jason Wong, Acting Director of Finance)
RECOMMENDATION
It is recommended that the Budget Standing Committee provide feedback in preparation for the City Council study session on June 8, 2022 related to the establishment of the City’s Fiscal Year (FY) 2022-23 operating budget.
BACKGROUND/DISCUSSION
In 2017, the City made the strategic shift away from a one-year operating budget cycle to a biennial operating budget cycle. FY 2019-21 was the last biennial operating budget, which was adopted by Council on June 26, 2019. Due to the extraordinary economic downturn stemming from the COVID-19 global pandemic, significant adjustments were made to the FY 2019-20, FY 2020-21, and FY 2021-22 budgets to react to the dynamically changing conditions. As a result, for FY 2022-23, staff is pursuing an annual budget, as opposed to a biennial budget for the upcoming fiscal year. The goal is to resume the two-year budget cycle once the economy shows signs of stabilization and longer-term recovery, as biennial budgeting generally requires a longer commitment of policy direction and funding levels.
CITYWIDE OVERVIEW – EXECUTIVE SUMMARY
The General Fund is the City’s largest and core operational fund, where the bulk of the essential services delivered by departments such as Economic and Community Development, Fire, Library, Parks and Recreation, Police, Public Works and City Administration are budgeted.
Given the ongoing global economic dislocations, including Russia’s invasion of Ukraine and COVID-19 disruptions of office work and supply chains, revenue projections remain uncertain. In particular, the projections are sensitive to changes in personal income, inflation, interest rates, and the extent to which workers return to offices. Nevertheless, the projections presented reflect the most up to date economic and financial data available at the time of writing. The FY 2022-23 Operating Budget was developed assuming that many of the revenue categories would continue to recover with the rollout of highly effective COVID-19 vaccines and corresponding loosening of public health restrictions. The City is experiencing a steady rebound of travel related revenues such as Transient Occupancy Tax and Commercial Parking Tax at San Francisco International Airport. Full recovery to pre-pandemic levels is not expected until business travel returns. On the expenditure side, the proposed budget unfreezes all frozen positions during the pandemic, adds new positions to provide promotional opportunities and assist existing staff with current workload, uses infrastructure reserves to fund critical infrastructure projects necessary throughout the City, and increases spending to provide additional services to the community.
P.O. Box 711
(City Hall, 400 Grand Avenue)
South San Francisco, CA
File#: 22-431 Agenda Date: 5/23/2022
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In March 2021, the federal government passed the American Rescue Plan Act (ARPA) emergency stimulus package which included $350 billion in aid for states, local and Tribal governments to support their responses to and recovery from the COVID-19 public health emergency. South San Francisco was awarded $12.28 million – $6.14 million of which was received in June 2021. The remaining half is expected to be received next month. The ARPA funds will be used primarily to replace lost public sector revenue. A portion of the ARPA funds along with general fund revenues were used to support critical social and community programs such as the Guaranteed Income Program, Youth Summer Internship Program, Food Voucher Program, Restaurant Grants, City Broadband Expansion, and seed funding for the City’s Economic Advancement Center.
While the current fiscal year has not yet closed, it is the expectation that, for the General Fund, the fiscal year will end in line or slightly more positively than originally expected. To remind the Budget Standing Committee, when the FY 2021-22 budget was adopted, the expectation was that the General Fund operating shortfall (revenues less expenditures) would be $2.8 million deficit which would be funded through utilization of the General Fund unassigned fund balance built up from operating surpluses in prior years. The projected deficit was revised lower to $2.38 million after adjustments to revenues and expenditures during the mid-year review in February 2022. The table below is the FY 2021-22 General Fund Budget Summary following mid-year adjustments.
Table 1: FY 2021-22 General Fund Budget Summary
FY2020-21 General Fund Surplus $15,000,000
FY2021-22 Adjustments:
- Budgeted Deficit for FY2021-22 ($2,800,000)
+ Net Mid-Year Adjustments $ 418,000
- Mid-year Adjusted Deficit
- Transfer to Infrastructure Reserves
($2,382,000)
($8,500,000)
General Fund Surplus less Adjustments equals:
Net GF Unappropriated Surplus Fund Balance $4,118,000
Should actual revenues prove to be stronger than expected or expenditures come in less than budget, this would translate into a smaller deficit which would boost available surplus unassigned fund balance.
For the upcoming fiscal year, FY 2022-23, the Finance Department is projecting operating revenues of $122,262,182 and $122,162,770 in operating expenditures (not including carry over purchase orders), giving a small net operating surplus of $99,412 which would be added to the General Fund’s unassigned fund balance.
FY2022-23 Projections
Revenues $ 122,262,182
Expenditures $ 122,162,770
Net Surplus $ 99,412
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PROPOSED FY 2022-23 GENERAL FUND BUDGET
South San Francisco is well positioned to recover economically from COVID-19, with a large industrial base anchored by the world’s largest biotechnology research center. It is expected that the City will continue to experience uptick in various revenue streams throughout FY 2022-23, as businesses recover, restaurants reopen, air travel (both domestic and international) improves and hotel occupancy increases.
One of the largest unexpected monetary considerations that has emerged in FY 2021-22 is the Budget Trailer Bill Language proposed by the State’s Department of Finance regarding the In-Lieu Vehicle License Fee (VLF) shortfall. Currently, the number of non-basic aid schools in the County determines how much property tax is available for VLF distribution to cities and San Mateo County. For FY 2021- 22, the City is entitled to $9.1 million in VLF revenue but has only collected $6.9 million this year. The shortfall of $2.2 million is expected to be backfilled by the State within the next two fiscal years.
The proposed language of the trailer bill essentially requires counties and cities to pay for the State’s VLF obligations using ERAF money that the local taxing agencies are already entitled to receive. If passed, the State budget bill will significantly reduce the City’s excess ERAF revenue given the trend of declining numbers of non-basic aid schools in San Mateo County. Cities and counties are working with their legislative lobbyists to respond to this draft language, which is not expected to be final until June 2022.
Staff expects that the negative impacts of the $2.2 million in VLF shortfall will largely be curtailed by stronger revenues in other areas along with tough expenditure controls at the departmental level. However, final results for the current fiscal year will not be determined until the books are closed and the accounts audited.
1. FY 22-23 GENERAL FUND REVENUE PROJECTIONS
The revenue forecast (not including Measure W) for FY 2022-23 is shown below, set against FY 2021-22 budget and FY 2020-21 actuals:
Revenue Types
FY2020‐21 FY2021‐22 FY2022‐23
Actuals
Adopted
Budget
Adjusted
Budget*
Proposed
Budget
%age Change
from
FY2020‐21
Taxes 74,849,595 71,305,834 73,555,834 80,849,791 13.4% Property Tax 44,239,406 41,074,710 41,074,710 43,804,769 6.6% Sales Tax 19,370,155 19,531,177 20,281,177 20,991,018 7.5% Transient Occupancy Tax 6,710,270 7,085,194 8,585,194 11,160,752 57.5% Other Tax 4,529,764 3,614,753 3,614,753 4,893,252 35.4% Franchise Fees 4,498,202 4,600,000 4,600,000 4,600,000 0.0% Licenses and Permits 15,589,001 16,453,166 16,453,166 15,500,000 ‐5.8% Fines & Forfeitures 535,750 676,975 676,975 710,824 5.0% Intergovernmental 4,323,148 2,325,338 4,783,652 2,844,618 22.3% Charges for Services 6,516,155 9,287,470 7,794,670 8,799,097 ‐5.3% Planning 206,787 226,882 226,882 879,000 287.4% Fire 2,934,940 2,626,314 2,626,314 2,626,314 0.0%
Parks & Recreation 1,157,796 2,966,522 1,473,722 2,796,248 ‐5.7% Police 880,766 930,780 930,780 979,649 5.3%
City Admin & Other 1,281,866 2,536,972 2,536,972 1,517,887 ‐40.2% File#: 22-431 Agenda Date: 5/23/2022
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Revenue Types
FY2020‐21 FY2021‐22 FY2022‐23
Actuals
Adopted
Budget
Adjusted
Budget*
Proposed
Budget
%age Change
from
FY2020‐21
Money & Property 2,245,296 4,194,976 4,194,976 5,453,469 30.0% Other Revenues 733,823 232,718 309,383 259,383 11.5%
Transfers In 2,272,022 1,187,080 4,018,961 3,245,000 173.4% ARP / Fund Balance
TOTAL REVENUES $111,562,992 $110,263,558 $116,387,617 $ 122,262,182 10.88% *Adjusted budget includes approx. $6.1 million revenue adjustments made throughout the fiscal year.
Property Tax remains the City’s largest revenue component and is projected to be $43.8 million in FY 2022-23. Property tax revenues have increased at an annual rate of 6% over the last five years, redolent of a booming economy and a high rate of development. As discussed earlier, the growth of this revenue stream is overshadowed by risk of increasing VLF shortfalls from declining numbers of non-basic aid schools and the potential loss of excess ERAF if the budget trailer bill proposed by the State Department of Finance passes in June 2022. To be conservative, staff has realigned the projection for VLF and excess ERAF for FY 2022-23 based on the latest information available.
Sales Tax revenues are expected to increase by 7.5% to $21.0 million for FY 2022-23. Sales tax receipts continue to be strong as retail sales, grocery costs and gasoline prices remain elevated due to the highest inflation rates in 40 years.
Transient Occupancy Tax (TOT) revenue is expected to continue with the gradual recovery as demonstrated in the 2nd half of FY 2021-22. TOT was hit the hardest during FY 2020-21 with collection dropping to an all-time low of $6.7 million (40% of the pre-pandemic amount.) Since then, domestic leisure travel shows signs of recovery with the easing of traveling restriction and widespread vaccinations.
The City’s TOT revenue, which is highly dependent on business travel, remains slow in growth. Given the current trend of monthly TOT collections, staff is projecting this revenue stream will reach $11.2 million which is 65% of the pre-pandemic level in the upcoming year.
Licenses and Permit revenues have been relatively stable over the past several years as construction and economic development throughout the City remains strong coupled with the low interest rates environment. For FY 2022-23, staff is projecting $15.5 million which is a slight decline in revenues related to construction and economic development due to high inflation prices, supply chain issues, and raising interest rates.
Charges for Services revenues have also experienced a significant downturn because of the pandemic.
Fire, police and planning revenues have been relatively stable over the past several years while Park & Recreation revenues have been volatile. For FY 2022-23, we expect a rebound in Park and Recreation revenues from facility rentals, day care programs, aquatic programs & various other classes. Staff projects revenue from recreational activities to exceed the FY 2021-22 Adjusted Budget but remain below prepandemic levels. Revenues are projected to be $8.8 million which is 5.3% lower than the FY2021-22 adopted budget.
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2. PROPOSED FY 2022-23 GENERAL FUND EXPENDITURES
The following table shows the proposed FY 2022-23 General Fund expenditure budgets by department.
Expenditure Types
FY2020‐21 FY2021‐22 FY2022‐23
Actuals
Adopted
Budget
Adjusted
Budget
2023
Proposed
%age
Change
from
FY2021‐22
City Council 224,256 292,426 292,426 244,749 ‐16.3% City Clerk 956,697 1,151,844 1,211,844 1,143,342 ‐0.7% City Treasurer 38,706 160,245 160,245 167,292 4.4% City Attorney 987,045 910,049 910,049 940,290 3.3% City Manager 3,725,990 3,214,467 4,057,739 4,497,997 39.9% Finance 2,917,391 3,807,781 4,332,882 3,892,875 2.2% Non‐Departmental 3,214,732 1,794,252
2,071,658 2,044,367 13.9%
Human Resources 1,654,368 2,042,597 2,278,204 2,518,004 23.3% Econ. & Comm. Development 6,560,599 8,227,651 13,556,469 8,907,770 7.8% Fire 31,817,321 29,508,065 29,787,503 31,313,293 6.1% Police 30,959,959 32,386,774 32,761,570 32,957,662 1.6% Public Works 5,731,644 5,978,429 6,295,981 7,120,654 19.1% Library 5,903,883 6,221,935 6,669,798 6,706,110 7.8% Parks & Recreation 15,795,639 16,729,027 17,990,116 19,608,365 17.2% CIP 3,384,196 625,000 3,896,254 100,000 ‐84.0% TOTAL GENERAL FUND
EXPENDITURES
$113,872,426
$113,050,543
$126,272,738 $122,162,770 8.0%
Information Technology (ISF) 3,238,514 3,693,005 4,218,377 4,311,906 16.8% Attachment 2 of this report provides a detailed explanation of each department, along with the proposed General fund budget breakdown of payroll, supplies and services, and interdepartmental charges. It also includes the IT department summary which is accounted for in its own internal service fund.
In reviewing Attachment 2 - Department Summaries, the following are some overarching expenditure considerations:
Payroll:
Overall payroll costs for FY 2022-23 have increased. The Finance Department conducted a thorough audit of every full-time and part-time position in each department and calculated the fully loaded cost burden. The payroll budget has considered known compensation increases under the City’s multiple Memorandum of Understanding (MOU) with its various bargaining units along with the assumed cost increases with healthcare and fringe benefits. The City unfroze all frozen positions from last fiscal year and these are included in the payroll budget.
The payroll budget does include budget for vacant positions with the assumption that most of the positions will be filled within the fiscal year.
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The payroll costs take into consideration the City’s required annual Unfunded Accrued Liability (UAL) payment to CALPERS. The UAL payment is a City obligation and is based on an amortization schedule provided by CALPERS. It is calculated based upon how much money is at CALPERS vs how much is required to pay pension benefits for all current and future retirees.
The total UAL obligation for FY 2022-23 is $17.7 million. This is a $2.1 million increase from the FY2021-22 $15.6 million UAL payment.
There are 21.26 FTE requests for FY 2022-23. This includes position re-classifications and new position requests. The proposed budget presented in Attachment 2 is inclusive of the position requests, re-classifications, and costing.
NEW PAYROLL REQUESTS
Department FTEs
City Manager 1.08
Finance 1.00
Human Resources 3.00
ECD 1.00
Public Works 3.52
Library 2.00
Parks & Recreation 7.66
TOTAL 19.26
Information Technology 2.00
GRAND TOTAL 21.26
The position listing in Attachment 2 are all positions within the department. However, the operating expenditures shown are limited to the General Fund. As for operating departments like ECD, Public Works, and Parks and Recreation, some payroll expenditures are charged to other funds. Other fund summaries can be found in Attachment 3.
Supplies and Services:
Supplies and services budget increased by 5% restoring budget from last fiscal year’s costcutting measures due to economic uncertainties. The proposed budget includes all decision packages (new requests) submitted by departments that have been reviewed by the City Manager and are subject to Council approval. These are shown in the Changes and Highlights section of each department summary in Attachment 2.
Interdepartmental Charges:
Interdepartmental Charges are expenses that are accounted for in the General Fund (and other funds as necessary) and summarily transferred out to fund “internal services”. The largest internal service fund is for the Information Technology (IT) department. In effect, the cost to fund IT services, as an example, is calculated and then “charged” to various funds of which the General fund is the largest component.
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The overall General Fund expenditure breakdown by department is shown visually below:
FY2022‐23 Proposed General Fund Expenditures by Department*
3. PROPOSED FY 2022-23 GENERAL FUND BUDGET SUMMARY
The following is a summary of the proposed FY 2022-23 General Fund Budget.
Human Resources
2%
Econ. & Comm. Development
7%
Non‐Departmental
2%
Fire
26%
CIP
0%
City Manager
4%
Other (Council, Clerk, Etc)
2%
Police
27%
Public Works
6%
Library
5%
Finance
3%
Parks & Recreation
16%
FY2022-23 Projections
Revenues $ 122,262,182
Expenditures $ 122,162,770
Net Surplus $ 99,412
*Does not include PO carryforwards.
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4. OTHER FUNDS
There are another 55 funds that the City Finance Department manages outside of the General Fund. The notable fund budgets for FY 2022-23 are represented in Attachment 3. Many of the final budgets for these funds are contingent upon the adoption of the Capital Improvement Program (CIP) by the City Council.
The numbers may change based upon Council’s June 2022 action related to the FY2022-23 CIP program.
5. RESERVES
Currently, the City’s financial reserve funds total approximately $51.2 million. A breakdown is shown below:
The General Reserve, which represents 20 percent of the City’s annual operating budget (General Fund), follows the best practices guidelines from the Government Finance Officers’ Association (GFOA). The Infrastructure Reserve is largely comprised of General Fund surpluses that were set aside over previous years in anticipation of the City’s future infrastructure projects. The value shown is the unencumbered monies available that have not yet been designated toward a project. It should be noted that within the proposed FY 2022-23 Capital Improvement Program, $6.29 million of direct capital project funding is requested from the Infrastructure Reserves plus an additional $1.55 million to support the Storm Water fund for capital projects, totaling $7.84 million. If approved, this would leave approximately $11.9 million in the Infrastructure Reserves. The CalPERS Stabilization Reserve was established through two separate Council actions ($4.5 million in FY 2015-16 and $1.046 million in FY 2017-18). The Unappropriated General Fund Balance is the unappropriated available fund balance remaining in the General Fund (as shown in the table in the summary section of this report) that has not been assigned for any particular purpose. This balance will change depending on the extent to which expenditures may exceed revenues (deficit) in FY 2021-22.
Although placed in different categories, the City Council by majority vote is empowered to use the above reserve funds as necessary.
FISCAL IMPACT
For Fiscal Year 2022-23, the City’s General Fund is projected to have operating revenues of $122,262,182, and $122,162,770 in expenditures net of any carryover purchase orders, resulting in a small net operating surplus of $99,412. The surplus would be added to the General Fund’s unassigned fund balance.
Financial Reserves
General Reserve $21,900,000
Infrastructure Reserve 19,700,000
CalPERS Stabilization Reserve 5,500,000
Unappropriated GF Balance 4,100,000
Total $51,200,000
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RELATIONSHIP TO STRATEGIC PLAN
The budget is the City’s spending plan that supports Priority Area 3, Financial Stability.
CONCLUSION
South San Francisco remains financially strong, with a AAA-rated credit rating. With most COVID-19 restrictions lifted and high vaccination rates in the County, staff expects revenues to rebound from their pandemic lows. Staff recommends unfreezing all frozen positions, adding new positions, using infrastructure reserves to fund critical infrastructure projects necessary throughout the City, and increasing spending to provide additional services to the community. The proposed budget for FY 2022-23 provides city departments sufficient resources to maintain an excellent level of service for the coming fiscal year.
Staff intends to revisit the FY 2022-23 budget with City Council when the audit for the current fiscal year is available (likely February 2023) and adjust the budget as necessary based upon tax receipts and other economic data indicators available at that time.
Staff welcomes feedback from the Budget Standing Committee related to the information contained herein.