Agenda Item Wording:
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Fiscal Year 2025/2026 Mid-Cycle Financial Report - Receive the Fiscal Year 2025/2026 mid-cycle financial report, appropriate funds for capital projects, and discuss possible revisions to the surplus policy.
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Prepared by: Renee Nagel, Finance Director 713-4475, renee.nagel@visalia.city Amee Swearingen, Budget Analyst 713-4170, amee.swearingen@visalia.city.
Department Recommendation: Receive the FY 2025/26 mid-cycle financial report, appropriate funds for capital projects, and discuss possible revisions to the surplus policy.
Summary:
The City operates under a two-year budget and FY 2025/26, which is the second year, will begin July 1, 2025. This mid-cycle report is to request any necessary budget amendments and to report any changes from the mid-year report which was presented in April 2025. In addition, staff will return to Council with FY 2025/26 mid-year projections in March 2026.
Background Discussion:
In April 2025, staff presented to Council budget projections for FY 2024/25 and 2025/26 for all operating funds. On off budget years, staff brings a Mid-Cycle report in June which reports any updates to the current fiscal year and the upcoming fiscal year. No significant changes have been made to the budget projections since the Mid-Year presentation to Council in April 2025 for FY 2024/25. The projection for FY 2025/26 builds upon the 2024/25 budget forecast and expected growth in revenues and expenditures.
This report focuses on the General Fund since it is the City’s largest account that funds the majority of the City’s essential services. The growth projection for the General Fund’s two primary revenue sources (78% of total revenues) for FY 2025/26 is the following:
Budget 25/26 Projection
• Sales Tax 1.0% 1.0%
• Property Tax 2.0% 3.0%
Sales Tax revenue is the most volatile because it is based on consumer spending. This projection is also being conservative due to the continued inflation and economic uncertainty. The economy continues to be volatile as changes occur with the Federal & State Government, as well as foreign partners. In addition, sales tax continues to compete with the high cost of living such as rent, utilities, health care, and entertainment. These items decrease the amount available to spend on tangible items which results in less sales tax.
The expenditure forecast for FY 25/26 assumes the following:
• Wages - 4% increase (this increase was approved by Council)
• Salaries and Benefits - Assumes zero vacancies for full-time employees and hourlies.
• PERS - is projected to grow at 4%. However, PERS does not typically grow at a flat percentage because it consists of two rates that change annually and are based on investment returns and changes (policy, wages, etc) from two years prior: (1) Employer Contribution rate (based on payroll); and (2) Unfunded Liability Payment (based on schedule provided by PERS).
• Health Insurance - 8% annual increase. Per the City’s MOU’s, the employees pay half of the increase, up to 5%. Anything above the 5% goes to the City. The total health insurance increase is projected to be 13% for FY 25/26 (8% City / 5% Employees). The annual increase is provided to the City in May of each year and is effective January 1st. The budget for FY 25/26 assumed 4% for the City.
• Allocations - is projected to increase from this fiscal year by $0.3 million due to rising costs. This cost is based on two years prior actuals (FY 23/24) to be in compliant with the OMB 87 allocation plan.
• Capital - Assumes $2.4 million for capital projects which was approved in the budget.
Table I
General Fund Forecast
The adopted budget for FY 2025/26 included a surplus of $4.8 million. The budget was based on estimates for FY 23/24 and then projected, using growth assumptions, for the two year budget.
Sales Tax and Property Tax actuals for FY 23/24 came in higher which has increased the projected amounts for FY 24/25 & 25/26 even though the growth assumption has not changed. Expenditures are also higher due to salary and benefit increases that were negotiated after the budget was prepared. These additional costs have changed the projected surplus for FY 25/26 to $3 million. The projection assumes zero vacancies for full-time employees and hourlies. In the past the City has seen savings from vacancies and is safe to assume there will be savings of $1.5 to $2.5 million. This savings has not been included in the projection.
Future Projections:
Although the General Fund is projected to have a surplus in both FY 2024/25 and FY 2025/26, the surplus decreases each year due to expenditures increasing more than revenues, as shown in Table 1, General Fund Forecast.
Staff is projecting expenditures to increase due to employee costs rising along with operational costs such as utilities, technology service agreements, and costs of goods (chemicals, fuel, parts, etc). Below are examples of operational cost that are projected to increase over the next couple of years:
• Utility Increases - The City has been notified that water, gas, and electricity will be increasing. These increases will not only impact operating costs but also reduce what is available for consumers to spend on tangible items, resulting in less sales tax revenue.
• Technology Increases - The City is working diligently to add or upgrade technology to be able to be more efficient and allow Citizens to conduct business with the City much easier. Technology service agreements are increasing annually, and majority of the systems are hosted on the cloud which results in higher annual costs. For example, the City is currently updating its website and the current system has no annual service fee. The new system, which is projected to be completed by fall 2025, will have an annual service fee of $100,000 and will increase over the life of the contract. There are several systems currently being upgraded that will increase technology costs over the next couple of years such as Businesses License, Building Safety and Planning, Convention Center, Payroll, Transient Occupancy, Police, and various security systems.
• Benefit Increases - The forecast includes increases in benefits; however, the projection is conservative, and these could increase more than projected and the cost increase are unknown at this time.
o PERS - as mentioned above, PERS does not typically grow at a flat percentage because it consists of two rates that change annually and are based on investment returns and changes from two years prior. The City has given a generous wage enhancement which will result in PERS increases over the next couple of years and the financial market continues to go up and down based on Federal policy changes and announcements. Based on these two items the City’s PERS rate could increase more than projected in the forecast.
o Other benefits - the projection includes a conservative increase for health and workers comp, however, these can be higher as they are based on actuals claims and cost to provide services.
• Liability Increases - The City is currently switching Insurance providers for City owned properties due to the current provider no longer insuring properties in California. Based on preliminary conversations, staff has been informed that the cost will be significantly increasing. In addition, the City’s liability insurance is projected to increase as it is based on number of claims over multiple years.
The forecast for the next couple of years is conservative and optimistic as it does not include a recession or decrease in revenue growth. If inflation continues to be lowered and product costs are lowered, then sales tax growth will increase due to consumers having more spendable income. In addition, the City is proactive in seeking new businesses and growing the industrial park which can increase the sales tax growth projection.
General Fund Additional Appropriations:
Staff is recommending to appropriate additional funds for the fence at Riverway Sports Park Soccer fields in the amount of $1,000,000. The project budget is $1.5 million and is currently out to bid. During the pre-bid job walk, potential bidders informed staff that the current budgeted amount was significantly low for the fencing which includes wrought iron around the parameters and chain link throughout the fields. The project also includes relocating some irrigation to allow for the fence poles.
Emergency Reserves:
The current surplus/reserve policy was amended in March 2024. The policy states that any revenues in excess of actual expenditures would continue to be deposited in the emergency reserve to maintain the reserve at a maximum of 30% of operating expenditures and then all remaining surplus is to be deposited into the Civic Center Reserve Fund. This change increased the reserve from 25% to 30% of operating expenditures.
The projected surplus for FY 2024/25 is $5.4 million. Based on the Mid-Year Budget projections, $2.1 million of the surplus will be transferred at year end to bring the reserve balance to $25.8 million, keeping the reserves at 30% of operating expenditures as shown in Table 2 General Fund Emergency Reserve Balance. The remaining surplus will be deposited into the Civic Center/Public Safety Facility Reserve Fund per Council’s policy.
Table 2
General Fund Emergency Reserve Balance
(All Amounts in Millions)
Surplus Policy:
Once the emergency reserve has been funded, any remaining surplus at year-end is to be deposited to the Civic Center/Public Safety Reserve Fund (003) per Council’s Emergency Reserve/Surplus Policy. The year-end surplus is projected to be $2.3 million after appropriating an additional $1.0 million in capital (sports park fence) and transferring $2.1 million to the Emergency Reserve, as shown in Table 3: GF FY 24/25 Projected Surplus. These numbers are projected; the amount transferred at year-end will depend upon the actual ending fund balance as of June 30, 2025. This policy can be changed at any time by Council, however, if Council desires to change it for the FY 24/25 surplus, this change will need to occur before September 1st.
Table 3
GF FY 24/25 Projected Surplus
(All Amounts in Millions)
If no changes are made to the surplus policy for FY 24/25, the available balance in the Civic Center/Public Safety Reserve will be $9.5 million ($7.2 million currently available in the Civic Center Fund + $2.3 million FY 24/25 GF surplus). On May 5, 2025, Council appropriated $70.4 million for the Civic Center Phase II Project leaving $7.2 million in fund balance for project changes or to eventually begin design on the Civic Center.
Going forward, staff is looking to Council to provide direction on where they would like to deposit surplus funds. In the past, these funds have played a vital role in being able to purchase and develop the Riverway Sports Park, purchasing the East Regional Park land, Recreation Park Stadium Improvements,198 Open Space, and now constructing the Civic Center Phase II which includes a Council Chamber, Public Safety Building, Evidence Building, and infrastructure for the entire campus. The City has many more projects that are needed and have been deferred due to funding shortages. To name a few that have been mentioned over the years is constructing East Regional Park, Corp Yard expansion, pool complex, purchasing land for the third regional park, a Convention Center refresh and expansion, public art, and a multi-purpose recreation facility. In addition, there are road projects, such as the extension of Santa Fe, that will need to be funded and do not qualify for impact fees.
Large projects are difficult to fund in a given year due to funding availability. Majority of the surplus is typically from vacancies savings which can be set aside to fund large projects. The surplus can be set-aside for one project or split amongst multiple by having a policy that assigns a percentage of the surplus to each project.
FY 2026/27 & 2027/28 Budget Process
The budget process for FY 2026/27 & 2027/28 will be starting in October. The required budget survey will be conducted with the City Survey this year. This survey is to help guide Council when setting the budget goals and priorities. Staff will be bringing the survey results and the current strategic goals to Council in October for review. The proposed budget calendar is shown in Table 4: Budget Process Calendar.
Table 4
Conclusion
While the City is in overall sound financial shape today, it will get more difficult in the near future. As a result of this, the City must be cautious with expenditures that will impact the City in the long-term. Majority of the revenue forecasts are showing growth, however, we must recognize that other foreign and domestic factors (i.e. inflation, housing prices, supply chain disruptions, etc.) could negatively impact the growth and expansion of our local economy. Any of these factors could also cause another economic downturn. The City should continue to hold a conservative and watchful course to be ready if and when a recession begins. Staff is optimistic, but acknowledges the City must also be fiscally responsible by having sufficient reserves, balanced budgets, and prudent spending policies.
Fiscal Impact: None
Prior Council Action: N/A
Other: N/A
Alternatives: None
Recommended Motion (and Alternative Motions if expected):
recommendation
Receive the FY 2025/26 mid-cycle financial report, appropriate funds for capital projects and begin discussion to amend the surplus policy.
Environmental Assessment Status: N/A
CEQA Review: N/A
Deadline for Action: 6/30/2025
Attachments: None