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City of South San Francisco
Legislation Text
File#: 24-450 Agenda Date: 5/8/2024
Version: 1 Item #: 2
Report regarding the 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 City Council study session on May 22, 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 City Council about the City’s General Fund structural deficit as reflected in the updated General Fund 10-Year Long Range Forecast. The General Fund is the City’s largest and core operational fund, where general taxes are accounted for and the bulk of the City’s core services are accounted for and delivered by departments such as Economic and Community Development, Fire, Library, Parks and Recreation, Police, Public Works, and City Administration.
The discussion of this report will be focused mainly on the General Fund operating budget.
FY 2023-24 Budget Update
City Council adopted the FY 2023-24 mid-year budget on February 28, 2024. During the mid-year review, staff updated the year end projections to reflect a potential $2.1 million shortfall for FY 2023-24. As presented during the FY 2023-24 mid-year budget, General Fund Total Revenues were projected to be $140.3 million.
As shown in the table below, the General Fund is projected to end the fiscal year with $146.0 million in total revenues, which reflects $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. FY 2023-24 expenditures are projected at $155.3 million, which would result in a General Fund surplus of approximately $3.1 million.
Should actual revenues prove to be stronger than expected or expenditures come in less than budgeted, this would translate into a smaller deficit or surplus, which would boost the available General Fund unassigned fund balance.
P.O. Box 711
(City Hall, 400 Grand Avenue)
South San Francisco, CA
File#: 24-450 Agenda Date: 5/8/2024
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Table 2: Projected City Reserves Summary
For June 30, 2024
(in millions)
General Reserves (20% set aside) $27.0
Pension Stabilization Reserves 5.8
Infrastructure Reserves 4.4
Total Reserve Levels $37.2
Available Unassigned Fund Balance (1) 25.6
Reserves & Surplus Fund Balance $62.8
(1) Est. balance includes the $3.1million surplus projection FY 2024-25 Proposed Budget
Due to a projected deficit of approximately $19.2 million for FY 2024-25, staff held a study session with the Budget Sub-Committee on April 9, 2024 to seek guidance.
After the April 9th meeting, the City Manager directed each department to reduce their operating budget by 5% to help balance the FY 2024-25 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 2024-25 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 the approved positions during FY 2023-24 as well as all the COLA increase per MOU agreements.
Contracts for AFSCME, Confidential, and Mid-Management bargaining units expire on June 30, 2024.
The FY 2024-25 proposed budget includes approximately $648,200 in personnel requests and $2,151,600 in supplies and services requests. More detailed information about these requests can be found in Attachment 2 to this report.
Table 1: FY 2023-24 Y/E Projections (in millions)
Revenues $ 146.0
Add: Carryover Purchase
Orders/Capital
Improvement Plan budget
12.4 Less: Expenditures ($155.3)
Net Surplus/(Deficit) $3.1
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For the FY 2024-25 proposed budget, expenditures are projected to exceed the revenue by approximately $11.4 million.
To balance the FY 2024-25 budget, the City Manager directed departments to reduce their operating budget by 5%. Detailed information about the reduction from each department can be found in Attachment 4. To maintain the current level of services, staff recommends transferring $3 million from Measure W (Fund 101) to the General Fund to cover public safety and park and recreation staff costs. To bridge the remaining gap, staff recommends the Budget Sub-Committee consider using $8.4 million from the General Fund unassigned fund balance. Consistent with best practices and the City’s past practice, staff provide a midyear budget update. If revenue projections are stronger than anticipated or expenditures are lower than budgeted, staff will recommend the appropriate budget adjustments. Due to the uncertainty of the business license tax measure, staff made no changes to the business license tax projections.
For the upcoming fiscal year, FY 2024-25, the Finance Department is projecting operating revenues of $136.1 million and $147.5 million in operating expenditures which will result in a projected deficit of $11.4 million.
1. FY 2024-25 GENERAL FUND REVENUE PROJECTIONS
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 is projected higher based on historical information
2. Sales Tax is expected to increase slightly
3. TOT revenue with modest increase
4. Franchise Fee with a moderate increase
5. Permit Fees slightly increase from mid-year forecast The General Fund revenue forecast (not including Measure W) for FY 2024-25 is shown below, set against FY 2023-24 budget and FY 2022-23 actuals (in thousands):
Table 3: FY 2024-25 Projections
(in millions)
Total Revenues $136.1
Measure W 3.0
Use of General Fund
Unassigned Fund Balance
8.4 Total Resources $147.5
Less: Expenditure (147.5)
Net Surplus/ (Deficit) Balanced
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Revenue Types
FY2022-23 FY2023-24 FY2024-25
Actuals
Adopted
Budget
Adjusted
Budget*
Proposed
Budget
Percentage
Change from
FY2023-24
Taxes $ 100,571 $ 93,192 $ 91,882 $ 94,563 1.5%
Property Tax 54,041 47,980 49,280 50,200 5.0%
Sales Tax 21,735 23,352 21,952 23,213 -1.0%
Transient Occupancy Tax 16,735 14,910 14,000 14,500 -3.0% Other Tax 8,060 6,950 6,650 6,650 -4.0%
Franchise Fees 5,241 4,600 4,600 6,200 35.0%
Licenses and Permits 20,468 16,963 12,463 13,610 -20.0% Fines & Forfeitures 757 700 700 873 25.0%
Intergovernmental 3,559 3,140 6,010 3,588 14.0%
Charges for Services 11,673 9,709 11,569 10,562 9.0%
Money & Property -341 3,940 4,450 4,455 13.0%
Other Revenues 353 338 338 283 -16.0%
Transfers In 5,284 2,594 3,718 1,934 -25.0%
PO/CIP Rollover 12,438 -
ARPA 4,987 4,987 - -100%
TOTAL REVENUES $ 147,565 $ 140,163 $153,155 $ 136,068 -3.0% *Adjusted budget includes approx. $12.4 million of CIP and PO rollovers made throughout the fiscal year.
Property Tax remains the City’s largest revenue component and is projected to be $50.2 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, high interest rates and a slowing economy are expected to dampen the growth of property valuation in this upcoming fiscal year. Staff has factored in modest growth 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 FY 2024-25 budget for appropriation. At present, the State’s proposed FY 2024-25 budget does not include any appropriations for the FY 2022-23 VLF county-wide shortfall of $70.0 million (of which the City’s share is $3.0 million). The State of California has consistently approved budget appropriations since FY 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.
Sales Tax revenues have been revised upward by $1.2 million for FY 2024-25 based on the latest forecast from the City’s sales tax consultant.
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 stay flat in the upcoming year.
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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 starting in mid-2022, along with recent bank collapses, casts a shadow on the economy and presents a challenging environment for developers in FY 2024-25. 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 from mid-year projection.
Franchise Fee includes a one-time electronic billboard revenue of $1.4 million for FY 2024-25.
Charges for Services revenues experienced a significant downturn during the pandemic. For FY 2024-25, staff expects to see a continued moderate increase to charges for services. As discussed during mid-year budget, the planning and building permits have been negatively impacted by the higher interest rate environment. However, we budgeted higher revenue from Fire for the GEMT program.
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.
2. PROPOSED FY 2024-25 GENERAL FUND EXPENDITURES
The following table shows the proposed FY 2024-25 General Fund expenditure budgets by department (in thousands).
Expenditure Type
FY2022-23 FY2023-24 FY2024-25
Actuals
Adopted
Budget
Adjusted
Budget
2025
Proposed
Percentage
Change from
FY2023-24
Adopted
City Council $ 242 $ 269 $ 269 $ 306 14.0%
City Clerk 1,028 1,265 1,265 1,198 -5.0%
City Treasurer 35 133 132 170 28.0%
City Attorney 1,220 1,109 1,109 1,459 32.0%
City Manager 3,820 4,931 5,221 3,891 -21.0%
Finance 3,090 3,992 4,520 3,883 -3.0%
Non-Departmental 9,357 1,894 1,894 1,894 0.0%
Human Resources 2,221 2,885 2,995 2,700 -6.0%
Econ. & Comm. Development 11,771 8,500 12,514 8,573 1.0% Fire 35,513 32,762 34,339 36,636 12.0%
Police 36,283 36,838 36,952 37,893 3.0%
Public Works 7,936 11,954 13,822 12,285 3.0%
Library 6,475 8,045 8,473 8,458 5.0%
Parks & Recreation 20,503 24,675 27,394 27,209 10.0%
CIP 689 900 4,376 900 0.0%
TOTAL GENERAL FUND
EXPENDITURES 140,183 140,152 155,276 147,455 5.0%
Information Technology (ISF) 3,771 4,443 5,038 4,321 -3.0% File#: 24-450 Agenda Date: 5/8/2024
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FY 2024-25 Expenditure Projection
Higher payroll costs for FY 2024-25 are largely due to:
1. 3% COLA, approximately $3.0 million
2. Increase in healthcare costs roughly resulted in $1.3 million increase for the General Fund a. 17% Kaiser
b. 7.9% for Blue Shield
c. 10% decrease in Dental
3. Increase of overall Pension costs of $2.7 million due to CalPERS’ investment losses from FY 2021- 22; The General Fund’s share of the increased pension cost is $2.1 million.
Attachment 2 to 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 the internal service fund.
Attachment 3 of this report shows a draft summary of the balancing measures submitted by each department.
The following narrative 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 $117.3 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 FY 2023-24 UAL payment of $17.4 million. 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.
• There are 5.45 full-time equivalent (FTE) requests for FY 2024-25. The proposed budget presented in Attachment 2 is inclusive of the position requests, re-classifications, and costing.
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NEW PAYROLL REQUESTS
Departments FTE
Salaries and
Benefits
(General Fund)
Salaries and Benefits
(Solid Waste Fund)
City Council - $20,000 -
City Manager - 40,000 -
Library 1.45 166,584 -
Parks & Rec 4.50 268,483 -
Police - 62,510 -
Public Works -0.5 45,873 $44,745
Grand Total 5.45 $603,450 $44,745
• 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 such as ECD, Public Works, and Parks and Recreation, some payroll expenditures are charged to other funds.
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. Please refer to Attachment 3 for details.
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 have not been finalized yet.
3. OTHER FUNDS
There are other funds that the Finance Department manages outside of the General Fund. The new requests from other funds can be found in Attachment 3. Many of the final budgets for these funds are contingent upon the adoption of the Capital Improvement Program (CIP) by City Council. The numbers may change based upon Council’s action related to the FY2024-25 CIP program.
4. RESERVES
The City’s financial reserve funds are expected to be approximately $53.6 million. A breakdown is shown below:
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The General Reserve, which represents at a minimum, 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 2024-25 Capital Improvement Program, a net $1.0 million of direct capital project funding is requested from the Infrastructure Reserves has been included in the above number.
The CalPERS Stabilization Reserve was established through two separate Council actions in FY 2015-16 and FY 2017-18 totaling $5.546 million. Finance capitalized on 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 2024, the balance of the account has grown to $5.8 million.
The Unassigned 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, are allowed to use the above reserve funds as necessary.
FISCAL IMPACT
For Fiscal Year 2024-25, the City’s General Fund is projected to have operating revenues of $136.1 million with additional Measure W funding and use of General Fund Unassigned Fund Balance of $11.4 million for a total of available revenues and resources of $147.5 million. Expenditures net of any carryover purchase orders are projected to be $147.5 million, resulting in a balanced budget.
RELATIONSHIP TO STRATEGIC PLAN
The budget is the City’s spending plan that supports Priority Area 3, Financial Stability.
Estimated ending Financial Reserve for FY 2024-25
(in millions)
General Reserve $ 27.0
Infrastructure Reserve* 3.6
CalPERS Stabilization Reserve 5.8
Unassigned General Fund
Balance*
17.2 Total $ 53.6
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CONCLUSION
South San Francisco has weathered well during the pandemic and have since seen a steadily recovery of revenue during the FY 2023-24. 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 keeping interest rates higher for longer to try to curb inflation. The high interest rate environment has caused a slowdown in the construction and real estate market as the cost of borrowing remains elevated. Like most city governments, employee compensation remains the biggest portion of the City’s operating budget.
In this upcoming budget, Staff recommend cautiously filling vacant positions and approving the department’s requests to maintain critical services to the community. Staff recommend the committee to approve the budget measures to reduce the overall expenditure but will allow the City to provide continued services to the community. Staff recommends transferring $3 million from Measure W (Fund 101) to the General Fund (Fund 100) to cover some of public safety and parks and recreation staff costs and use $8.4 million from the unassigned fund balance to balance this year’s budget. Staff will continue to explore other avenues to increase revenue and will bring it forward to the sub-committee when such measures materialize.
Staff intends to revisit the FY 2023-24 budget with City Council when the audit for the current fiscal year is available (likely in February 2025) and adjust the budget as necessary based upon tax revenue trends and other economic data indicators available at that time.
Staff welcomes feedback from the Budget Standing Committee related to the information contained herein.
Attachments:
Att 1 – General Fund Revenue and Expenditure Reports
Att 2 - New Request – Positions
Att 3 – New Request – Supplies and Services – General Fund and Other Funds Att 4 - City Wide Balancing Measures Details