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HomeMy WebLinkAboutStaff Report 5946 City of Palo Alto (ID # 5946) Finance Committee Staff Report Report Type: Action Items Meeting Date: 8/18/2015 City of Palo Alto Page 1 Summary Title: 3rd Quarter FY 2015 Financial Report Title: Third Quarter Fiscal Year 2015 Financial Report From: City Manager Lead Department: Administrative Services Motion Staff recommends that Finance Committee review and approve the Third (3rd) Quarter financial report. Background The purpose of this report is to provide the Finance Committee with information on the financial status of the City’s General Fund and Enterprise Funds as of the end of the 3rd Quarter of fiscal year (FY) 2015. As reported in the FY 2016-2025 General Fund Long Range Financial Forecast and the FY 2016 Operating Budget, the City’s major tax revenue streams continue to exceed expectations. As a result, the mid-year budget changes for FY 2015 included a $4.8 million upward adjustment in revenues, a 3.2 percent increase over the FY 2015 Adopted Budget. Expenses were also adjusted and, after subtracting Budget Amendments authorized by Council, the net projected surplus for FY 2015 was estimated at $4.3 million. Attachment A contains a line by line report of major revenues and expenditures, as well as a comparison to the FY 2015 Adopted Budget and Adjusted Budget as of March 31, 2015. The net projected surplus for FY 2015 was increased to $8.0 million in June 2015 as part of the presentation of the FY 2016 Operating Budget to City Council. Revenue activity subsequent to the mid-year budget changes in March indicates it is now likely that FY 2015 will end with a surplus in excess of $8 million due to items such as an extraordinarily large $3.3 million documentary transfer tax receipt, and one-time receipts for excess Educational Revenue Augmentation Funds (ERAF) and reimbursement of state unfunded mandates. As approved in the FY 2016 Operating Budget, $2.1 million of the FY 2015 surplus will be used to fund one-time expenditures in FY 2016. City of Palo Alto Page 2 Discussion GENERAL FUND Revenue Highlights for FY 2015 3rd Quarter Year to Date (YTD) Following is a table which highlights the City’s major revenue sources for the 3rd Quarter YTD, compared to the same period of the prior year. Revenue for each period is expressed as a percentage of Adjusted/Final Budget. In total, revenue is up $5.6 million, or 5 percent, from prior year as of the end of the 3rd Quarter YTD. After factoring out a FY 2014 anomaly in the Charges for Services line ($2.0 million explained later), the “normalized” increase in revenue for the nine month period is $3.6 million, or 3.5 percent, driven primarily by property tax and transient occupancy tax increases. In total, receipts are at 69 percent of Adjusted Budget, which is typical for the end of the 3rd Quarter due to property tax receipts which spike in the last quarter of the fiscal year. It is important to note that the FY 2015 Adjusted Budget includes the voter approved Transient Occupancy Tax increase from 12% to 14% effective January 1, 2015 and the voter approved Telephone Utility Tax decrease from 5% to 4.75% effective April 1, 2015. Following is a chart which demonstrates the three year trend for major sources of General Fund tax revenue, and compares FY 2013 and FY 2014 actuals with FY 2015 Adjusted Budget. As detailed in the City’s most recent Long Range Financial Forecast, all major tax revenue streams are expected to continue a positive trajectory. Property tax and transient occupancy tax are expected to continue strong growth trends, while sales tax and documentary transfer tax will City of Palo Alto Page 3 advance at a slower rate. The chart is followed by a more detailed discussion of each major revenue category. Property tax revenue at the close of 3rd Quarter YTD was $20.7 million, an increase of 9 percent over the same period prior year. Property tax is received from the County of Santa Clara during the 2nd, 3rd and 4th quarters of the year, and receipts at 64 percent of full-year budget is typical for this line item through March 31. The FY 2015 Adjusted Budget is $32.6 million, 6.4 percent higher than the prior year’s actual revenue of $30.6 million. Staff expects property tax revenue will exceed FY 2015 Adjusted Budget by $1.4 million, primarily due to a one-time receipt of $0.9 million for an excess ERAF distribution from the County of Santa Clara. ERAF is the fund used to collect and disburse property taxes that are shifted to/from cities, the county and special districts prior to their reallocation to K-14 school agencies. Property tax increases are driven by high demand in the residential sector and robust activity in the commercial property market. Palo Alto’s single family home median sale price has doubled since 2008 and currently stands at $2.5 million. The current trend in real estate activity is expected to continue into FY 2016, as evidenced by continued growth in assessed values resulting from robust sales such as seven large commercial sales in May, 2015, which alone are expected to increase FY 2016 property tax revenue by $0.5 million. City of Palo Alto Page 4 Sales tax revenue for 3rd quarter YTD has decreased $2.7 million, or 13 percent, from the same period last year for a total of $17.7 million in receipts YTD. FY 2014 revenue through 3rd Quarter included a large one-time receipt from a single vendor. After adjusting for this anomaly, sales tax revenue declined $1.1 million from prior year, a decrease of 6 percent. Through the first three quarters of the fiscal year, receipts are at 61 percent of Adjusted Budget. The FY 2015 Adjusted Budget includes a one-time positive adjustment of $1.7 million to align the accrual period with the fiscal year. In prior years sales tax was accrued through the period ended May 15. Effective for FY 2015 sales tax will be accrued through June 30, which creates a one-time revenue addition of $1.7 million for the period May 16 through June 30. This is a one-time accounting adjustment which will be made in the 4th Quarter. Sales tax revenue continues to show positive growth and has fully recovered from the depths of FY 2010. Staff expects that full-year revenue will be very close to the Adjusted Budget amount of $29.2 million. Transient occupancy tax (TOT) revenue reached $9.4 million through the end of the 3rd Quarter, an increase of $1.8 million from prior year. Average daily room rates increased 14 percent from prior year - $202 per day to $230 per day - while average occupancy rates remained flat at 77 percent. The Epiphany Hotel has been open for a full year, and two new Hilton hotels opened in March, 2015. The Clement Hotel is expected to open at the end of this calendar year. Effective January 1, 2015, the TOT rate increased from 12 percent to 14 percent. In the first three months, the 2 percent increase generated $0.6 million in revenue. As part of closing the FY 2015 Budget, staff will bring forward a recommendation to allocate the receipts from both the 2 percent rate increase and the newly opened hotels to the Infrastructure Reserve. Documentary transfer tax revenue for the nine months ended March 31 totals $4.7 million, down $0.9 million or 15 percent from the prior year. An unusually large sale of commercial properties by Hudson Pacific resulted in a $3.3 million receipt in the 4th Quarter. Staff expects full year revenue will be in excess of $9.8 million, the highest year on record and 32.5 percent higher than last year. Charges for services revenue through the first three quarters of FY 2015 is up $2.7 million from the same period last year, primarily due to a $2.0 million timing difference in the billings to Stanford University for fire and emergency services. After adjusting for this anomaly, this revenue category is up $0.7 million from prior year, primarily driven by an increase in the annual charge to Stanford for fire services. Permits and licenses revenue for 3rd Quarter YTD is up $1.3 million from the same period prior year due to a 3rd Quarter surge in new construction permits. This revenue category will be adjusted at year-end to defer a portion of revenue to FY 2016 for those permits that are in progress at June 30. City of Palo Alto Page 5 Expense Highlights for FY 2015 3rd Quarter YTD Following is a table which highlights the City’s expenses by function for the 3rd Quarter YTD, and compares expenses to the same period prior year. In addition, the expense for the period is expressed as a percentage of budget for each of the years. Actual expenses through the first three quarters of the fiscal year total $109.6 million, a 4 percent increase over prior year. The expenses are right in line with the Adjusted Budget at 67 percent of full-year budgeted amounts. Effective July 2, 2014, as approved in the FY 2015 Adopted Budget, Development Services was separated from Planning and Community Environment so that development partners could work together more comprehensively and provide a higher quality of service. Salary and non- salary expenses were identified and transferred out of the Planning, Fire, Information Technology, and Public Works departments. The largest expense transfer was from the Planning Department. Library expenses are up over prior year due to increased staffing costs as a result of the Mitchell Park and Rinconada Libraries both re-opening in FY 2015. City of Palo Alto Page 6 Public Safety comprises the largest portion of General Fund expenditures – 42 percent of actuals as of March 31. Following is the detail for Public Safety overtime expenses through the 3rd Quarter of the current fiscal year: Police overtime has increased $0.1 million, or 10 percent, over the same period last year. On a combined basis, salaries and overtime are at 75 percent of budget through the first nine months of the fiscal year. Overtime cost is primarily due to vacancies, which increased from 8 positions to 11 positions. The Department’s overtime analysis is included in Attachment B. Fire overtime has decreased slightly from the same period last year. On a combined basis, salaries and overtime are at 73 percent of budget through the first nine months of the fiscal year. Overtime cost is driven by vacancies. Vacancies increased from 4 to 9, all of which are being held open pending the outcome of negotiations on the Stanford fire services contract. The Department’s overtime analysis is included in Attachment B. General Fund Budget Stabilization Reserve (BSR) Balance The General Fund BSR balance as of July 1, 2014 was $35.1 million. Staff anticipates the City could end the year with an $8 million surplus due to continued upward revenue trends through the 4th Quarter, and items such as one-time receipts for excess ERAF ($0.9 million) and reimbursement of state unfunded mandates ($1.0 million). As part of closing the FY 2015 Budget, staff will bring forward recommendations to allocate budget surplus funds, including a transfer to the Infrastructure Reserve. City of Palo Alto Page 7 ENTERPRISE FUNDS Following is a summary of change in net position for each of the Enterprise Funds for the nine months ended March 31, 2015, including a comparison of results from the same period last year. Water Fund 3rd Quarter YTD revenue has decreased $3.6 million, or 12 percent, from same period prior year due to reduced water usage by retail and wholesale customers, as requested by the San Francisco Public Utilities Commission in response to California’s fourth year of drought. Gas Fund 3rd Quarter YTD revenue declined $3.8 million, or 14 percent, from same period prior year due to markedly reduced consumption over the course of the winter months November through February. Airport Fund 3rd Quarter YTD revenue is $0.4 million. City of Palo Alto took over operation of the Airport from County of Santa Clara during the 1st Quarter of FY 2015. Revenue sources include tie-down fees and rental revenue. City of Palo Alto Page 8 Electric Fund operating expenses through the 3rd Quarter total $78.6 million, or 13 percent higher than the same period last year due to increased spot market purchases as a result of less hydroelectric power. Gas Fund expenses have declined $1.0 million, or 6 percent, from prior year due to lower commodity prices. Wastewater Treatment Fund expenses have increased 5 percent over the same period last year due to increased salaries and benefit expense as a result of filling vacancies, and higher allocated charges. Storm Drainage Fund expenses have increased $0.3 million, or 18 percent, over the same period last year, primarily due to an increase in allocated charges. Fiber Optics Fund expenses are 7 percent higher than the same period last year due to increased salaries and allocated administrative expenses. Airport Fund expenses have increased due to assumption of active operations from County of Santa Clara in the 1st Quarter. Airport expenses are being partially funded by a loan from the General Fund. City of Palo Alto Page 9 Pension and Retiree Medical Liabilities Long-term unfunded liabilities for pension and retiree medical continue to be the dominant issue in discussion of the City’s long-range financial planning. At the direction of City Council, Staff will bring forward a report in September 2015 which identifies potential strategies to address these unfunded liabilities. In order to slow the growth of pension costs over the long term, the City implemented a second tier pension formula in 2011 (2% @ 60) and the California Public Employees’ Pension Reform Act of 2013 (PEPRA) mandated a third tier pension formula of 2% @ 62 effective January 1, 2013. Following is a table which shows the employee count in each of the Miscellaneous and Safety plans as of June 1, 2015. As of that date, 28 percent of the City’s full-time employees were enrolled in Tier 2 and Tier 3 plans. City of Palo Alto Page 10 As of June 30, 2014 the City’s unfunded pension and retiree medical liabilities totaled $439 million. The Governmental Accounting Standards Board (GASB) passed new accounting standards for the presentation of pension liability which will be effective for FY 2015. The primary changes relate to amortization periods and disclosure, and the impact of these changes will be included in Staff’s September 2015 presentation on strategies for funding of long-term liabilities. In addition, new accounting standards for presentation of the retiree medical liability were enacted and will be effective for FY 2018. Attachments:  Attachment A: General Fund Third Quarter Financial Report (XLSX)  Attachment B: Public Safety Overtime Analysis (XLSX) ATTACHMENT ACITY OF PALO ALTO GENERAL FUND THIRD QUARTER FINANCIAL REPORT FISCAL YEAR ENDING JUNE 30, 2015 (in thousands) BUDGET ACTUALS (as of 03/31/2015) Adopted Adjusted Pre % of Adj Categories Budget Budget Encumbr Encumbr Actual Budget* Revenues & Other Sources Sales Tax 25,957 29,238 - - 17,703 61% Property Tax 31,927 32,556 - - 20,715 64% Transient Occupancy Tax 14,156 15,901 - - 9,400 59% Documentary Transfer Tax 7,514 6,500 - - 4,744 73% Utility Users Tax 11,285 10,895 - - 8,070 74% Motor Vehicle Tax, Penalties & Fines 2,164 2,168 - - 1,340 62% Charges for Services 23,013 24,863 - - 18,052 73% Permits & Licenses 7,804 7,738 - - 6,288 81% Return on Investment 685 685 - - 796 116% Rental Income 14,254 14,206 - - 11,110 78% From Other Agencies 453 453 - - 603 133% Charges To Other Funds 10,647 10,647 - - 8,006 75% Other Revenues 1,060 1,493 - - 1,375 92% Total Revenues 150,919 157,343 - - 108,202 69% Operating Transfers-In 18,433 18,620 - - 13,639 73% Encumbrances and Reappropriation 6,386 - - - 0% Contribution from Budget Stabilization Reserve As Assumed in the Adopted Budget 1,732 1,732 - - - 0% Total Sources of Funds 171,084 184,081 - - 121,841 69% Expenditures & Other Uses City Attorney 2,578 2,924 10 455 1,930 82% City Auditor 1,065 1,075 26 808 78% City Clerk 1,276 1,286 73 832 70% City Council 432 517 53 265 62% City Manager 2,728 2,485 235 1,613 74% Administrative Services 7,175 7,417 23 160 5,341 74% Community Services 22,764 24,339 40 1,835 16,688 76% Development Services 10,535 10,900 208 6,852 65% Library 7,521 8,301 355 5,802 74% Office of Sustainability 272 575 121 343 81% People Strategy and Operations 3,264 3,757 181 222 2,337 73% Planning and Community Environment 7,015 9,018 75 1,488 5,297 76% Public Safety 62,054 63,460 285 714 45,775 74% Public Works 13,397 14,475 38 1,194 9,777 76% Non-Departmental 13,272 11,890 5,914 50% Total Expenditures 155,348 162,419 652 7,139 109,574 72% Operating Transfers-Out 2,077 2,320 - - 1,708 74% Transfer to Infrastructure 13,659 14,591 - - 10,244 70% Total Use of Funds 171,084 179,330 652 7,139 121,526 72% Net Change to BSR - 4,751 Budget Amendments Authorized by Council thru 9/30/14:* Including reappropriations and prior yearShuttle Contract, EPA Contribution (6/23/14)- encumbrances. Golf Course Operating Budget (6/23/14)- Transportation Management Authority (8/4/14)(30) Sustainability and Climate Action Plan (8/18/14)(137) Increase Airport Fund loan for legal counsel (9/22/14)(200) Golf Course Operating Loss Reserve (9/22/14)- Golf Restaurant Lease Revenue (10/6/14)(23) Business Registry (11/3/14)- Comprehensive Plan Fiscal Analysis (3/2/15)(158) Tree Pruning Contract (3/9/15)(160) Residential Preferential Parking Program (3/9/15)(119) Midyear Budget (4/20/15)(4,330) Total Augmentations Authorized by Council - (5,157) Net Surplus/(Deficit) Excluding BAOs - (406) BSR Balance BSR % of Total Use of Funds, excluding Prior year reappropriations & encumbrances Earmarked Reserves, 9/30/15: - - - 7/30/2015 Attachment B Overtime Analysis for Fiscal Years 2013 through 2015 thru 03/31/15 2013 2014 2015 POLICE DEPARTMENT Overtime Expense Adopted Budget $967,900 $1,500,000 $1,500,000 Modified Budget 970,382 1,500,000 1,500,000 Net Overtime Cost - see below (82,849) 593,565 757,380 Variance to Budget $1,053,231 $906,435 $742,620 Overtime Net Cost Actual Expense $1,542,754 $1,711,764 $1,497,045 Less Reimbursements Stanford Communications 51,299 54,552 51,031 Utilities Communications Reimbursement 28,247 29,845 29,949 Local Agencies (A)16,255 8,905 7,448 Police Service Fees 83,785 73,934 56,352 Total Reimbursements 179,586 167,236 144,780 Less Department Vacancies 1,446,017 950,963 594,884 Net Overtime Cost ($82,849)$593,565 $757,380 Department Vacancies (number of days)5,543 4,251 2,506 Workers' Compensation Cases 10 14 11 Department Disabilities (number of days)641 776 468 FIRE DEPARTMENT Overtime Expense Original Budget $1,624,415 $1,424,414 $1,424,414 Modified Budget (B)1,624,415 1,750,956 1,608,710 Net Overtime Cost - see below 628,711 1,012,521 95,089 Variance to Budget $995,704 $738,435 $1,513,621 Overtime Net Cost Actual Expense $1,812,170 $2,562,549 $1,707,952 Less Reimbursements Stanford Fire Services (C)549,088 776,452 517,509 Cal-Fire/FEMA (Strike Teams)- 50,542 184,269 Total Reimbursements 549,088 826,994 701,778 Less Department Vacancies 634,371 723,034 911,085 Net Overtime Cost $628,711 $1,012,521 $95,089 Department Vacancies (number of days)2,340 2,618 2,709 Workers' Compensation Cases 9 18 12 Department Disabilities (number of days)216 489 175 NOTES: (A)Includes Animal Services contract with Los Altos and Los Altos Hills. (B)Includes Strike Team Reimbursement of $184,296 approved by Council in the FY 2015 Midyear Report on 4/20/15. (C )Stanford reimburses 30.3% of Fire Service expenditures. Public Safety Departments 7/30/2015