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City of South San Francisco
Legislation Text
File#: 23-361 Agenda Date: 5/31/2023
Version: 1 Item #: 2
Report regarding the City of South San Francisco Operating Budget for Fiscal Year 2023-24. (Karen Chang, Director of Finance)
RECOMMENDATION
It is recommended that the Budget Standing Committee provide feedback in preparation for the City Council study session on June 16, 2023 related to the establishment of the City’s Fiscal Year (FY) 2023-24 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, FY 2021-22 and FY 2022- 23 budgets to react to the dynamically changing conditions. As a result, for FY 2023-24, 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.
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.
The discussion of this report will be focused mainly on the General Fund operating budget.
CITYWIDE OVERVIEW – EXECUTIVE SUMMARY
FY 2022-23 Budget update
While the current fiscal year has not yet closed, it is the expectation that, for the General Fund, the fiscal year will end with a slight deficit. When the Council adopted the FY 2022-23 budget, the expectation was that the General Fund would have a slight surplus of $55,000.
The City of South San Francisco has shown resiliency during the COVID-19 pandemic. During the midyear budget, the City has seen strong rebounds in some revenue categories particularly Transient Occupancy Tax (TOT), property tax, sales tax, and permit fees.
P.O. Box 711
(City Hall, 400 Grand Avenue)
South San Francisco, CA
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However, as revenues increase, there is often a commensurate increase in expenditure. During the FY 2022-23, the City has increased expenditure significantly especially in personnel costs as a result of labor negotiations, general operating costs to keep up with inflation and also in anticipation of opening of the Library, Parks and Recreations building.
During the mid-year budget cycle, staff anticipated closing the year with a surplus of about $6 million.
However, as we approach the year end, there was an unexpected loss due to a property sale at the PUC site for developing affordable housing, a childcare center, and public space amenities. Therefore, staff currently projected the City will close the year at a slight deficit of about $17,000.
Should actual revenues prove to be stronger than expected or expenditures come in less than budget, this would translate into a smaller deficit or surplus which would boost the available General Fund unassigned fund balance.
Table 1: Projected City Reserves Summary as of 6-30-2023 General Reserves (20% set aside) $25,100,000
Pension Stabilization Reserves $5,600,000
Infrastructure Reserves $7,440,800
Total Reserve Levels $38,140,800
Available Unassigned GF Fund Balance (1)6,060,000
Reserves & Surplus Fund Balance $44,200,800
(1) Est. balance after the $6M set aside for ERP replacement during mid-year A summary of City’s General Fund revenue and expenditure as well as Reserves for FY 2019-2024 can be found in Attachment 1 of this report.
FY 2023-24 Proposed Budget
There are still looming economic uncertainties. Given that the Federal Reserve continues to raise interest rates to try to combat inflation, 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.
The FY 2023-24 Operating Budget has been developed assuming many of the revenue categories would experience moderate to flat growth. On the expenditure side, the proposed payroll budget incorporates all FY 2022-23 Y/E Projections
Revenues $ 132,954,510
Add: PO/CIP budget c/o 10,883,022
Less: Expenditures <$ 143,854,523>
Net Surplus/<Deficit> $ <16,991>
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the approved positions during FY 2022-23 as well as all the budgeted impact as a result of FY 2022-23 labor negotiations.
The FY 2023-24 proposed budget includes approximately $807,000 in personnel requests, $3,298,900 in supplies and services requests, and $45,000 for capital outlays. More detailed information about these requests can be found in Attachment 2 to this report.
For the FY 2023-24 proposed budget, the expenditure has exceeded the revenue by approximately $8 million.
In order to balance the FY 2023-24 budget, staff recommend an across-the-board attrition of $3 million (approximately 2.8%) from each department’s budget to help to reduce the gap. Finance created an attrition saving line in each department’s personnel budget to memorialize the amount needed. The City also recommends using the unspent revenue loss balance of $4.987 million from American Rescue Plan Act’s (ARPA) to cover the remaining deficit.
In March 2021, the federal government passed the 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 – the two tranches of $6.14 million received in June of 2021 and 2022. $10 million of the ARPA funds can be used to replace lost public sector revenue loss. The remaining portion of the ARPA funds were used or plan to be used to support critical social and community programs such as the Guaranteed Income Program, Youth Summer Internship Program, Food Voucher Program, Restaurant Grants, and City Broadband Expansion.
For the upcoming fiscal year, FY 2023-24, the Finance Department is projecting operating revenues of $140,162,500 (include the use of ARPA) and $140,153,300 in operating expenditures (includes the $3 million attrition, but excludes any potential carry over purchase orders), giving a small net operating surplus of $9,200 which would be added to the General Fund’s unassigned fund balance.
1. FY 23-24 GENERAL FUND REVENUE PROJECTIONS
The revenue forecast (not including Measure W) for FY 2023-24 is shown below, set against FY 2022-23 budget and FY 2021-22 actuals:
FY2023-24 Projections
Revenues $ 135,175,500
Add: ARPA Funds 4,987,000
Total Revenue &
Resources
140,162,500
Expenditures <$ 140,153,300>
Net Surplus $ 9,200
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Revenue Types
FY2021-22 FY2022-23 FY2023-24
Actuals
Adopted
Budget
Adjusted
Budget*
Proposed
Budget
%age Change
from
FY2022-23
Taxes 90,813,357 80,849,791 88,049,791 93,191,500 15.2% Property Tax 49,779,285 43,804,769 45,804,769 47,980,000 9.5% Sales Tax 22,361,011 20,991,018 22,391,018 23,351,500 11.2% Transient Occupancy Tax 12,135,638 11,160,752 14,160,752 14,190,000 27.1% Other Tax 6,537,422 4,893,252 5,693,252 6,950,000 42.0% Franchise Fees 4,863,076 4,600,000 4,600,000 4,600,000 0.0% Licenses and Permits 14,062,472 15,500,000 19,425,400 16,962,894 9.4% Fines & Forfeitures 700,960 710,824 710,824 700,000 -1.5% Intergovernmental 3,196,346 2,844,618 4,231,054 3,139,827 10.3% Charges for Services 9,747,605 8,799,097 8,265,097 9,709,257 10.3% Planning 905,739 879,000 250,792 510,000 -41.9%
Fire 3,019,090 2,626,314 2,626,314 2,728,000 0.0%
Parks & Recreation 2,917,504 2,796,248 2,846,248 3,235,240 15.6% Police 1,115,947 979,649 979,649 1,246,670 27.2%
City Admin & Other 1,789,325 1,517,886 1,562,094 1,989,347 31.0% Money & Property 3,060,851 5,453,469 5,453,469 3,940,000 -27.7% Other Revenues 514,996 259,383 263,903 337,826 30.2%
Transfers In 4,763,729 3,245,000 6,151,400 2,593,804 133.6% ARPA 4,987,373
TOTAL REVENUES $131,723,392 $122,262,182 $137,150,938 $ 140,162,481 14.60% *Adjusted budget includes approx. $14.8 million revenue adjustments made throughout the fiscal year.
Property Tax remains the City’s largest revenue component and is projected to be $48.0 million in FY 2023-24. Property tax revenues have increased at an annual rate of 6% over the last five years from economic boom along with robust developments. However, interest rate hikes throughout 2023 and looming recession are expected to dampen the growth of the property valuation in this upcoming fiscal year. Staff has factored in such a slowdown in revenue growth for the FY 2023-24 budget. This revenue stream is also overshadowed by the risk of increasing Property Tax In-Lieu of Vehicle License Fees (VLF) shortfalls from declining numbers of non-basic aid schools. Following the previous practice, the County of San Mateo, on behalf of itself and all the municipalities within the county, will file a claim with the State of California in August 2023 for the $70 million VLF shortfall, which the State will consider as a part of its 2024-25 budget for appropriation. The State’s proposed 2023-24 budget does not include any appropriations for the 2021-22 VLF county-wide shortfall of $32.9 million (of which the City’s share is $1.3 million). The City has submitted a letter to state representatives to address this matter. To be conservative, staff has realigned the projection for VLF for FY 2023-24 based on the latest information available.
Sales Tax revenues are expected to increase by 11.2% to $23.3 million for FY 2023-24. Staff expects a decline in sales tax revenue in FY 2023-24. However, the decline is likely to be offset by elevated costs of goods and services due to inflation. Overall, staff believes sales tax revenue will remain relatively flat.
Transient Occupancy Tax (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, this revenue stream has File#: 23-361 Agenda Date: 5/31/2023
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demonstrated a strong recovery in the subsequent two years due to easing of traveling restriction and widespread vaccinations, reaching $14.1 million for FY 2022-23 (projected). Staff anticipates a moderate increase in TOT next fiscal year due to resumed business travel.
Licenses and Permit revenues had been relatively stable prior to FY 2022-23 as construction and economic development throughout the City was strong. Rising interest rates triggered by untamed inflation starting in mid-2022, along with recent bank collapses, casts a shadow on the economy and presents a challenging environment for developers in FY 2023-24. Staff is cautiously optimistic about the development growth within the city boundary and project a modest increase in revenues related to construction and economic development.
Charges for Services revenues experienced a significant downturn during the pandemic. In FY 2022-23, charges for services from fire, police and planning departments have mostly recovered to the pre-pandemic level while revenues from parks & recreations such as childcare programs, aquatic programs and facility rentals have yet to be fully restored. For FY 2023-24, we expect these Park and Recreation programs to continue to recover. Staff projects revenue from recreational activities to exceed the FY 2022-23 adjusted budget but remain below pre-pandemic levels. Total charges for services are projected to be $9.7 million, which is $910k or 10.3% higher than the FY 2022-23 adopted budget.
Use Money & Property is expected to be lower due to the sales of some properties (PUC site,109 Longford Drive and 201 Baden Avenue) that occurred in FY 2022-23. Due to a higher interest rate environment, staff is not budgeting any property sale for FY 2023-24. However, interest earnings from investment are expected to be higher than FY 2022-23.
2. PROPOSED FY 2023-24 GENERAL FUND EXPENDITURES
The following table shows the proposed FY 2023-24 General Fund expenditure budgets by department.
Expenditure Type
FY2021-22 FY2022-23 FY2023-24
Actuals
Adopted
Budget
Adjusted
Budget
2024
Proposed
Percentage
Change from
FY2022-23
Adopted
City Council 252,677 258,749 260,649 269,486 4.1%
City Clerk 887,680 1,143,342 1,154,449 1,265,011 10.6%
City Treasurer 39,853 167,292 167,904 133,428 -20.2%
City Attorney 1,138,457 940,290 940,290 1,108,825 17.9% City Manager 3,911,696 4,527,997 5,324,597 4,931,075 8.9% Finance 3,148,918 3,892,875 4,405,085 3,992,281 2.6%
Non-Departmental 14,746,076 2,044,367 2,852,698 1,894,367 -7.3% Human Resources 2,065,928 2,518,004 2,684,109 2,884,524 14.6% Econ. & Comm. Development 11,006,918 8,907,770 15,609,630 8,499,933 -4.6% Fire 32,560,465 31,313,293 33,424,717 32,761,869 4.6%
Police 33,281,487 32,957,662 34,450,023 36,838,240 11.8% Public Works 6,294,565 7,120,654 8,603,705 11,954,045 67.9% File#: 23-361 Agenda Date: 5/31/2023
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Library 6,495,266 6,706,110 7,273,745 8,044,806 20.0%
Parks & Recreation 18,092,525 19,608,365 22,869,652 24,675,441 25.8% CIP 831,343 100,000 3,833,270 900,000 800.0%
TOTAL GENERAL FUND
EXPENDITURES 134,753,855 122,206,770 143,854,522 140,153,329 14.7% Information Technology (ISF) 3,404,272 4,311,906 5,241,804 4,443,433 3.1% 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.
The following provides additional information for each of the major expenditure categories.
Payroll:
• Total payroll costs, which includes salaries, wages, overtime, healthcare, pension, and other benefits, are projected to be $106 million , The projected cost reflects negotiated increases in employee compensation, increases in cost of healthcare, increase in pension contributions. • The payroll costs take into consideration the City’s required annual Unfunded Accrued Liability (UAL) payment to CALPERS. The UAL payment is the City’s obligation and is based on an amortization schedule provided by CALPERS. It is calculated based upon how much money is at CALPERS versus how much is required to pay pension benefits for all current and future retirees. The total UAL obligation for FY 2023-24 is $17.4 million. This is a 1.6% decrease from the FY2022-23 $17.7 million UAL payment. The decrease was due to favorable investment returns at CalPERS during FY 2020-21, the cost will be much higher in FY 2024-25 when CalPERS investment loss of 7.5% in FY 2021-22 will be accounted for. • There are 11.35 FTE requests for FY 2023-24. The proposed budget presented in Attachment 2 is inclusive of the position requests, re-classifications, and costing.
NEW PAYROLL REQUESTS
Departments FTE Salaries and Benefits
(General Fund)
Salaries and Benefits
(Sewer Enterprise
Fund)
Library 2.00 180,494.00 -
P&R 8.14 484,313.00 -
Police (0.50) (27,627.00) -
PW 1.50 99,985.00 165,250.00
HR - 40,000.00 -
Fire 0.21 30,650.00 -
Grand Total 11.35 807,815.00 165,250.00
• The positions listed 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 File#: 23-361 Agenda Date: 5/31/2023
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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:
• 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.
The overall General Fund expenditure breakdown by department is shown visually below:
FY2023-24 Proposed General Fund Expenditures by Department* File#: 23-361 Agenda Date: 5/31/2023
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3. PROPOSED FY 2023-24 GENERAL FUND BUDGET SUMMARY
The following is a summary of the proposed FY 2023-24 General Fund Budget.
4. OTHER FUNDS
There are another 61 funds that the City Finance Department manages outside of the General Fund. The notable fund budgets for FY 2023-24 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 action related to the FY2023-24 CIP program.
5. RESERVES
The City’s financial reserve funds are expected to be approximately $39.2 million. A breakdown is shown below:
The General Reserve, which represents 20 percent of the City’s annual revenue budget excluding transfers in (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 2023-24 Capital Improvement Program, $5.05 million of direct capital project funding is requested from the Infrastructure Reserves. If approved, this would leave approximately $2.4 million in the Infrastructure Reserves.
The CalPERS Stabilization Reserve was established through two separate Council actions in FY 2015- 16 and FY 2017-18 totaling $5.546 million. Finance took advantage of the higher interest environment and set up a separate investment account with the City’s investment manager, Chandler, in December FY2023-24 Proposed Budget
Revenues $ 140,162,500
Expenditures $ 140,153,300
Net Surplus $ 9,200
Financial Reserves FY 2023-24
General Reserve $25,100,000
Infrastructure Reserve 2,390,800
CalPERS Stabilization Reserve 5,600,000
Unappropriated GF Balance 6,060,000
Total $ 39,150,800
*Does not include PO carryforwards.
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2022 that yields a higher rate of return. As of April 2023, the balance of the account has grown to $5.6 million.
The Unappropriated General Fund Balance is the 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 2022-23. It is important to note that the unassigned fund balance also acts as a buffer allowing for the natural ebb and flow within the General Fund that occurs during the year as a result of the mismatch between when revenues are received, and expenditures are incurred.
Although placed in different categories, the City Council by majority vote will be allowed to use the above reserve funds as necessary.
FISCAL IMPACT
For Fiscal Year 2023-24, the City’s General Fund is projected to have operating revenues of $135,175,108 with additional ARPA funding of $4,987,373 for a total of revenues of $140,162,500 and $140,153,300 in expenditures net of any carryover purchase orders, resulting in a small net operating surplus of $9,200.
RELATIONSHIP TO STRATEGIC PLAN
The budget is the City’s spending plan that supports Priority Area 3, Financial Stability.
CONCLUSION
South San Francisco has weathered well during the pandemic and have since seen a steadily recovery of revenue during the fiscal year FY 2022-23. However, there is still a looming cloud of uncertainty in the economy. Amid the high inflation, consumers are showing a softer demand for goods and are spending more on services. Retail sales growth is at risk as consumers dip into savings and assume more debt especially with the Federal Reserve continuing to raise interest rates to try to curb inflation. The rate increase has caused a slowdown in the construction and real estate market as the cost of borrowing has significantly increased over the past year. Like most city governments, the employee compensation will remain the biggest portion of City of South San Francisco operating budget. In FY 2023-24, we have seen the financial impact on our budget.
In this upcoming budget, Staff recommends cautiously filling the vacant positions, approve the department request to maintain the current services level to the community. Staff recommends the committee to use infrastructure reserves to fund critical infrastructure projects necessary throughout the City, and to maintain a leveled spending to provide critical services to the community. Staff also recommends using the one-time residual balance of American Rescue Plan Acts fund of $4.987 million as the additional resource to bridge the shortfall of the FY 2023-24. Staff intends to revisit the FY 2023-24 budget with City Council when the audit for the current fiscal year is available (likely February 2024) 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.