Agenda Item Wording:
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Review 2023/24 Mid-Year Projections amend the General Fund surplus policy, and appropriate funds for various capital projects.
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Deadline for Action: 4/15/2024
Submitting Department: Finance and Technology Services
Contact Name and Phone Number: Renee Nagel, Finance and Technology Services Director 713-4375, Amee Swearingen, Budget Analyst 713-4170
Department Recommendation:
This report provides a Mid-Year budget update for the General Fund for this current fiscal year (FY 2023/24), an amendment to the General Fund surplus policy, and a request to fund several capital projects. Total appropriation requested is $1,576,100 and is listed by fund below:
• General Fund - appropriation of $1,063,000 for 5 projects;
• Convention Center Fund - appropriation of $500,000 for 1 project; and
• Fleet Maintenance Fund - appropriation of $13,100 for 1 project.
Background Discussion:
Annually the Finance Department presents a mid-year budget report to City Council that compares the budget to the current financial status. On years, the two-year budget is being prepared, mid-year projections only focus on the General Fund. The General Fund is the largest fund for essential services and its revenue source can fluctuate with the economy. Mid-Year projections prepared in off budget years focus on all operating funds. The City is currently in the process of preparing the two-year budget for FY 24/25 and 25/26, therefore is only reporting projections for the General Fund. There are no notable changes for the Enterprise and Internal Service funds.
The current budget was adopted in June of 2022. The adopted budget surplus for this fiscal year was $6.2 million and is currently projected to be $16.2 million as shown in Table 1- FY 23/24 General Fund Mid-Year projections.
Table 1
FY 23/24 General Fund Mid-Year Projections
The current budget was created in April 2022, at the time had continued uncertainty due to COVID and how the pandemic stimulus money would affect Sales Tax. For this reason, staff was very conservative with budgeted revenue projections.
Revenues:
Since the budget was adopted, all revenues have had growth, except for Business License which had an end of year adjustment. For this fiscal year, revenues are projected to be $7.4 million higher than budget and $0.5 million higher than last fiscal year actuals. The only category down from last fiscal year actuals is All Other Revenues due to receiving some capital grants that are not in the current year.
The largest revenue source in the General Fund is sales tax which represents 46% of the total revenues. Sales tax has seen a 28% growth since 2020 which increased from $33.4 million to $46.6 million. The large growth is mainly due to the multi-year COVID stimulus money that the Federal Government issued. This one-time money has ended and sales tax is projected to end the fiscal year with no growth as shown in Chart 1 - Sales Tax.
Chart 1
Sales Tax
Sales Tax revenue is very volatile because it is based on consumer spending. The one-time COVID money was good for the economy and as a result most Cities saw a large increase in sales tax. However, this extra spending has slowed down as the cost of living continues to rise and disposable income becomes less.
Operating Expenditures:
FY 23/24 operating expenses are projected to be less than the budget by $3.3 million and higher than last fiscal year by $1.2 million.
Majority of the Department’s expenses are down from the budget due to vacancies. The adopted budget assumes all positions (full-time and hourly) are filled the entire year. Police is the largest General Fund Department which has experienced higher than normal vacancies over the last three to five years. The second largest decrease in operations is in the Parks & Recreation Department. Recreation is still adding back programs from COVID which required them to shut down all programs. In addition, Visalia Unified School District ended the after-school activities program with the City. This program is now done by Pro Youth.
There are a few Departments that have higher than budget expenditures. The Fire Department is the largest and is up by $500 thousand. This increase is mainly due to the Strike Team which caused employee overtime to be higher. These expenses will be reimbursed by Cal Fire within 1-2 years. Strike Team expenses are not reoccurring and are not predictable, therefore they are not budgeted.
Even though the operating expenditures are down from budget, they are up from last fiscal year actuals by $1.2 million. Some of this increase is due to growth, technology, supply shortages, and inflation.
Capital Project Additional Appropriations
The Six Year Capital Plan is adopted with the two-year budget. The first two years of the plan are the only two years that are appropriated. During the two-year budget, projects will arise due to unforeseen issues, maintenance, etc. These projects can be brought to Council throughout the fiscal year or during the mid-year budget report.
General Fund:
Staff is recommending funding 5 additional capital projects for fiscal year 23/24 totaling $1,063,000.
• Replace 22 SCBA Cylinders for $28,000: Self-Contained Breathing Apparatus (SCBA) cylinders are the air bottles used for breathing protection during response to fires and other incidents with a toxic environment. SCBA cylinders have a 15-year shelf life, and the Fire Department has identified 13 Self-Contained Breathing Apparatus (SCBA) cylinders will expire in March 2024 and an additional 9 cylinders in April 2024. Fire is requesting these 22 cylinders be approved for replacement during this mid-year budget period to maintain an acceptable level of cylinders for response. Staff is requesting an appropriation for $28,000 to replace 22 SCBA cylinders.
• Parking Structure Elevator and Sprinkler Repair for $110,000: The 222 West Acequia Parking structure has the south side elevator in need of some repairs. The hydraulic jack packing is leaking and causing oil to seep out of the ram and causing the elevator to shut down. The parking structure also needs repairs to the fire suppression system. The dry pipe valves are worn and tripping causing unnecessary pump runs and callouts to our department along with the fire department. Also, the water supply line from the service side to our pump room is showing signs of corrosion and leaking in several spots that needs to be replaced. Staff is requesting an appropriation for $110,000 for the repairs to the parking structure.
• New Irrigation Well at Stonebrook Park for $100,000: The current irrigation well is inoperable. During the past summer, the well started producing sand, plugging up the irrigation system. A well survey was performed and discovered a large hole in the well casing. This project will drill a new irrigation well and install all the pumping equipment to restore well water back in the park and eliminate the need for Calwater usage to irrigate the park. Staff is requesting an appropriation for $100,000 for the new well at Stonebrook Park.
• Classification and Compensation Study for $250,000: The purpose of the study is to review and evaluate current job classifications and descriptions, reporting relationships, and organizational changes. The study will compare classifications and total compensation of positions within comparable agencies to determine the city’s competitiveness in the marketplace. Staff is requesting an appropriation for $250,000 for the classification and compensation study.
• Rawhide Repairs for $575,000: There are several maintenance items that need to be repaired at the Rawhide stadium which include the ticket booth roof ($30,000), fence ($500,000), and some smaller miscellaneous repairs and assessments ($45,000) such as protruding boards. Staff is requesting an appropriation for $575,000 for the repairs at Rawhide stadium.
Convention Center Fund:
Staff is requesting an appropriation for $500,000 to replace the Convention Center elevator. The current elevator was installed in 1970 and is over 30 years old. Due to the age and it being outdated, getting parts is very difficult and takes a long time to get. It was recently down for 6 months waiting for parts. The prolonged waiting periods for parts creates issues during events that are catered. During those six months, three events had to be cancelled due to the elevator not working resulting in a loss of revenue of approximately $15,000. A functioning elevator is needed for ADA compliance and for catered events. This fund is subsidized by the General Fund.
Fleet Maintenance Fund:
During the 6 Year Capital Plan Review on April 1st, Council directed staff to move this project forward into this fiscal year. The project is to replace 4 portable fleet welders. The current fleet welding machines are old and outdated. The newer welding machines are modernized and compact in size with more versatile capabilities. These welders are used in day-to-day fleet operations. Staff is requesting to appropriate $13,100 from the Fleet Maintenance Fund.
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 since FY 16/17. Going forward, the reserve will have to be increased to continue to maintain the 25% level. The reserve balance at June 30, 2023 was $19.0 million.
The projected surplus for FY 2024 is $15.1 million (estimated surplus minus recommended capital appropriations of $1,063,000 listed above). Based on this fiscal year’s projection, $0.2 million of the surplus will be transferred at year end to bring the reserve balance to $19.2 million keeping the reserves at 25% of operating expenditures as shown in Table 2 General Fund Emergency Reserve Balance.
Table 2
General Fund Emergency Reserve Balance
(in millions)
This year staff would like to request that Council make a change to the current surplus/reserve policy (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. The requested one-time exception to the policy this year would be to move $12.0 million to the Civic Center/Public Safety Facility Reserve Fund bringing the reserve to $66.9 million ($54.9m + $12.0m). The $12 million is needed to meet the current Phase 2 estimate for the construction of the three buildings currently under design. The amount needed is an estimate from the design consultant and the exact cost will be determined once it has been bid.
After the Civic Center transfer, the estimated remaining surplus would be $2.9 million as shown in Table 3 General Fund Surplus Transfer.
Table 3
General Fund Surplus Transfer
(in millions)
Staff is requesting authorization to transfer the remaining surplus to the Emergency Reserve Fund, bringing the balance of that fund to 28%. Since this is a projection, this surplus could be more or less. If the surplus is higher, staff recommend adding additional funds to the Emergency Reserve bringing the fund to a maximum of 30% of operating expenditures. Anything above the 30% will be deposited in the Civic Center Fund.
A larger emergency reserve will help during a recession and maintain service levels. Staff will return next mid-year to review the policy to determine if it needs to be increased again and if Council wants to change how the policy is structured.
Preliminary Forecast for FY 24/25 - 27/28
The Finance Department has prepared three different projections that change only the revenue forecast. The expenditure forecast does not change in the scenarios. The first projection assumes growth in all revenues. The second projection assumes a slight revenue realignment that starts in FY 24/25. The third projection assumes a slight recession that starts in FY 24/25 and ends in FY 25/26.
The expenditure forecast assumes the following:
• Wages and Benefits - 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.
• 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: (1) Employer Contribution rate (based on payroll); and (2) Unfunded Liability Payment (based on schedule provided by PERS).
• Health insurance is projected to grow 4% annually. 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 the number of health claims and size of claim.
• 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 $1.5 to $2 million. This savings has not been included in the projection. Staff is working diligently to reduce number of vacancy and recruitment time.
• Operating Expenditures - 3% in the first two years and 4% in the last two years due to additional parks and more technology which results in higher annually maintenance costs.
• Service Provided - 3% annual increase. This is a charge from other funds for Services such as fleet maintenance, fuel, and parts.
• Allocations/Reimbursements - 2% annual increase.
• Transfers Out/Debt - 3% annual increase. Transfers are for funds that are subsidized by the General Fund.
• Capital - $3.0 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.
Forecast Projection 1 (Growth):
The growth projection for the General Fund revenues for the four remaining years (24/25 - 27/28) are the following:
• Sales Tax (2%)
• Property Tax (3%)
• Franchise Tax (3%)
• All Other Revenues (2%)
Sales Tax and Property Tax represents 79% of the General Fund total revenues.
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 revenue realignment):
The revenues in this projection assumes:
• Sales Tax - FY 24/25 & 25/26 (-1%), remaining years (2%)
• Property Tax - 3% annually
• Franchise Tax - FY 24/25 & 25/26 (2%), remaining years (3%)
• Business License Fees - FY 24/25 & 25/26 (-1%), remaining years (2%)
• All Other Revenues - FY 24/25 & 25/26 (1%), remaining years (2%)
Table 4
General Fund Forecast - Revenue Realignment
This forecast is considered a slight revenue realignment because only Sales Tax and Business License decreases for two years at a negative 1% and the rest of the revenues slightly increase annually. During the Great Recession, Sales Tax decreased for three years (2008 - 2010) for a total reduction of 26%.
With a slight revenue realignment starting next year, the forecast still shows a surplus for the forecasted years with the surplus decreasing every year. 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 more of a conservative forecast and does not include any recession.
Forecast Projection 3 (slight recession):
The revenues in this projection assumes:
• Sales Tax - FY 24/25 & 25/26 (-3%), remaining years (2%)
• Property Tax - FY 24/25 (3%), FY 25/26 & 26/27 (1%), FY 27/28 (2%)
• Franchise Tax - FY 24/25 & 25/26 (1%), remaining years (2%)
• Transit Occupancy Tax - FY 24/25 (-2%), FY 25/26 (0%), remaining years (2%)
• Business License - FY 24/25 (-2%), FY 25/26 (0%), FY 26/27 (1%), FY 27/28 (2%)
• All Other Revenues - FY 24/25 (-1%), FY 25/26 (0%), remaining years (2%)
Table 5
General Fund Forecast - Slight Recession
This forecast is considered a slight recession because revenues still 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 shows a surplus for the first couple of years with the last couple of years becoming a deficit. 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 would look at ways to reduce operating costs, evaluate all vacant positions, defer capital, and review current fees to ensure fees are aligned appropriately.
Conclusion
While the City is in overall sound financial shape today, we must be cautious in making 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 State of California has recently released its forecast and like many others, is projecting a large deficit. As mentioned above, the scenarios provided do not include a large revenue decrease. 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 must also be fiscally responsible by having sufficient reserves, balanced budgets, and prudent spending policies. Staff will be returning in few months with the proposed two-year budget.
Fiscal Impact:
None
Prior Council Action: Council conducted work sessions on Feb 5th, 20th, and March 4th, 18th and April 1st to review Capital Project’s.
Other: N/A
Alternatives: N/A
Recommended Motion (and Alternative Motions if expected):
recommendation
Receive the Mid-Year budget update for the General fund for FY 2023/24, amend the General Fund surplus policy per staff recommendation, and appropriate funds for capital projects totaling $1,576,100 as outlined in the report.end
Environmental Assessment Status: N/A
CEQA Review: N/A
Attachments: none