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City of South San Francisco
Legislation Text
File#: 24-467 Agenda Date: 6/12/2024
Version: 1 Item #: 2
Report regarding the City of South San Francisco Operating Budget for Fiscal Year 2024-25 and approving the GANN Appropriation Limit. (Karen Chang, Director of Finance)
RECOMMENDATION
It is recommended that the City Council adopt a resolution that approves the City’s Fiscal Year (FY) 2024-25 Operating Budget and the Gann Appropriations Limit.
BACKGROUND/DISCUSSION
During the revenue enhancement study session in November 2023, staff reminded the City Council that there is a 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, in which general taxes are accounted for and the bulk of the City’s core services are funded and delivered by departments such as Economic and Community Development, Fire, Library, Parks and Recreation, Police, Public Works, and City Administration.
The information included herein was presented at three public meetings:
• April 9, 2024 – Budget Standing Committee
• May 8, 2024 – Budget Standing Committee
• May 22, 2024 – Regular City Council.
CITYWIDE OVERVIEW – EXECUTIVE SUMMARY
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.
P.O. Box 711
(City Hall, 400 Grand Avenue)
South San Francisco, CA
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Should actual revenues prove to be stronger than expected or expenditures come in less than budgeted, this would translate into a smaller deficit or larger surplus, which would boost the available General Fund unassigned fund balance.
Table 2: Projected City Reserves Summary
For June 30, 2024
(in millions)
General Reserves (20% set aside based on
$137.3M)
$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 preliminary 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 submit potential 5% operating budget reductions for her evaluation to help balance the FY 2024-25 budget.
As a result of implementing departmental expenditure reduction measures, staff were able to lower the General Fund deficit to $11.0 million, which was presented at the May 8th budget sub-committee meeting.
As we continued to examine the base budget, we were able to identify some duplications in the base model to further reduce the deficit to $10.8 million.
There are still looming economic uncertainties. Given that the Federal Reserve continues to sustain the relatively high federal funds rate 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.
Table 1: FY 2023-24 Y/E Projections (in millions)
Revenues (including transfers) $ 146.0
Add: Carryover Purchase
Orders/Capital Improvement
Plan budget
12.4 Available Revenue / Resources $ 158.4
Less: Expenditures ($ 155.3)
Net Surplus/(Deficit) $ 3.1
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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, although some positions will be held vacant in 2024-25, as well as all the COLA increases per MOU agreements. Tentative contracts have recently been reached for AFSCME, Confidential, and Mid-Management bargaining units. All bargaining units labor contracts will now expire on June 30, 2025.
The FY 2024-25 proposed budget includes $603,450 in personnel requests and $2,225,597 in supplies and services requests. More detailed information about these requests can be found in Attachment 2 to this report.
For the FY 2024-25 proposed budget, expenditures are projected to exceed revenues by approximately $11.0 million.
To balance the FY 2024-25 budget, the City Manager directed departments to reduce their operating budget, or identify alternative funds to utilize, 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 that the City Council consider using $8.0 million from the General Fund unassigned fund balance. Consistent with best practices and the City’s past practice, staff will provide a mid-year budget update. If revenue projections are stronger than anticipated or expenditures are lower than budgeted, staff will recommend the appropriate budget adjustments. Staff continue to explore revenue enhancement and expenditure reduction measures that would help to correct the structural deficit. Due to the uncertainty of the business license tax measure, staff made no changes to the business license tax projections. However, staff has included the one-time billboard revenue in FY 2024-25 budget.
For the upcoming fiscal year, FY 2024-25, the Finance Department is projecting operating revenues of $134.4 million and $145.4 million in operating expenditures which will result in a projected deficit of $11.0 million.
Table 3: FY 2024-25 Projections
(in millions)
Total General Fund Revenues $134.4
Transfer in from Measure W 3.0
Use of General Fund
Unassigned Fund Balance 8.0
Total Resources $145.4
Less: Expenditures (145.4)
Net Surplus/ (Deficit) Balanced
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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. The amounts noted in parentheses reflect the projected change from the current fiscal year.
1. Property Tax revenue is projected higher based on historical information ($1.4M)
2. Sales Tax is expected to increase slightly ($1.2M) from the FY 2023-24 adjusted budget, but is largely flat compared to the FY 2023-24 adopted budget.
3. Franchise Fee (add a one-time $1.4M billboard revenue)
4. Intergovernmental Grants (decrease of $800K) because the Free South City Shuttle service revenue in FY 2023-24 included both FY 2023-24 and FY 2024-25 in the adopted budget.
5. Measure W – one-time $3M
The General Fund revenue forecast (not including Measure W) for FY 2024-25 is shown below, juxtaposed against the FY 2023-24 budget and FY 2022-23 actuals (in thousands):
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 13,160 -22.0% Fines & Forfeitures 757 700 700 873 25.0%
Intergovernmental 3,559 3,140 6,010 2,644 -15.0%
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 1,661 -36.0%
PO/CIP Rollover 12,438 -
ARPA 4,987 4,987 - -100%
Measure W - - - 3,000 2.2%
TOTAL REVENUES $ 147,565 $ 140,163 $153,155 $ 137,421 -1.96% *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 the declining number of non-basic aid schools.
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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 are expected to remain relatively flat in FY 2024-25 when compared with the FY 2023-24 adopted budget.
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 had hoped for. Based on the current industry trend, staff anticipates TOT might stay flat in the upcoming year.
Franchise Fee includes a one-time electronic billboard revenue of $1.4 million for FY 2024-25.
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 and project a modest increase in revenues related to construction and economic development from the mid-year projection. However, the projected revenues anticipate a decrease of $3.8 million or 22% decrease from the FY 2023-24 adopted budget, but matching FY 2023-24 projections. The revised FY 2023-24 mid-year revenue projection was mostly driven by the slowdown in permit issuance due to the high interest rate environment. The decrease also reflected higher numbers of permits pulled in FY 2022-23 in anticipation of changes to building codes and fee increases.
Fine & Forfeitures revenue include the latest revised revenue information provided by departments.
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 the mid-year budget, 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.
Transfers In will decrease due to the one-time transfer of $5M of American Rescue Plan Fund in FY 2023-24. Also, during FY 2023-24, the transfer in from Measure A in the base budget includes both FY 2023-24 and FY 2024-25 money for the Free South City Shuttle services, staff has to update the base budget FY
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2024-25 to reflect one year appropriation. We have included a one-time transfer from Measure W to cover some of public safety and parks and recreation staff costs.
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 $ 298 11.0%
City Clerk 1,028 1,265 1,265 1,282 1.0%
City Treasurer 35 133 132 174 31.0%
City Attorney 1,220 1,109 1,109 1,459 32.0%
City Manager 3,820 4,931 5,221 3,901 -21.0%
Finance 3,090 3,992 4,520 3,897 -2.0%
Non-Departmental 9,357 1,894 1,894 1,894 0.0%
Human Resources 2,221 2,885 2,995 2,708 -6.0%
Econ. & Comm. Development 11,771 8,500 12,514 8,889 5.0% Fire 35,513 32,762 34,339 36,421 11.0%
Police 36,283 36,838 36,952 38,204 4.0%
Public Works 7,936 11,954 13,822 11,104 -7.0%
Library 6,475 8,045 8,473 8,860 10.0%
Parks & Recreation 20,503 24,675 27,394 26,349 7.0%
CIP 689 900 4,376 - -100.0%
TOTAL GENERAL FUND
EXPENDITURES 140,183 140,152 155,276 145,441 4.0%
Information Technology (ISF) 3,771 4,443 5,038 4,274 -4.0% The following provides additional information for each of the major expenditure categories (in thousands).
Expenditures
FY 2023
Actual
FY 2024
Adopted
Budget
FY 2024
Adjusted
Budget
FY 2025
Base
Budget
FY 2025
New
Requests
Expenditure
Reduction
FY 2025
Proposed
Budget
% of Total
Expenditure
PAYROLL $ 103,541 $ 105,943 $ 106,842 $ 117,166 $ 596 $ (4,381) $ 113,381 78.0% SUPPLIES & SERVICES 26,995 23,261 33,191 21,452 2,226 (1,622) 22,056 15.2% CAPITAL OUTLAY 167 45 864 45 - (45) - 0.0%
INTERDEPARTMENTAL CHARGES 9,505 8,091 9,505 9,505 - - 9,505 6.5% TRANSFERS 1,389 1,400 4,876 500 - - 500 0.4%
TOTAL $ 140,183 $ 140,153 $ 155,277 $ 148,668 $ 2,821 $ (6,048) $ 145,441 100.0% File#: 24-467 Agenda Date: 6/12/2024
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FY 2024-25 Expenditure Projection
Higher payroll costs for FY 2024-25 are largely due to:
1. 3% COLA and MOU adjustments, which will increase expenditures by approximately $3.2 million, and included the latest tentative MOU adjustment.
2. Increase in healthcare costs will roughly result 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 and 3 to this report provide 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 an internal service fund.
Attachment 4 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 $113.4 million. The projected cost reflects negotiated increases in employee compensation, increases in cost of healthcare, and an increase in pension contributions.
The increase was offset by cost reduction measures of $4.4 million. • 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 of CalPERS’ investment return of negative 6.1% in FY 2021-22, which begins its 20-year amortization in FY 2024-25.
• There are 6.45 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 - $12,000 -
City Manager (potential reclass for staff) - 40,000 -
Library (grant funded) 1.45 166,584 -
Parks & Rec (grant funded) 4.50 268,483 -
Police - 62,510 -
Public Works 0.5 45,873 $44,745
Grand Total 6.45 $595,450 $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, or reimbursed by outside agencies.
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 FY 2024-25 CIP program.
The table below shows expenditures (including transfers) for all budgeted City funds summarized by fund type. City-wide appropriation requests for FY2024-25 total approximately $261,942,000.
The following table shows the proposed FY 2024-25 Other Funds expenditure budgets by major fund categories (in thousands)
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4. RESERVES
The City’s financial reserve funds are expected to be approximately $55.3 million. A breakdown is shown below:
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 the proposed FY 2024-25 Capital Improvement Program is reflected 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 rate 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 Fund
FY2022-23
Actuals
FY2023-24
Adopted
Budget
FY2023-24
Adjusted
Budget
FY2024-25
Proposed
Budget
FY2023-24
Adopted vs.
FY2024-25
Proposed (%)
General Fund $ 140,183 $ 140,153 $ 155,388 $ 145,441 3.8% Measure W 10,710 8,762 21,960 16,368 86.8%
Special Revenue Funds 18,100 23,690 92,244 22,932 -3.2% Capital Improvement Funds 90,599 20,539 168,417 9,728 -52.6% Debt Service Fund 11,465 11,525 11,525 13,232 14.8%
Proprietary Funds 33,692 59,449 75,853 23,317 -60.8%
Internal Service Funds 32,880 31,078 37,077 30,923 -0.5% TOTAL $ 337,629 $ 295,196 $ 562,464 $ 261,942 -11.3%
Estimated ending Financial Reserve for FY 2024-25
(in millions)
General Reserve $ 27.0
Infrastructure Reserve 4.9
CalPERS Stabilization Reserve 5.8
Unassigned General Fund Balance 17.6
Total $ 55.3
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(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 $134.4 million with additional Measure W funding and use of General Fund Unassigned Fund Balance of $11.0 million for a total of available revenues and resources of $145.4 million. Expenditures net of any carryover purchase orders are projected to be $145.4 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.
CONCLUSION
South San Francisco has weathered well during the pandemic and has 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 selectively filling vacant positions and approving the department’s requests to maintain critical services to the community. Staff recommend that the City Council approve the proposed budget measures to reduce overall expenditures so that the City can continue to provide the essential services to the community. Staff further 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 $8.0 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 strategies forward to the Budget Sub-committee when such measures materialize.
Despite staff’s efforts to balance the current FY 2024-25 budget, there is a structural deficit that requires long-term strategies to achieve long-term fiscal sustainability.
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 recommends that the City Council adopt the FY 2024-25 budget.