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City of South San Francisco
Legislation Text
File#: 24-366 Agenda Date: 4/9/2024
Version: 1 Item #: 2
Report regarding the discussion of City of South San Francisco Operating Budget for Fiscal Year 2024-
25. (Karen Chang, Director of Finance)
RECOMMENDATION
It is recommended that the Budget Standing Committee provide feedback in preparation for the Budget Subcommittee study session on May 8, 2024 related to the establishment of the City’s Fiscal Year (FY) 2024-25 operating budget.
BACKGROUND/DISCUSSION
During the revenue enhancement study session in November 2023, staff discussed with the Council about the City’s General Fund structural deficit as reflected in the updated General Fund 10-Year Long Range Forecast.
The council adopted the FY 2023-24 mid-year budget on February 28, 2024. During the mid-year review, staff updated the year end projection to reflect a potential $2.1 million shortfall for FY 2023-24.
Based on a preliminary budget projection for FY 2024-25, staff currently estimates General Fund total revenue to be $131.1 million and $150.3 million in total expenditures. This will result in a deficit of approx. $19.2 million. The current projected deficit is significant enough to warrant a deep dive discussion with the Budget Standing Committee.
The discussion of this report will be focused mainly on the General Fund and Information Technology Department operating budget.
CITYWIDE OVERVIEW – EXECUTIVE SUMMARY
FY 2024-25 Revenue Projection
The FY 2024-25 Operating Budget has been developed assuming many of the revenue categories would experience moderate to flat growth.
1. Property Tax revenue to remain flat due to the volatility of the VLF shortfall
2. Sales Tax is expected to remain flat due to economic uncertainty
3. TOT revenue with modest increase
4. Franchise Fee with a moderate increase from FY 2023-24
5. Permit Fees slightly increase from mid-year forecast P.O. Box 711
(City Hall, 400 Grand Avenue)
South San Francisco, CA
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Property Tax remains the City’s largest revenue component and is projected to be $49.2 million in FY 2024-25. Property tax revenues have increased at an annual rate of 6% over the last five years from the economic boom along with robust developments. However, interest rate hikes throughout 2023 and a 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 during the mid-year budget for the FY 2023-24 budget and expects to see this continued trend in FY 2024-25. 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, filed a claim with the State of California in August 2023 for the $70.0 million FY 2022-23 VLF shortfall, which the State will consider as a part of its 2024-25 budget for appropriation. At present, the State’s proposed 2024-25 budget does not include any appropriations for the 2022-23 VLF county-wide shortfall of $77.0million (of which the City’s share is $3.0 million). The State of California has consistently approved budget appropriations since 2019-20 for San Mateo County’s VLF shortfall. The City has submitted a letter to its state representatives to address this matter. To be conservative, staff has realigned the projection for VLF for FY 2024-25 based on the latest information available.
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 demonstrated a strong recovery, however, during FY 2023-24, TOT has not rebounded as quickly as staff has hoped for. Based on the current industry trend, staff anticipates TOT might slightly decrease in the upcoming fiscal year. However, since TOT was adjusted during mid-year, staff is cautiously optimistic that the current base budget level is appropriate.
Revenue Type FY 2023 Actual
FY 2024
Adjusted
Budget
FY 2024
Actual as of
2-29-24
FY 2025
Based
Budget
% of Total
Projected
Revenue
Property Taxes $ 54.00 $ 49.30 $ 31.90 $ 49.20 38%
Sales Taxes 21.70 22.00 12.80 22.00 17%
Transient Occupancy Tax 16.70 14.00 9.50 14.50 11%
Other Taxes 8.10 6.70 5.40 6.70 5%
Franchise Fees 5.20 4.60 2.30 4.80 4%
License & Permits 20.50 12.50 10.00 13.20 10%
Fines & Forfeitures 0.80 0.70 0.30 0.70 1%
Intergovernmental (Grants) 3.60 6.00 3.80 3.30 3%
Charges for Services 11.70 11.60 7.20 10.10 8%
Use of Money & Property (0.30) 4.50 2.00 4.50 3%
Other Revenues 0.40 0.30 0.30 0.30 0%
Transfers In 5.30 3.70 1.00 1.90 1%
PO/CIP Rollover - 12.40 12.40 - 0%
ARPA - 5.00 - - 0%
Total $ 147.70 $ 153.30 $ 99.10 $ 131.10 100%
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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 started 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 based on discussions between with developers and Economic and Community Development staff.
Charges for Services revenue is projected to remain relatively flat in FY 2024-25. This projection is based on the current master fee schedule.
Use Money & Property is budgeted as the same level as FY 2024-25 as staff expects the Federal Reserve to start reducing the federal funds rate in FY 2024-25.
Expenditure Projection
FY 2023-24 Year-End Estimate
As presented during the FY 2023-24 mid-year budget on February 28, 2024, General Fund Total Revenues were projected to be $140.3 million. Since that time, the City received welcome news that it will be receiving $5.7 million more in property tax residual (as a taxing entity) from the former Redevelopment Agency (RDA) than anticipated, reflecting the impact of long-term growth and development of the RDA on assessed value. As such, staff anticipates General Fund total revenues of $146.0 by the end of FY 2023-
24. As a simple means of estimating year-end budget performance for FY 2023-24, the table below notes that General Fund total expenditures through February 2024, which is 66.7% of the fiscal year, were $92.3 million. Assuming a similar burn rate for the remainder of the fiscal year, the General Fund would account for approximately $138.4 million in total expenditures juxtaposed against the current amended budget of $155.3 million. It is important to note that the net surplus that is calculated at the end of the fiscal year that is reported on the City’s income statement in the Annual Comprehensive Financial Report (ACFR) is the net of total revenues and total expenditures. Using the revised projection for total revenues of $146.0 million and a straight-line method of projecting total expenditures to derive $138.4 million, one plausible outcome is a net surplus of $7.6 million, which would be consistent with generally accepted accounting principles (GAAP). While the potential outcome for FY 2023-24 is favorable, the straight-line methodology for year-end estimates is the most straightforward and simple method. Absent the one-time use of the remaining $5.0 million in American Rescue Plan Act (ARPA) funds and the one-time bump in property tax residual from the former RDA of $5.7 million, the year-end result would be a net loss of $3.7 million.
However, when measuring true budget performance for expenditures, the amended budget, which includes budget related to purchase orders that have a remaining balance at the end of the fiscal year, is measured against the total expenditures plus the remaining balance of purchase orders that are carried over to the subsequent fiscal year. This is referred to as the budgetary basis (Non-GAAP). Using the example above, the straight-line method for projecting total expenditures only reflects projected expenditures that were either expended or accrued. Comparing the amended budget of $155.3 million to total projected expenditures of $138.4 million is not a meaningful nor accurate measurement, as carryover purchase File#: 24-xxx Agenda Date: 4/9/2024
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orders and capital improvement plan (CIP) projects represent contractual obligations from the current year. As an example, at year-end for FY 2022-23, there were $8.7 million in carryover purchase orders and $3.7 million in CIP carryover for the General Fund that were carried over into FY 2023-24.
On the expenditure side, personnel costs and benefits remain the largest component of the General Fund budget. Finance is projecting no increase in interdepartmental charges. The 2024-25 projection of $150.20 million in General Fund expenditure does not include $4.4 million new requests from departments.
FY 2024-25 Expenditure Projection
Higher payroll costs for FY 2024-25 are largely due to:
1. 3% COLA, roughly $3.0 million
2. Increase in healthcare costs roughly resulted in $1.5M increase for the General Fund a. 17% Kaiser
b. 10% for Blue Shield
3. Increase of overall Pension costs of $2.7M due to CalPERS’ investment losses from FY 2021-22; General Fund impact is $2.1 million.
DEPARTMENT
FY 2023
Actual
FY 2024
Adjusted
Budget
FY 2024
Actual
2-29-24
% spent FY
2024
FY 2025 Based
Budget
City Council $ 0.20 $ 0.30 $ 0.20 63.6% $ 0.30
City Clerk 1.00 1.30 0.60 48.8% 1.10
City Treasurer - 0.10 0.10 62.1% 0.10
City Attorney 1.20 1.10 0.70 64.8% 1.10
City Manager’s Office 3.80 5.20 2.20 41.2% 4.30
Finance Department 3.10 4.50 2.00 45.0% 3.80
Non-Departmental* 9.40 1.90 1.20 61.9% 1.90
Human Resources Dept. 2.20 3.00 1.60 52.8% 2.70
Economic & Community Develop. 11.80 12.50 7.20 57.4% 9.50 Fire Department 35.50 34.30 24.90 72.5% 37.00
Police Department 36.30 37.00 25.00 67.8% 38.90
Public Works Department 7.90 13.80 6.60 48.0% 13.10
Library Department 6.50 8.50 5.00 59.3% 8.30
Parks and Recreation Dept. 20.50 27.40 14.60 53.2% 27.20 CIP 0.70 4.40 0.40 8.9% 0.90
TOTAL 140.10 155.30 92.30 59.4% 150.20
Information Technology $ 3.80 $ 5.00 $ 2.80 56.5% $ 4.40 File#: 24-xxx Agenda Date: 4/9/2024
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After discussing the potential deficit in FY 2024-25 at the Department Head meeting on March 21, 2024, the City Manager directed each department to take a deep dive in their existing budget to identify any discretionary items in their budget.
Attachment 1 of this report shows a draft summary of the discretionary items that departments have identified to date. Staff is currently working with each department to confirm the final numbers.
The narratives below provide 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 $116.80 million. The projected cost reflects negotiated increases in employee compensation, increases in cost of healthcare, and an 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 the assets that are in the City’s pension plans versus how much is required to pay pension benefits for all current and future retirees. The total UAL obligation for FY 2024-25 is $19.9 million. This is a 14.4% increase from the FY2023-24 $17.4 million UAL payment. The cost is much higher in FY 2024- 25 because CalPERS’ investment return of negative 6.1% in FY 2021-22, which begins its 20- year amortization in FY 2024-25.
Supplies and Services:
• The budget currently shown in the summary reflects the adopted budget from fiscal year 2023- 24, plus mid-year adjustment minus one-time expenses.
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 interdepartmental charges haven’t been finalized yet.
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1. RESERVES
General Fund reserves are expected to be approximately $61.8 million. A breakdown is shown below:
The General Reserve, which represents 20 percent of the General Fund’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.
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 2022 that yields a higher rate of return. As of March of 2024, 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 2023-24. 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, can use the above reserve funds as necessary.
Strategy for balancing this year’s budget (Short-Term)
While staff continues to refine budget assumptions for FY 2024-25, the current baseline budget is projected to result in a net deficit of approximately $19.0 million. Below are the strategies to bring the General Fund closer to a balanced budget with an initial target amount:
Attrition/Hiring Freeze: $3.0 million
Each month, the City’s list of vacant positions will be reviewed. The report will include the operating fund(s) that the position is/are allocated to. The attrition/hiring freeze will apply to positions funded in General Fund Reserves as of February 2024
(in millions)
General Reserve $29.3
Infrastructure Reserve 3.6
CalPERS Stabilization Reserve 5.6
Unappropriated GF Balance 23.3
Total $ 61.8
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part or wholly by the General Fund. The City will have a target amount of General Fund payroll budget savings to achieve during FY 2024-25. As employees leave the City, whether through retirement, resignation, or other means of termination, the amount of General Fund payroll budget savings will fluctuate from month to month. As such, the City Manager will have the discretion to strategically authorize recruitment for frozen positions based on need if the General Fund’s target payroll budget savings has been met.
Business License Tax ballot measure: $3.0 million
The biennial statistically significant community survey that was presented to the City Council at the January 2024 retreat indicated support from likely voters for a business license tax (BLT) ballot measure.
Below are subsequent near-term actions based on Council direction:
• Before considering the BLT ballot measure, staff to provide a deep dive on the budget (via this special meeting with the Budget Subcommittee and the budget study session in May 2024); • Update the BLT analysis to quantify the potential fiscal impact of modernizing the City’s BLT and present the results to the City Council.
Review employee payroll cost allocation: $3.0 million
• Evaluate the appropriateness of shifting employee payroll costs for employees that are wholly or partially funded by the General Fund to other operating funds based on job duties; • Evaluate the capacity of other operating funds to take on employee payroll costs.
Discretionary expenditure items: $3.0 million
• Each department has done an initial evaluation of its budget for supplies and services to identify discretionary items that are not mission critical to providing core services. As a part of the presentation, departments will share the impact of reducing the larger initial discretionary items.
Beyond the base budget, the City has prioritized new funding requests to only those that are cost neutral or those that are mandatory.
Use of General Fund reserves
Beyond the strategies noted above, the remaining budget deficit would result in the use of General Fund reserves. If the initial target amounts for the above strategies remain intact and the projected revenues and expenditures came to fruition, General Fund reserves would decrease by $7.0 million. If the Budget Subcommittee directs staff to limit use of General Fund reserves, staff will need to increase its strategic target amounts for Attrition/Hiring Freeze and Discretionary expenditures.
One-time Resources
• Additional Income from Billboard agreements ($1.4 million) • Loan from Community Benefits payments to build firehouse ($9 million) • Review if any discretionary programs funded by Infrastructure Reserve can be repurposed • CalPERS Stabilization Reserve
The above one-time resources will not resolve the General Fund’s structural deficit. However, the onetime resources will provide the City’s major revenues with additional time to recover in the post-COVID era, including TOT, permit revenues, and user fees.
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FISCAL IMPACT
While staff are currently compiling all the information to finalize the Fiscal Year 2024-25, staff anticipates that the General Fund will have a potential deficit of approximately $19.0 million.
RELATIONSHIP TO STRATEGIC PLAN
This effort supports the City’s strategic initiative (Priority Area 3) of ensuring fiscal stability.
CONCLUSION
As discussed in the revenue enhancement study session in November 2023, the City is facing a significant structural deficit. It would not be sustainable to continue to provide the current level of services without incorporating the recommended strategies for balancing the General Fund budget.