Agenda Item Wording:
title
Receive the FY 2023/24 mid-cycle financial report.
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Deadline for Action: 6/30/2023
Submitting Department: Finance and Technology Services
Contact Name and Phone Number: Renee Nagel, Finance Director x4475, renee.nagel@visalia.city <mailto:renee.nagel@visalia.city> Amee Swearingen, Financial Analyst x4170, amee.swearingen@visalia.city <mailto:amee.swearingen@visalia.city>
Department Recommendation:
Receive the FY 2022/23 mid-cycle financial report.
Background Discussion:
In April 2023, staff presented to Council budget projections for FY 2022/23 and 2023/24 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 2023 for FY 2022/23. The projection for FY 2023/24 builds upon the 2022/23 budget forecast and expected growth in revenues and expenditures. The growth projection for the General Fund’s two primary revenue sources (79% of total revenues) for FY 2023/24 is the following:
Budget Projection
• Sales Tax 2.0% 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 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. However, 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 - 2.5% increase (this increase was approved by Council on 5/15/23)
• 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 - 2.5% annual increase. Per the City’s MOU’s the employees pay half of the increase. The total health insurance increase is projected to be 5% for FY 23/24 (2.5% City / 2.5% Employees). The budget assumption included a 4% increase for the City share (total increase 8%). The annual increase is provided to the City in May of each year and is effective January 1st.
• Capital - Assumes $1.3 million for capital projects which was approved in the budget.
Table I
General Fund Forecast
The adopted budget for FY 2023/24 included a deficit of $6.2 million. Since Sales Tax and Property Tax has increased, the projection for FY 2023/24 is higher from budget for both revenues. Based on these assumptions, the projected surplus for FY 2023/24 is $9.9 million. The surplus for FY 2023/24 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 savings of $1.0 to $2.0 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 2022/23 and FY 2023/24, the surplus decreases each year due to expenditures increasing more than revenues, as shown in Table 1, General Fund Forecast. 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.
Staff has prepared a second projection that assumes a slight recession that starts in FY 23/24. In this forecast, operating expenditures are the same as shown in Table 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 2
General Fund Forecast- slight 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 on year three. 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.
Emergency Reserves:
At Council’s direction, the City maintains a reserve equal to 25% of operating expenditures. The balance of this reserve was $17.4 million at June 30, 2022. As the City’s operating budget grows, so must the reserve in order to maintain the 25% level. Staff is projecting a transfer of approximately $1.5 million at year end to maintain the 25% level for FY 22/23 bringing the reserve to $18.9 million as shown in Table 3: GF Emergency Reserve Fund.
Surplus Policy:
Once the emergency reserve has been funded, any remaining surplus at year-end will 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 $14.8 million. After the transfer of $1.5 million to the Emergency Reserve, the remaining surplus of $13.3 million will be transferred to the Civic Center/Public Safety Reserve Fund. A summary of these projected changes is shown below in Table 4: Future Building Reserve Fund. The numbers shown here are projected. The amount transferred at year-end will depend upon the actual ending fund balance as of June 30, 2023.
Table 4
The $60.2 million is currently earmarked for the new Public Safety Office Building which is currently being designed.
PERS Prepayment
As discussed on many occasions, the annual California Public Employees’ Retirement System (CalPERS) contributions required to fund the City’s pension obligations are increasing significantly. Instead of making regular bi-weekly payroll contributions and unfunded liability payments, CalPERS offers all public agencies the option to prepay the annual employer contribution and the annual unfunded liability payment in lump sums at the beginning of each fiscal year. The advantage of this option is the increased earnings on the contributions during the additional time they are included in the PERS portfolio. The City is limited in the type of investments which it can make and with the additional flexibility of investments in PERS, these funds are likely to earn more, and as a result, help to increase the City’s pension funding.
The prepayment of PERS contributions is evaluated on an annual basis, taking into account the current investment opportunities available to the City. The prepayment saves the City approximately $400,000 which is a greater return than if it was invested in the City’s account. Based on this analysis, staff plans to take advantage of this prepayment option for the 2023/24 fiscal year.
FY 2024/25 & 2025/26 Budget Process
The budget process for FY 2024/25 & 2025/26 will be starting in October of this year. The current budget is the first budget that was completed with the recent changes that the GFOA has made for the budget award. The City was awarded the GFOA award for the current biannual budget. Staff will be bringing the survey results and the current strategic goals to Council in October for review. Table 5: Budget Process Calendar, shows the new calendar for the budget.
Table 5
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 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.
Fiscal Impact:
None
Prior Council Action: N/A
Other: N/A
Alternatives: None
Recommended Motion (and Alternative Motions if expected):
recommendation
Receive the FY 2023/24 mid-cycle financial report. end
Environmental Assessment Status: N/A
CEQA Review: N/A
Attachments: None