Agenda Item Wording:
title
Review Fiscal Year 2022/23 mid-year financial report with recommended budget appropriations.
body
Deadline for Action: 4/17/2023
Submitting Department: Finance and Technology Services
Contact Name and Phone Number: Renee Nagel, Finance & Technology Director 713-4375 Amee Swearingen, Financial Analyst 713-4170
Department Recommendation:
Review Fiscal Year 2022/23 mid-year financial report with recommended budget appropriations.
Recommended appropriations by Fund:
General Fund:
1. Appropriate funds for capital projects in the amount of $225,000 in 22/23 and
$75,000 in 23/24.
Internal Service Funds:
Vehicle Replacement Fund
1. Appropriate $28,000 to replace wrecked Police motorcycle.
Background Discussion:
The City adopted the 22/23 & 23/24 Budget in June 2022. The budget is based on the prior years spending and is adjusted based on estimated cost increases and any new or changed programs. Annually the Finance Department presents a mid-year budget report to City Council that compares the budget to the current financial status for the General Fund, Measure T Fund, Measure N Fund, and the Enterprise Funds. This report also allows adjustments to be made to operations or capital projects if needed.
As shown in this report, the majority of the City’s funds are healthy and well-managed. General Fund revenues are up in the major revenue categories, and departments are controlling their expenditures where practical, and working to enhance revenue collection where possible. Overall, the City continues to be in good financial shape. However, like all government agencies throughout California, the City is faced with higher contributions to fund pension obligations, technology cost increases, higher costs due to inflation, and the threat of a recession.
Economic Outlook
Visalia’s economy continues to be strong despite the historically high inflation. Over the last two years, the average annual inflation rate has been 7% and this rate has continued into 2023. Nationwide consumers continue to splurge on travel, restaurants and discretionary items that were limited during the pandemic despite the continued rise in the cost of living. In the past, as inflation rose, consumers would spend less on entertainment or discretionary purchases and just focus on the necessities. Since the pandemic, consumers have changed their spending behaviors and are spending their disposable income on things they want, even if it means using their savings or getting credit card debt.
This continued splurge spending has been good for the economy and is one of the biggest reasons that a recession has not begun. Economists predict that extra spending will have to slow down as the cost of living continues to rise and disposable income becomes less.
In addition to inflation, the economy is dealing with rising interest rates due to the Federal Reserve. Since March 16, 2022, the Federal Reserve has increased interest rates 9 times with increases from 0% to 4.75%. It is anticipated that they will increase again when they meet in May 2023. The rising interest rates are supposed to slow down inflation and hopefully realign inflation to the ideal rate of 2%. The Federal Reserve believes that this rate promotes a healthy, sustainable economy. Raising interest rates slows inflation by slowing down spending which could result in a small recession.
The housing market continues to be strong; however, it has slowed since its peak. Houses are still selling, they are just on the market a little longer and are not causing bidding wars. Limited inventory has helped the market stay strong despite the rising interest rates and has kept prices from dropping. This is also helping the economy by keeping consumers from having negative equity in their homes. This can affect credit and financial positions negatively.
Even though the economy is strong today, these contributing factors bring uncertainty with the near future economy. The City should continue to hold a conservative and watchful course to be ready if and when a recession begins. The City should also be cautious with expenditures that will impact the City in the long term. This approach will help the City continue to maintain its good financial position.
General Fund
The General Fund is the largest individual fund in the City and is comprised of 8 operating departments. The total adopted budget for the General Fund is $84.8 million for FY 2022/23 and $87.1 for FY 2023/24. The adopted budget surplus for this fiscal year was $6.9 million and is now projected to be $15.5 million as shown in Table 1 FY 22/23 General Fund Projection. This surplus is due to revenues being up from budget by $5.8 million and expenditures down by $1.6 million due to vacancies.
Table 1
FY 22/23 General Fund Projection
General Fund Revenues are projected to be higher than budgeted by $5.8 million. The majority of the increase is due to property tax and sales tax coming in higher than budget. The budget was projected to be more on the conservative side after seeing larger than normal growth during the last three fiscal years.
Sales Tax is projected to increase from budget by $3.1 million (6.7%). Compared to last year’s revenues, sales tax is projected to increase by $0.9 million (2 %). This increase is due to the rise in the cost of tangible items which is mostly a result of inflation and continued higher than normal spending patterns. In addition, the City is structured with a variety of businesses that includes business to business transactions located in the industrial park.
Chart 1, Actual and Projected Sales Tax, shows the projected sales tax revenue has been above the 40 year average growth for the last two fiscal years due to the higher than normal growth. The growth total over the last three fiscal years is 29%.
Chart 1
Actual and Projected Sales Tax
Property Tax is projected to increase from budget by $0.7 million (4.5%). Compared to last year’s revenues, property tax is projected to increase by $0.4 million (2.6%). This is due to an increase of assessed property values from the County and a rise in real estate transactions with increasing prices. Visalia’s property values continue to increase, which creates higher property taxes when the property is sold. This projection is provided to the City by the County which is based on the property assessments calculated for the year in September.
Property Tax - VLF Swap revenues are projected to increase from budget by $1.0 million (6.6%) and from last fiscal year by $1.1 million (7.6%). The Property Tax VLF swap was put in place in 2004 to fund the Vehicle License fees (VLF) that was taken from Cities when the VLF rate was reduced in 1998 from 2% to 0.65%. This revenue has increased significantly over the last two years due to the rise in vehicle prices. Staff is projecting higher than normal growth this year due to the high demand and continued vehicle shortages.
Franchise Fee is projected to be slightly more than budget by $0.3 million (9.2%). Compared to last year’s fees received, the revenues are projected to increase by another $15,800 (0.5%). In previous years the franchise fees had decreased due to technology advances. However, this fee over the last two years has increased due to utility fee increases. Based on these increases, staff is projecting this fee to continue to grow.
Transient Occupancy Tax (TOT) is projected to have an increase from budget of $690,400 (15.1%). Compared to last year, TOT is projected to stay about the same. The revenue increase last year was 38% which was the largest increase TOT had in history. Staff believes this increase was not due to the reopening because this was seen in FY 20/21 which had a 22% increase. Due to the large increase last fiscal year, staff is projecting no increase this year. July through February revenue is slightly down from last year. Data currently shows that Hotel stays are down but Airbnb is up.
Business License is projected to slightly decrease from budget by $59,400 (-2%). Compared to last year, Business License is projected to increase by $29,400 (1%). These fees are based on business gross receipts from the prior year.
All Other Revenues are projected to increase from budget by $85,900 (0.9%). Compared to last year’s actuals, all other revenues have decreased by 1.3 million (-12.7%). The largest decrease is Engineering Development Services which is for inspection fees and filing fees. Last fiscal year had larger than normal development activity (UPS, Amazon, etc) and the projection for this year also includes a slight development slowdown from past years. The second largest decrease from last year is Recreation. Recreation in the past provide after school care/activities at various school sites. VUSD is now receiving funding from the State to provide this service with HEART at all school sites. Other revenues that are down are fire inspections, strike team reimbursements, water citations, and police traffic fines.
General Fund Expenditures
Operating Expenditures - are projected to be lower than budget by $1.5 million due to vacancies. At the beginning of the fiscal year, the City still had a lot of vacancies due to adding several new positions in this budget and vacancies that had carried over from the prior year. Most of the positions have been filled or are in the recruitment process. This savings is also less due to employees receiving the approved MOU 4% wage increase for FY 23/24 in this fiscal year.
Overall, the operating expenditures are up from last fiscal year by $5.5 million. The increase from last fiscal year consists of $3.6 million in salary and benefits and $1.8 million in operating expenditures. The largest operating expenditure increases over last fiscal year are utilities (electricity & gas), technology service agreements, and maintenance contracts due to inflation costs.
Allocations Net Reimbursements - Annually the City prepares a cost allocation plan that is based on prior two-year actuals. This plan is prepared according to Federal OMB A-87 guidelines. The allocation plan charges out the central service division costs (Finance, Human Resource, Risk, IT, etc) to other divisions to get the true cost of performing the services required. Allocations allow for General Fund expenditures to be reimbursed from other funds (Enterprise & Special Revenue Funds) and grants. The amounts budgeted are not based on the calculated plan due to timing. The Allocations Net Reimbursements projection is still an estimate because the actual plan for FY 22/23 has not been approved by our cognizant agency. The plan uses expenditures from two years prior.
Transfers Out to Other Funds is projected to be higher than budget by $0.2 million and down from last year actuals by $3.7 million. This category is for transferring General Fund money to other funds for Council authorized items such as debt payments, fund subsidies, and fund set-asides for future obligations. Last fiscal year had a higher-than-normal set-aside for potential litigation. This category does not include fund advances.
Capital - Capital expenditures were budgeted with the two-year budget that was presented in June 2022.
General Fund Additional Appropriations
Capital Project Requests:
Staff is recommending funding 4 capital projects for fiscal year 22/23 totaling $225,000 and 1 project for fiscal year 23/24 totaling $75,000. These projects are listed below:
1) City Rebranding for $50,000: This project is for the rebranding and marketing of the City to put forth all the positive aspects of working for the City and living in Visalia, as was discussed during the Council’s annual planning workshop. This includes updating the city’s identity, image, and “brand”. Elements include improving digital access to be more interactive, user friendly and provide better information and communication; developing a tagline for instant recognition; producing professional videos for recruitment/informational purposes; increasing/improving social media presence to attract applicants. This project currently has $150,000 and has a contract with We The Creative. Staff is requesting an additional appropriation for $50,000 in 22/23 for City rebranding implementation.
2) IPads for Planning Commission for $10,000: The purchase and use of iPads for the Planning Commissioners will help in reducing cost in the Planning Divisions operating and personnel budgets due to the amount of time allocated to printing the public hearing staff report packets, and delivery the packets to each of the Commissioners. The division is still proceeding with transitioning the preparation of the Planning Commission agenda and staff reports into the Granicus system; however, in the interim, Commission and staff will use the City’s website to review both the agenda and staff reports, rather than printing reports. Staff is requesting an appropriation for $10,000 in 22/23 for the purchase of IPads and service.
3) Tables and Chairs for Senior Center for $45,000: The current furniture is over 8 years old, this facility has the most set-up and breakdown in recreation due to the variety of programs and the needs of the user group at this facility. Furniture in the facility has a lot of wear and tear from constantly being taken down and put up for various types of programming. Current tables are damaged and often have to be removed from use when edges break. Additionally, chairs are breaking, and cushions are beginning to rip and tear. For better sanitization, chairs with solid/firm surfaces would be best. Staff is requesting an appropriation for $45,000 in 22/23 for the purchase of 37 tables, 150 chairs and 5 carts for the tables for the senior center.
4) Ballistic Vest Replacement for $55,000: All sworn positions are provided a ballistic vest that is required to be replaced every 5 years. There are several vests that are required to be replaced in 2023 through 2024 as well as vests for new hires. Staff is requesting an appropriation for $55,000 in 22/23.
5) Riverway Sports Park Well Replacement $65,000: Riverway Sports Park currently has two irrigation wells that are used to irrigate the 80-acre park. On June 13, 2022, a pump efficiency test was performed on both Riverway Sports Park wells. During the efficiency test it was discovered that the original Phase 1 well was under performing and the well would need to be pulled to further determine the cause of the low gallon per minute (GPM) output. The well continued the loss of GPM in the next few months and the decision was made to operate on only the Phase 5 well to determine the issue with the Phase 1 well. On August 30, 2022, the Phase 1 well was pulled, and it was discovered the lower half of the pump was missing. A video camera was sent down the well shaft, during the video process many of the perforation in the casing were clogged with rust and the missing half of the pump had fallen to the bottom of the well. The project will brush the well casing to open the perforations, air lift all debris from the well, and install a new pump and shaft bearings. Staff is requesting an appropriation for $65,000 in 22/23.
In addition there is another project request for FY 23/24 (Effective July 1, 2023).
6) COS Training Resource Center for $75,000: A consistent need amongst industrial employers in the city is a skilled workforce, particularly with the growth occurring in the industrial park today. While there are numerous investments being made into many quality academic and workforce development programs in the area, this funding will kickstart a pilot concept that aims to make customizable training services easier to access for Visalia Industrial Park (VIP) employers. The COS Training Resource Center (TRC) manages the largest Employment Training Panel Multiple Employer Contract award in the greater region and provides responsive, short-term, customized workplace education and training solutions. This funding will execute a service contract with the TRC to provide training solutions in the VIP physically to make the trainings less costly for TRC to administer which in turn reduces costs to participating employers and leads to increased access, upskilling of workers, and increased wages. The pilot program will be for one year with the aim of demonstrating proof in concept that will garner ongoing support from other potential funding sources such as the Good Jobs Challenge grant. Staff is requesting an appropriation of $75,000 in FY 23/24.
General Fund Emergency Reserves
Council’s policy is to have an emergency reserve equal to 25% of operating expenditures. This has been a priority since the recession and the policy has been met for the last four years. Going forward, the reserve will have to be increased to continue to maintain the 25%. The reserve balance at June 30, 2022 was $17.4 million.
The projected surplus for FY 2023 is $15.3 million (estimated surplus minus recommended capital appropriations of $225,000 listed above). Based on our projection, $1.5 million of the surplus will be transferred at year end to bring the reserve balance to $18.9 million keeping the reserves at 25% 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, bringing the reserve to $60.7 million. The current surplus/reserve policy was adopted in March 2018. 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 25% of operating expenditures and then all remaining surplus is to be deposited into the Civic Center Reserve Fund.
Table 2
General Fund Emergency Reserve Balance
(All Amounts in Millions)
Balance as of 6/30/22 $17.4
Additional amount required to remain at 25% 1.5
Projected Balance for 6/30/23 $18.9
Preliminary Forecast for FY 23/24
The projection for FY 23/24 builds upon this year’s budget forecast and expected growth in revenues and expenditures. The adopted budget and projection assumes the following:
The growth projection for the General Fund’s two primary revenue sources (79% of total revenues) for the next two years is the following:
|
|
Budget |
Projection |
|
• Sales Tax |
2.0% |
1.0% |
|
• Property Tax |
2.0% |
3.0% |
The Sales Tax projection is conservative considering the previous three fiscal years (19/20 - 21/22) had a total increase of 29% which was a higher-than-normal growth. This higher-than-normal growth has also inflated the Sales Tax base used to prepare projections for this fiscal year and next year (23/24).
In addition, Sales Tax revenue is the most volatile because it is based on consumer spending. This projection is also being conservative due to the continued rise in inflation. The continued splurge spending that is occurring has been good for the economy and is one of the biggest reasons that a recession has not begun. As mentioned earlier in the report, economists predict this extra spending will have to slow down as the cost of living continues to rise and disposable income becomes less.
The expenditure forecast for FY 23/24 assumes the following:
• Wages - Projection assumes no additional increase from this fiscal year due to the 4% in the MOU for FY 23/24 being advanced into this year. On July 1, 2022 wages increased by 8% (4% FY 22/23 & 4% FY 23/24).
• Salaries and Benefits - Assumes zero vacancies for full time employees and hourlies.
• PERS - The Employer Contribution rate plus the Unfunded Liability Payment assumes a projected increase of 9% for 23/24.
• Health Insurance - 4% annual increase. The total health insurance increase is projected to be 8% each year. Per the City’s MOU’s the employees pay half of the increase.
• Capital - Assumes $1.3 million for capital projects which was approved in the budget. Typically, the capital budget increases throughout the year as projects arise and are approved by Council.
The adopted budget for FY 23/24 included a surplus of $6.2 million. Since Sales Tax and Property Tax are increasing, the projection for FY 23/24 is higher from budget for both revenues. Based on these assumptions, the projected surplus for FY 23/24 is $11 million. The surplus for FY 23/24 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 a savings of $1.0 to $1.5 million. This savings has not been included in the projection.
Preliminary Forecast for FY 24/25 - 26/27
The Finance Department has prepared two projections: 1) that builds upon this year’s budget forecast and expected growth in revenues and expenditures; and 2) that assumes a slight recession that starts in FY 23/24.
Forecast Projection 1 (Growth):
The growth projection for the General Fund revenues for the three remaining years (24/25 - 26/27) are the following:
• Sales Tax (2%)
• Property Tax (3%)
• All Other Revenues (1-2%)
Sales Tax and Property Tax represents 79% of the General Fund total revenues.
The expenditure forecast assumes the following:
• Wages - 4% annual increase. The projected increase is for additional allocated positions and wage adjustments due to merits and reclassifications. Future wage increases will be negotiated with bargaining groups and approved by Council. Given recent developments, any discussion of wage adjustments must be given significant new attention as the fiscal future has become less predictable.
• Projection assumes zero vacancies for full time employees and hourlies. In the past the City has realized savings from vacancies and it is believed that we are safe to assume there will be a savings of $1 to $1.5 million. This savings has not been included in the projection. Staff is working diligently to reduce number of vacancy and recruitment time.
• PERS increase - Employer Contribution rate (4%) plus the Unfunded Liability Payment (schedule provided by PERS) that changes annually.
• Health Insurance - 4% annual increase. The total health insurance increase is projected to be 8% each year. Per the City’s MOU’s the employees pay half of the increase. This number could be higher due to several large health claims.
• Capital - $1.5 million annually. This can be reduced as in the past by deferring maintenance. This is not recommended due to the specific maintenance needs of the City’s facilities and assets.
Table 3
General Fund Forecast - Continued Growth
The forecast shows the City having a surplus in all five years. However, the surplus decreases each year due to expenditures increasing more than revenues. Most of this increase is due to employee costs rising along with operational costs such as utilities, technology service agreements, and costs of goods (chemicals, fuel, parts, etc). This is an optimistic forecast and does not include any recession or slowdown in revenue growth.
Forecast Projection 2 (slight recession):
In this forecast, operating expenditures are the same as the scenario 1 above. The difference in these two forecasts is in the revenue assumption. The revenues in this projection assumes:
• Sales Tax (FY 23/24 (-3%), FY 24/25 (-2%), remaining years (1% growth))
• Property Tax (FY 23/24 (0%), FY 24/25 (0%), remaining years (1% growth))
• Franchise Tax (all years 1%)
• All Other Revenues (FY 23/24 (-3%), FY 24/25 (-2%), remaining years (1% growth))
Table 4
General Fund Forecast - Recession
This forecast is considered slight recession because revenues do not decline dramatically and revenues only decrease for two years. During the Great Recession, Sales Tax decreased for three years (2008 - 2010) for a total reduction of 26%.
With a slight recession starting next year, the forecast has a surplus for the next two years with it turning into a deficit by the last year. This is only a projection and it is staff’s intent to bring a balanced budget to Council each year. In order to balance the budget, staff will look at ways to reduce operating costs, evaluate all vacant positions, defer capital, and review current fees to ensure fees are aligned appropriately.
SPECIAL REVENUE AND INTERNAL SERVICE FUNDS
The mid-year report focuses on operating funds. As a result, the only special revenue funds that have operating costs are Measure T and Measure N, which are included. Staff is also including the Vehicle Replacement Fund to appropriate funds for an additional capital project. All fund projections shown below do not assume a recession.
Vehicle/Equipment Replacement Fund
The Vehicle/Equipment Replacement Fund is used to replace all General Fund vehicles and large equipment. The initial purchase of a General Fund vehicle is funded by the General Fund and put into the Vehicle/Equipment Replacement Fund as an asset. The amount that the assets depreciate annually is charged to the General Fund to be set-aside for future replacements in this fund. When a vehicle is fully depreciated and meets the City replacement policy, the vehicle is replaced from the money that has been set-aside. Interest earned in this fund helps offset price increases. The balance of this fund is shown in Table 5, Vehicle Replacement Fund Projection.
Table 5
Vehicle Replacement Fund Projection
Staff is recommending to appropriate funds for the following project:
Replace Wrecked Motorcycle - $28,000. In November 2022, Visalia Police Department was dispatched to a robbery that occurred at Chase Bank. The officer observed the suspect and attempted a traffic stop. The suspect intentionally slowed down and swerved towards the officer causing the officer to go down on his motorcycle. The motorcycle was damaged and declared a total loss. Staff is requesting to appropriation $28,000 to replace the 2015 motorcycle that was fully depreciated.
Measure T
In 2004, City of Visalia voters approved a measure to increase sales tax by ¼ cent. This is known as Measure T and the sales tax revenues are earmarked for public safety. The measure uses a detailed, 20-year plan which includes hiring of personnel, construction of capital projects and equipment purchases. Plan elements implemented to date are as follows:
• Two Police substations built
• 23 Police Officers hired and vehicles purchased (reduced from 28 due to revenue shortfalls and as directed by the City Council at their June 20, 2011 meeting)
• 13 Firefighters hired
• Added 1 Administrative Fire Captain and 1 Battalion Chief
• Built Fire Station 55 and Training Facility
• Built Fire Station 53
• Purchased 2 New Fire Trucks
• Built Visalia Emergency Communication Center
The Measure T plan elements are on track due to being on an amended expenditure plan. Chart 2 - Measure T Revenues & Expenditures, compares the revenues originally projected in the plan versus the revenues collected and projected through FY 2023/24. The amended plan expenditures shown on the chart are the actual and projected expenditures.
Measure T sales tax continues to grow but at a slower rate than the General Fund sales tax rate. Measure T does not receive any of the general 1% sales tax. It only receives the additional ¼ cent tax. This slower growth rate is due to how district sales taxes are applied compared to general sales taxes in two main areas: car sales and business to business sales. District sales tax is applied to the City the car is registered in, not the City it is sold in. Therefore, for Visalia to receive the district sales tax for a purchase of a vehicle, that vehicle would have to be registered in Visalia. If a resident from Dinuba purchases a vehicle in Visalia, Visalia would receive their local 1% share of the State sales tax but would not receive any of the district taxes (Measure T & N). Likewise, Business to Business sales tax works the same way. One of the areas that Visalia has seen a large sales tax growth is in Business to Business sales. These transactions do not help Measure T as they do our General Sales Tax.
Chart 2
Measure T Revenues & Expenditures
In FY 08/09 the revenues fell below the plan estimates. To keep the Measure T funds from going negative, the City took several remedial actions over the years, namely:
• Reduced Police Officers allocation by 6 (3 through attrition & 3 transferred to the General Fund). In July 2014, an officer was added back. The current number of
officers is 23 reduced from 28.
• Reduced Fire position allocation from 18 to 15. In June 2019, moved the Battalion Chief and Administrative Captain to Measure N bringing the total Fire position allocation to 13 which is 1 less than the original plan of 14. The additional positions were added in the first several years of the plan bring the total to 18.
• Declared a fiscal emergency for fiscal years 09/10, 10/11, 11/12, and 12/13
• Maximum of 1 vacancy is allowed in each fund
These changes helped reduce operating expenses which allowed the funds to no longer be in a deficit. According to the ballot measure, Measure T sales tax is to be shared 60% for police and 40% for fire. Thus, the City maintains two funds: Measure T - Fire and a Measure T - Police.
Measure T - Fire
Due to the larger than normal increase in sales tax revenue and the amendments, Fire Measure T revenues exceed the projected expenditures by $0.9 million, as shown in Table 6 Fire Measure T Projection. The fund balance is projected to be $7.2 million at the end of the fiscal year. The surplus is projected to decrease each year due to the increase in benefits costs. In addition, the Measure T Fire plan is to contribute towards the Public Safety Building that is currently under design.
Table 6
Fire Measure T Projections
Recommendation: Staff will continue with the plan as amended. Staff will continue to monitor expenses to assure that the fund remains in balance and can contribute to the Public Safety Building. Staff will return with funding options for the Public Safety Building.
Measure T - Police
As shown in Table 7 Police Measure T Projections, the police fund is projected to have a surplus of $1.8 million in this fiscal year. The Police Measure T Fund will be contributing $151,200 (9.6% of total debt payment) towards the annual VECC debt payment which started in fiscal year 15/16. Per the Measure T plan, this fund would be paying 25% ($284,500 annually) of the debt payment. Since revenues could not cover the full debt payment, staff reduced the Measure T portion of the annual debt payment to $151,000. In addition, the General Fund is carrying three Measure T officers. Each officer costs about $150,000. Staff is projecting a smaller surplus in the future years, starting in FY 23/24, due to PERS increases. In addition, the Measure T Police plan is to contribute towards the Public Safety Building that is currently under design.
Table 7 - Police Measure T Projections
Recommendation: Staff will continue with the plan as amended. Staff will continue to monitor expenses to assure that the fund remains in balance and can contribute to the Public Safety Building. Staff will return with funding options for the Public Safety Building.
Measure N
In November of 2016, the voters of Visalia passed a ½ cent Sales Tax Override, Measure N -
The Visalia Essential City Services Measure. Sales Tax from Measure N will provide for essential city services such as police, fire, and recreation, as well as maintenance of parks and roads. The measure uses a detailed, 10 year plan which includes hiring of personnel, construction of capital projects and equipment purchases.
As part of the measure, Council adopted an Accountability Ordinance (Ordinance 16-21) to establish accountability measures as outlined below:
Revenues:
• 10% of budgeted revenues must be deposited in an Uncertainty Fund. Money can only be accessed during a fiscal emergency;
• 10% of budgeted revenues must be deposited into the following categories:
o 2% Youth Programs
o 8% Maintenance and Emerging Needs Expenditures:
• Money shall not be used for debt service payments;
Revenues for FY 22/23 are projected to be higher than budget by $0.7 million as shown in Table 8, Measure N Projection. Operating expenditures are projected to be slightly below budget by $0.3 million due to not being fully staffed.
Table 8 - Measure N Projection
(Expenditures based on amended plan)
The projection for FY 22/23 and going forward include a 1% growth in sales tax each year. Like Measure T, Measure N sales tax doesn’t grow at the same rate as the General Fund. Currently, the fund has a large cash balance due to the time it takes to get programs up and running. For example, the squad program took a while to get fully up and running due to recruitments and purchasing equipment.
The expenditures for future years are per the current amended plan which will need to be adjusted as costs increase with equipment, vehicles, and technology. In addition, this forecast does not include an additional appropriation of approximately $8 million for Station 51. The budget currently has the station budgeted for $4 million. This station houses two fire units plus one squad unit. Staff will also be returning with the emerging needs category to establish a policy on how these funds should be used and any surplus money.
Recommendation: Staff will continue with FY 22/23 budget as approved. Staff will return to Council and the Measure N Committee to request additional funding and with a proposed policy for surplus money and emerging needs.
ENTERPRISE FUND EVALUATIONS
Enterprise Funds have different accounting requirements than the Governmental Funds. Accounting for the General Fund focuses on paying current year’s operating expenditures, with separate accounting for capital assets and debt service.
However, the accounting for enterprises must:
1. Cover current operating costs;
2. Pay debt service;
3. Replace capital assets; and,
4. Maintain reasonable fund balance.
The evaluation of enterprise funds must determine if all of these financial measurements are occurring or if there are financial circumstances that allow the enterprise to overcome these financial necessities. If the first two items are being covered, then an evaluation of the individual fund’s cash balance is needed to determine if the fund has adequate resources to replace capital assets.
In the enterprise accounting model, one element of cost is depreciation. Depreciation is a non- cash expense intended to represent the proportional usage of an entity’s capital plan. For short- term analysis, the fund will deduct depreciation from an operation’s projected income statement to determine the projected change in cash.
BUILDING SAFETY
Building Safety is currently projected to meet their objective of covering operating cost as shown on Table 11, Building Safety. The Building Safety revenues are projected to be $4.5 million and expenditures are projected to be $3.5 million. Revenues are projected to be down from FY 21/22 by $1.4 million. Expenses are projected to be up from budget by $104,000 due to wage increases.
Residential and commercial building permits were at historical lows in FY 10/11 (2,841 permits issued). Over the years, building permits have increased with last year being the largest number of permits issued (6,634). It is projected that this fiscal year will have a slight decrease in the number of permits issued as shown in Table 9, Total Permits Issued & Valuations.
Table 9
Total Permits Issued & Valuations
In the first quarter of 2023 the City has seen a decrease in building permit issuance for new single-family residential development. Decreases for new single-family residential permits can likely be attributed to increases in interest rates, as well as the inability for the City to process and obtain approvals for several new single-family residential subdivisions in the City’s Urban Growth Tier II boundary due to not having an adopted ordinance to implement the City’s agricultural mitigation policy. However, with the City adopting an Agricultural Preservation Ordinance to address the agricultural mitigation policy in the summer of 2023, staff anticipates new single-family residential permit activity to increase as we begin processing these new single-family residential subdivisions in the Tier II boundary. Staff also anticipates new single-family residential permit issuance to be slightly less than years past due to mortgage interest rate increases as shown in Table 10 - New Single family Dwelling Permits Comparison.
Table 10
New Single family Dwelling Permits Comparison
Overall, the construction activity drives the revenue collection in several categories and is an indicator of future activity for several other categories, such as property taxes, impact fees, and storm and sanitary sewer system fees. Based on this staff will continue to monitor the building activity.
The Building fund has been able to be more efficient and enhance customer service over the past few years with additional staff. There is an electronic drop box for contractors to submit their plans for review. Staff is still working on fine tuning the deployment on the recently upgraded permit system that will soon allow enhanced services such as electronic submittals and payment, providing e-plan reviews, and real time status of any permit. This will bring the development community a higher level of self service. In addition, staff is continuing to look at ways to reduce permit review turn-around time, maintain zero rollover inspections, and increase customer satisfaction.
Table 11
Recommended Action: Staff will continue to monitor permit activity.
CONVENTION CENTER
The Convention Center operation is treated as an enterprise even though its revenues do not cover operating costs, debt service, or capital purchases as shown in Table 12, Convention Center. While it can be argued the operation should not be accounted for
in this manner, the fund is accounted for as an enterprise because it supplies a service that is based upon user fees and the City’s intent is for the operation to be as self-sufficient as possible.
Revenues for FY 22/23 are projected to be up $73,100 (4%) from budget and $219,600 (12%) from last year. Expenditures for FY 22/23 are projected to be up from budget by $67,100 (2%) and up from last year by $704,400 (18%).
Table 12
Occupancy revenues can be affected by multiple factors such as type of event, length of event, room rental charged, hotel rooms occupied, and discount to rooms booked in the Charter Oak Ballroom given to the Marriott (given policy). As shown in Table 13 Convention Center Operating Revenues and Expenditures, staff is reducing expenditures as fewer revenues are received.
Table 13
Convention Center Operating Revenues and Expenditures
Recommended Action: Staff will continue to work on measures that increase revenues and decrease expenditures.
AIRPORT
The majority of the Airport’s operating revenues are from aviation fuel sales. Fuel sales for this fiscal year are projected to be up from the previous year as shown in Table 14 Airport Fuel Sales.
Table 14
Airport Fuel Sales in Gallons
The Airport has been able to add 14 new hangers with grant funding they received in lieu of not subsidizing air service. All hangers are currently in a lease agreement. There are 4 large corporate hangers and 10 smaller T hangers. This has created more revenue for the Airport fund with hanger rent and more fuel sales. Airport revenues are projected to be up from last fiscal year by 6% ($170,600) and operating expenses up by 11% ($300,100). The operating surplus for this fiscal year is projected to be $181,700 as shown in Table 15 Airport. This surplus will be used to fund capital or as a grant match in the future.
Table 15
Recommended Action: Staff will continue to monitor Airports expenses and revenues to ensure revenues cover expenditures.
TRANSIT
The City’s Transit operation remains financially sound as a result of significant federal and state funding it receives. Without these funds, Transit would be unable to operate or replace its capital assets. Further, operating grants pay approximately 80% of its operating costs. With continued operating and capital funding from federal and state grants, the fund will remain healthy.
As shown in Table 16 Transit, operating revenues exceed expenditures by $0.8 million, resulting in an ending capital cash balance of $26.6 million for June 30, 2023. The operating expenditures are higher than budget by $1.7 million mainly due to the increase in CNG fuel and diesel fuel. While highly dependent upon grant funding, Transit is financially sound.
Table 16
The V-LINE service to Fresno is in the sixth year of operations as shown in Table 17, VLINE Ridership. The V- LINE operates from Visalia to Fresno with stops at the Transit Center, Visalia Airport, Fresno Airport, Fresno State, and the Fresno Courthouse Park. Ridership was down in the previous years due to COVID-19 travel restrictions but is projected to be back up to pre-covid numbers.
Table 17 VLINE Ridership
The City is required under the Transportation Development Act to maintain a fare revenue- to- operating expense ratio (farebox recovery) of 20%. Since COVID-19, this requirement has been waived. The last year the farebox ratio was met was in fiscal year 18/19 as shown in Table 18, Transit Fare Revenue Ratio.
Table 18
FARE REVENUE RATIO
On a Nationwide level, Transit has been experiencing decreased ridership within Transit Agencies of similar size and geographical uniqueness as Visalia Transit. Fare revenues are projected to be back to pre-covid levels (18/19). Staff is currently looking at ways to reduce costs and ways to increase ridership.
Recommended Action: Continue to monitor funding of Transit and continue to identify ways to reduce operating costs.
Animal Services
Animal Services collects revenues from animal licensing, permit fees, shelter fees, kennel fees, and other various fees. The revenue collected is insufficient to cover operating costs. As a result, the fund has an operating loss which is anticipated and approved by City Council because Animal Control is a state mandated function that communities must provide. Much like the Convention Center, the operation requires an operating subsidy from the General Fund.
The revenues for the Animal Control Service Fund are projected to be down from budget by$60,500 and up from last year by $5,500. Expenditures are projected to be slightly down from budget by $51,800 and up from last year by $103,300. Most of this increase is due to supplies costing more and the utility increases. The Animal Service Fund is projected to have an operating deficit of $1.3 million for FY 22/23, as shown in Table 19, Animal Services. The deficit combined with the annual debt payment for the Animal Control Facility will require a $1.8 million subsidy from the General Fund.
Table 19
Animal Services expenditures are rising faster than revenues as shown in Table 20 Animal Services Operating Revenues/Expenditure Comparison. Staff will be working on a plan to increase revenues and decrease expenditures once the new Animal Services Manager has been hired. In addition, this function has recently been moved to the Parks and Recreation Director to help oversee the operations.
Table 20
Animal Services Operating Revenues/Expenditure Comparison
Recommended Action: Staff will continue to look for ways to increase revenues and decrease operating costs to lower the General Fund subsidy.
Enterprise Utilities Funds
The City has three utility operations: sewer, storm water and solid waste. These three utilities operate very efficiently and tend to be among the lowest costs for similar services in the South San Joaquin Valley. Chart 3, Combined Residential Solid Waste and Sewer Rates, compares the combined residential solid waste and sewer rates to other local communities. Visalia’s combined residential sewer and solid waste rates are less than the average utility rate among Valley communities.
Chart 3
Wastewater
The Water Reclamation Facility upgrade was completed in 2018 which brings wastewater discharge to tertiary standards: clean enough for all uses except drinking water. The project cost over $114 million and received $18 million in grants to help offset the cost. The project received a State loan of $96.4 million that will be paid back over 30 years at 2.1% interest. The loan payment is $4.4 million annually and will be completed in FY 2047/48.
In anticipation of the project and additional maintenance cost, the Wastewater rates were increased over a three year period, with the last rate increase in 2012. Staff does not anticipate another rate increase in this two year budget cycle. The projected revenues for FY 22/23 are up from budget by $2 million as shown in Table 21, Wastewater. This increase is mainly due to growth in sewer accounts. The operating expenditures are projected to be up from budget by $1.5 million. The operating increases are due to more equipment maintenance, testing, and chemicals that are required with the upgraded facility. In addition, chemical cost has risen significantly due to inflation.
Table 21
Recommended Action: Staff will continue to monitor the revenues and expenditures.
Solid Waste
Solid Waste is currently projected to meet the objective of covering operating costs as shown on Table 22, Solid Waste. The projected ending capital cash balance for June 30, 2023 is $8.7 million. The main reason why the Solid Waste operation has been able to accumulate cash in the past is that the State had given the City grants to purchase clean air vehicles.
The City is not projecting to receive grants in the future due to the grants becoming more competitive and harder to receive due to the entire fleet being CNG.
The expenses are projected to be up by $0.5 million from budget. This is mainly due to CNG fuel usage, recycling fees and landfill charges. The fund has several large projects that need to be completed that will use half of its cash. These projects include replacing 18 trucks and constructing and refurbishing several buildings. These projects will improve operations and will allow the department to operate more efficiently. The last rate change was in 2011 and staff does not anticipate another rate increase in this two year budget cycle.
Table 22
Recommended Action: Staff will continue to monitor the revenues and expenditures as improvements are implemented in the department.
Storm Sewer
Storm Sewer is projected to have a $0.8 million deficit as shown in Table 23, Storm Sewer. The Storm Sewer fund has been operating with a shortfall and to mitigate this, Council authorized a ballot measure to use a portion the Kaweah Dam/Storm Water Facility Maintenance Fee for storm sewer maintenance.
The ballot measure was passed on March 18, 2013 with 58.47% of the property owners voting yes to continue the fee and expand the use of it. The Storm Sewer fund now receives an additional $300,000 annually for local storm water costs, ensuring that the current system operates at full capacity.
Table 23
Staff is currently working with a consultant to update the City’s Storm Master Plan which will eventually outline the storm capital needs and funding. Once completed, staff will return to Council to realign within the year.
Recommended Action: Staff will continue to work with the consultant and return to Council with a recommendation to increase fees.
Summary
Visalia’s economy continues to have growth. Building permits are slightly down and the housing market is still holding strong as interest rates rise. Visalia continues to have growth from people relocating here from areas that have a higher cost of living due to retiring or permanently working from home. The City has also benefited from strong growth in the industrial park. While the majority of the revenue forecasts are showing growth, 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. Staff is optimistic, but acknowledges 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: N/A
Recommended Motion (and Alternative Motions if expected):
recommendation
Appropriate additional funds to the Mid Year budget as follows:
General Fund:
1. Appropriate funds for capital projects in the amount of $225,000 in 22/23 and
$75,000 in 23/24.
Internal Service Funds:
Vehicle Replacement Fund
1. Appropriate $28,000 to replace wrecked Police motorcycle
end
Environmental Assessment Status: N/A
CEQA Review: N/A
Attachments: None