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HomeMy WebLinkAboutStaff Report 14106 City of Palo Alto (ID # 14106) Finance Committee Staff Report Meeting Date: 6/7/2022 Report Type: Action Items City of Palo Alto Page 1 Title: Fiscal Year 2022 Third Quarter Financial Status Report From: City Manager Lead Department: Administrative Services RECOMMENDATION Staff recommends that the Finance Committee review and accept the Third Quarter financial report, and forward it to the City Council. EXECUTIVE SUMMARY 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 3 rd Quarter of Fiscal Year (FY) 2022 (July 1, 2021 through March 31, 2022). Attachment A contains a line by line report of major General Fund revenues and expenditures for 3rd Quarter Year-to-Date (YTD), as well as a comparison to the FY 2022 Adopted Budget and Adjusted Budget as of March 31, 2022. Through the nine months completion of the current fiscal year, the City’s general and enterprise funds are performing within FY 2022 budgetary levels. As a result of actions taken in the FY 2022 Midyear Budget Report (CMR 13801), the Budget Stabilization Reserve (BSR) is currently at $40.7 million, which is above the City Council recommended 18.5 percent level of $38.7 million by $2.0 million. As reported in the FY 2023 Proposed Operating Budget, it is estimated that there will be a surplus of approximately $14 million in the General Fund in FY 2022; however, these funds have been programed for use of one-time needs in FY 2023 as well as establishing a reserve for funding a number of service reinvestments for a second year in FY 2024. For more information, see the Budget Balancing Strategy of the Transmittal Letter in the FY 2023 Proposed Operating Book. Staff will return as part of the review of the FY 2022 Annual Comprehensive Financial Report with year-end budget adjustments to recognize these funds and align the budget with the actuals. DISCUSSION General Fund Revenue Highlights for FY 2022 3rd Quarter Year to Date (YTD) The 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. 1 Packet Pg. 3 City of Palo Alto Page 2 Table 1: FY 2022 Third Quarter General Fund Revenue (000's) 3rd Quarter Actuals Adjusted Budget % change FY 2022 %FY 2021 % Property Tax 4.4%$53,228 64.1%$53,173 61.5% Sales Tax 12.5%28,184 65.4%25,030 65.4% Charges for Services 15.2%24,932 83.2%24,414 73.8% Transient Occupancy Tax 215.8%8,428 93.7%4,830 51.8% Utility User Tax 3.5%14,370 77.8%14,080 76.7% Permits and Licenses 9.9%8,273 58.3%8,366 52.4% Documentary Transfer Tax 31.6%7,137 123.3%6,875 97.3% All Other Revenue Sources 35.0%42,424 70.9%34,062 65.4% Total Revenue 19.6%$186,976 72.8%$170,830 66.6% FY 2022 FY 2021 $34,136 $32,709 18,432 16,378 20,755 18,009 7,895 2,500 11,174 10,797 4,820 4,384 $136,097 $113,755 8,802 6,689 30,083 22,289 Property Tax. At the close of third quarter, property tax revenue receipt was $34.1 million, 64.1 percent of the adjusted budget, and an increase of 4.4 percent over the same period in the prior year. Property tax is received from the County of Santa Clara during the second, third, and fourth quarters of the calendar year. Unlike revenue streams that were highly dependent on consumer spending or travel, such as sales tax and transient occupancy tax, property tax revenues remained relatively flat during the COVID-19 pandemic. The compound annual growth rate (CAGR) over the 10 years has been approximately 8.2 percent. The FY 2022 secured and unsecured property tax assessed values (AV) growth rates are 4.0 percent and 1.7 percent, respectively, an average of 3.9 percent. The lower than historical growth reflects impacts typical during recessions and/or economic downturns lagging one year after more than more economically sensitive revenues such as sales and transient occupancy tax. In the FY 2023 Proposed Budget presentation on May 2, 2022, the estimate for FY 2022 was revised upward to $56.8 million, $3.6 million or 6.8 percent higher than the adjusted budget. Included in this forecast is $6 million in expected Excess Educational Revenue Augmentation Fund (ERAF) 1 minus $1.5 million set aside for the at-risk amount due to the lawsuit by the California School Boards of Association and its Education Legal Alliance against the Controller of the State of California for over the calculation methodology of the Excess ERAF. The County of Santa Clara’s Finance Agency and Office of the Assessor, the entities responsible for managing the property tax billing, collection, and processing changes (e.g. sales, assessment appeal, etc.) forecasts indicate the upward revised FY 2022 forecast of $56.8 million will be met or exceeded. FY 2021 actual property tax revenue was $56.6 million which included $5.6 million for ERAF distributions from the County of Santa Clara. Though Excess ERAF receipt has steadily grown the last nine years, excess ERAF is not considered a permanent local revenue source. Lastly, The Governor’s Budget Trailer May Revise has a provision that could potentially cap excess ERAF 1 Packet Pg. 4 City of Palo Alto Page 3 payments at current levels, staff will continue to evaluate this, the impacts, and work with the Council on any opposition to this. Sales Tax. As of the third quarter, sales tax revenue has seen an increase of $2.1 million or 12.5 percent, from the same period last year. Due to timing of the California Department Tax and Fee Administration (CDTFA) sales tax distribution, third quarter sales tax represents seven months of sales tax activity and does not represent sales tax activity for the full three quarters of the fiscal year. Actual performance for this fiscal year will not be known until August/September. The FY 2023 Proposed Operating Budget presentation revised the FY 2022 forecast estimate to $31.5 million, $3.3 million or 11.7 percent higher than the adjusted budget based on performance to date, recent consumer trends, and the projected outlook by City’s sale’s tax consultant. Transient Occupancy Tax (TOT). TOT revenues reached $7.9 million through the end of the third quarter, an increase of 215.8 percent over the prior year. As of the writing of this report and due to the one-month timing delay in receipts, the third quarter results represent 7.5 months of TOT receipts. Though receipts remain below pre-pandemic levels, recovery has been strong over the FY 2021 receipt of $5.2 million. The FY 2023 Proposed Operating Budget presentation revised the FY 2022 forecast estimate to $13.2 million, $4.8 million or 57.1 percent higher than the adjusted budget based on performance to date. If the current trends continue, receipts are likely to exceed this forecast as well. The two Marriott hotels are fully open with total of 293 rooms, The Westin Hotel and Clement Hotel and two smaller hotels opened in the first and second fiscal year quarters, and performance of the two on-line hoteliers has strengthened. As of February 2022, hotel average daily room and occupancy rates were $181 per day and 57.2 percent, respectively. This represents an increase of 62.7 percent and 57.8 percent over the prior year, respectively. In comparison, the same period of the prior year it was $112 and 36.2 percent. The occupancy percentage ranges from 20 percent to over 90 percent with overall rising room rates; however, a minority of hotels lowered their room rates over the prior year’s average. Documentary Transfer Tax. Cash receipts total $8.8 million, or 123.3 percent of the FY 2022 Adjusted Budget are $2.1 million higher than prior year receipts for the same period. This revenue source is volatile since it is highly dependent on sales volume and the mix of commercial and residential sales. Actual receipts to date have exceeded expectation based on historical av erages. Based on an additional month of receipts, actual receipts will exceed this revised forecast as well, by how much is not certain due to the volatility of this revenue source. Driving this performance is an increase in the number of sale transactions by 14.2 percent, a handful of large commercial sales, and many sales between $5 million to $16 million. The FY 2023 Proposed Operating Budget presentation revised the FY 2022 forecast estimate to $9.6 million, $2.5 million or 35.2 percent higher than the adjusted budget. 1 Packet Pg. 5 City of Palo Alto Page 4 Charges for Services. Through the first three quarters of FY 2022 is up by $2.7 million, or 15.2 percent of the same period last year mainly due to the following: • Paramedic service fees increased $0.75 million over the same period from last year due to higher rate and more trips in current year. • Golf course revenues increased $0.67 million • Program and classes increased $0.92 million All Other Revenue Sources. The third quarter revenue has continued to be higher than the same period of last year due the American Rescue Plan Act distribution of $6.85 million received in May 2021 and recognized as revenue in FY 2022. As of the writing of this report, the second half of the ARPA distribution has not yet been received by the City. In addition, the following other revenue sources showed growth compared to the same period in the prior year for items such as Motor vehicle tax, fines and penalties by $0.1 million, Rental Income by $0.8 million8, and Charges to Other funds with an increase of $1.6M mainly for the cost of providing services to work groups in other City funds. General Fund Expense Highlights Table 2 highlights General Fund expenses by department for FY 2022 third quarter, compared to the same period of prior year. Each quarter’s expenses are expressed as a percentage of the Adjusted Budget for each year. Table 2: FY 2022 Third Quarter General Fund Expenses (000's) FY 2022 FY 2021 % chg FY 2022 %FY 2021 % Police $31,975 $30,241 5.7%$44,346 72.1%$40,547 74.6% Fire 28,147 26,178 7.5%37,731 74.6%34,735 75.4% Community Services 19,370 18,929 2.3%32,958 58.8%28,786 65.8% Public Works 12,010 12,656 -5.1%20,000 60.1%19,984 63.3% Planning & Development Services 12,438 11,339 9.7%21,554 57.7%19,612 57.8% Library 6,218 6,250 -0.5%9,145 68.0%8,655 72.2% Administrative Services 6,561 5,578 17.6%9,614 68.2%8,338 66.9% All Other Departments 13,816 14,196 -2.7%39,100 35.3%26,320 53.9% Total Expenses $130,535 $125,367 4.1%$214,448 60.9%$186,977 67.0% 3rd Quarter Actuals Adjusted Budget Actual expenses through the first three quarters of the fiscal year total $130.5 million, a 4.1 percent increase over prior year expenses, but overall expenses are tracking at 60.9 percent of 1 Packet Pg. 6 City of Palo Alto Page 5 adjusted budget which is lower than FY 2021 at 67.0 percent through the third quarter. Actual expenditures plus encumbrances are right in line with the adjusted budget at 69.0 percent. As a service driven organization, the largest expenses are salaries and benefits. Total General Fund salary and benefits expenditures through March 2022 are approximately $9 7.8 million, or 73.1 percent of the $133.8 million adjusted budget, compared to $93.9 million in the same period in the prior year. While the third quarter salary and benefit trend is consistent with prior year and is on target for quarterly trends, it should be noted that overtime expense, paid leave, and workers compensation expense are trending higher than previous year due to vacancies across all departments, employees separating from the City for various reasons (i.e. retirement or other agencies), and increases in workers compensation cases. Police and Fire The expense budget for the Police and Fire Departments comprise approximately 46 percent of total General Fund expenditures for the third quarter, which is consistent with prior year trends. The following table highlights Police and Fire salaries a nd overtime for the third quarter. Net overtime cost analysis for the Police and Fire Departments can be found in Attachment B. Table 3: Public Safety Salaries and Overtime Expenses (000's) FY 2022 FY 2021 % chg FY 2022 %FY 2021 % Police - Salaries $12,358 $12,862 -3.9%$18,341 67.4%$17,713 72.6% Police - Overtime 1,581 1,028 53.8%1,244 127.1%944 108.9% Total Police 13,939 13,890 0.4%19,585 71.2%18,657 74.4% Fire - Salaries 9,754 10,294 -5.2%14,102 69.2%13,529 76.1% Fire - Overtime 3,585 2,118 69.3%2,704 132.6%2,971 71.3% Total Fire 13,339 12,412 7.5%16,806 79.4%16,500 75.2% Total Public Safety Salaries & Overtime $27,278 $26,302 3.7%$36,391 75.0%$35,157 74.8% 3rd Quarter YTD Actuals Adjusted Budget Police overtime is 53.8 percent higher than FY 2021 and represents 127.1 percent of the adjusted budget due to backfilling vacancies and adding staffing resources to the 24/7 dispatch center. As of this writing, the Department has 9 vacancies: six police officers (not including five additional "hire-ahead" police officers authorized in February), one dispatcher, two records specialists, and approximately 11 staff members on various categories of leave/light -duty. Although overtime is tracking higher, overall the Department is trending within budget for all salary categories and anticipates doing so through the remainder of FY 2022. The Department’s 1 Packet Pg. 7 City of Palo Alto Page 6 net overtime cost is $0.5 million after deducting the reimbursements and salary savings due to vacancies, analysis is included in Attachment B. Fire overtime is 69.3 percent higher than FY 2021 and 132.6 percent of the adjusted budget. In order to maintain operational standards (e.g., minimum staffing levels, response times, etc.), the Fire Department is required to backfill vacant positions using overtime with current staff, so vacancies are the primary driver of increased overtime costs. In any given year, there are typically three to five cases of attrition in the Department; however, the Department had up to twelve vacant positions in FY 2022. Additionally, backfill is also required when employees utilize leave (e.g., workers’ compensation, family medical leave, Strike Team, sick leave, etc.), and usage of leave balances has increased since the onset of the pandemic. While overtime actuals can vary year-to-year, the budget generally remains constant, but can be modified as staffing levels change. During the FY 2022 mid -year budget review, funding in the amount of $682,500 was allocated for the backfill of five new fire fighter positions associated with the SAFER grant as well as $90,000 for backfill related to the paramedic certification pilot program. It should be noted that there is a correlation between the amount of overtime and salary/benefit expenditures. Since they are both used together to fund employee costs, increases to one typically results in decreases to the other to offset costs for overall salaries and benefits. For example, the 12 vacant positions generated salary and benefit savings during the vacancy periods, but have been backfilled by other staff using overtime in equivalent positions or staff in an acting role who receive wage differentials. The Department is actively searching for ways to stay within budget as FY 202 2 overtime costs have increased compared to prior years due to higher levels of vacancies and leave. Of the 12 vacancies this year, eight have been filled and the employees are currently in the fire academy. Those positions have been backfilled using overt ime, but overall salary/benefits costs are otherwise tracking within budget. The Department anticipates that overtime costs and salary will begin to stabilize once vacancies are filled and staff complete academy training. The Department’s net overtime cost is $3.2 million after deducting the reimbursements and salary savings due to vacancies, analysis is included in Attachment B. Enterprise Funds The following is a summary of change in net position for each of the Enterprise Funds for the nine months ended March 31, 2022, including a comparison of results from the same period last year. 1 Packet Pg. 8 City of Palo Alto Page 7 Table 4: Enterprise Funds Change in Net Position Increase FY 2022 FY 2021 (Decrease)% Change Water 4,834 8,457 (3,623)$ -42.84% Electric (7,155)7,125 (14,280)-200.42% Fiber Optic 1,035 1,030 5 0.49% Gas 1,703 4,235 (2,532)-59.79% Wastewater collection 86 753 (667)-88.58% Wastewater treatment 2,260 2,970 (710)-23.91% Refuse 4,866 4,425 441 9.97% Storm Drainage 2,411 2,611 (200)-7.66% Airport 2,759 504 2,255 447.42% Total Change in Net Position 12,799$ 32,110$ (19,311)$ -60% 3rd Quarter YTD Actuals Water Fund decreased $3.6 million, or 42.84 percent, from prior year due to overall decr ease in revenues mainly from residential sales as a result of voluntary use reduction caused by drought conditions. Electric Fund decreased $14.3 million, or 200.42 percent, from prior year due to overall decrease in revenues and increase in expenses. Th e Sale to Customers decreased $3.0 million due to lower consumption and expenses increased through the 3 rdquarter due to increase in electric supply purchases costs as a result of low hydroelectric supply. Gas Fund decreased $2.5 million, or 59.79 percent, from prior year due to higher gas market prices offset by overall increase of largely from commercial and retail. Wastewater Collection Fund decreased $0.67 million, or 88.58 percent, from prior year due to overall decrease in revenues primarily from commercial retail and increase in operating expenses such as administrative and general expenses, and depreciation expenses. Wastewater Treatment Fund decreased $0.71 million, or 23.91 percent from prior year due to the increase in operating expenses which may reimburse by other partners based on year-end true-up calculations. Refuse Fund increased $0.44 million, or 9.97 percent, from prior year due to decrease in operating expenses resulting from full payment of Sunnyvale Materials Recovery and Transfer Station (SMaRT Station) debt service share and landfill post -closure rent. Storm Drain Fund increased $0.46 million, or 21.33 percent from prior year due to 2.5 percent rate increase and partially offset by the decrease in operating costs. Airport Fund increased $2.26 million or 447.2 percent from prior year due to federal grants received from Federal Aviation Administration. 1 Packet Pg. 9 City of Palo Alto Page 8 RESOURCE IMPACT There are no financial impacts recommended in this report. Staff will return to Council as part of the review of the FY 2022 Annual Comprehensive Financial Report with year -end budget adjustments to recommend any adjustments needed to align budgets with actuals. STAKEHOLDER ENGAGEMENT This report has been coordinated between the Treasury Division, Accounting Division, and the Office of Management and Budget in the Administrative Services Department, as well as with City departments ENVIRONMENTAL REVIEW This is not a project under Section 21065 for purposes of the California Environmental Quality Act (CEQA). . Attachments: • Attachment A: FY 2022 Third Quarter Financial Report • Attachment B: FY 2022 Q3 Public Safety Overtime Analysis 1 Packet Pg. 10 5/26/20229:03 AM   ATTACHMENT A CITY OF PALO ALTO GENERAL FUND THIRD QUARTER FINANCIAL REPORT FISCAL YEAR ENDING JUNE 30, 2022 (in thousands)   BUDGET ACTUALS (as of 3/31/2022) Adopted Adjusted Pre % of Adj Categories Budget Budget Encumbr Encumbr Actual Budget* Revenues & Other Sources Sales Tax 28,184 28,184 ‐              ‐                  18,432 65% Property Tax 51,228 53,228 ‐              ‐                  34,136 64% Transient Occupancy Tax 8,428 8,428 ‐              ‐                  7,895 94% Documentary Transfer Tax 7,137 7,137 ‐              ‐                  8,802 123% Utility Users Tax 14,370 14,370 ‐              ‐                  11,174 78% Motor Vehicle Tax, Penalties & Fines 1,434 1,434 ‐              ‐                  727 51% Charges for Services 24,515 24,932 ‐              ‐                  20,755 83% Permits & Licenses 7,761 8,273 ‐              ‐                  4,820 58% Return on Investment 852 852 ‐              ‐                  878 103% Rental Income 14,403 14,403 ‐              ‐                  10,300 72% From Other Agencies 10,277 11,044 ‐              ‐                  7,045 64% Charges To Other Funds 14,165 14,165 ‐              ‐                  10,640 75% Other Revenues 504 526 ‐              ‐                  491 93% Total Revenues 183,259 186,976 ‐              ‐                  136,097          73% Operating Transfers‐In 23,121 22,802 ‐              ‐                  17,101 75% Encumbrances and Reappropriation 150 11,101 ‐              ‐                   ‐                    ‐                Contribution from Development Services Reserves 800 1,040 ‐              ‐                   ‐                    ‐                Total Sources of Funds 207,329 221,918 ‐              ‐                  153,198          73% Expenditures & Other Uses City Attorney 3,945 4,363 ‐             513                 2,779               75% City Auditor 972 1,001 200            587                 211                  100% City Clerk 1,327 1,383 42              62                   757                  62% City Council 433 470 ‐             25                   209                  50% City Manager 3,319 3,770 119            75                   2,237              64% Administrative Services 8,923 9,614 54              346                 6,561               72% Community Services 31,052 32,958 268            4,884              19,370             74% Fire 35,677 37,731 175            492                 28,147             76% Human  Resources 3,878 4,029 50              19                   2,556              65% Library 8,903 9,145 130            212                 6,218               72% Office of Emergency Services 1,237 1,409 ‐             254                 795                  74% Office of Transporation 1,747 1,892 47              55                   1,198               69% Planning and Development Services 17,673 21,554 393            3,564              12,438             76% Police 43,116 44,346 88              447                 31,975             73% Public Works 18,755 20,000 343            2,708              12,010             75% Non‐Departmental 13,478 20,782 24              205                 3,076               16% Total Expenditures 194,435 214,448 1,934         14,448           130,535          69% Operating Transfers‐Out 4,296 5,498 ‐              ‐                  4,124               75% Transfer to Infrastructure 10,406 10,406 ‐              ‐                  7,804               75% Total Use of Funds 209,137 230,352 1,934        14,448           142,463          69% Net Change to BSR (1,808) (8,434) 10,735              Budget Amendments in the General Fund Authorized by Council thru 3/31/2022: (4,000)                        FY 2022 Mid‐Year Amendments in Various Funds: CMR #13801 (2/7/22) (2,626)                        Total Budget Amendments Authorized by Council (6,626)                        BSR Balance 35,962              40,655                         BSR % of Adopted Total Use of Funds 17.2% 19.4% * Adopted BSR reflects FY 2021 Year‐End Estimate at the time of the FY 2022 Budget Adoption. Adjusted BSR reflects FY 2021 Year‐End Actuals based on the ACFR.  Prelim Q1 Report Utilities Transfer Litigation Reserve:  CMR #13439 (10/25/21)  1.a Packet Pg. 11 At t a c h m e n t : A t t a c h m e n t A : F Y 2 0 2 2 T h i r d Q u a r t e r F i n a n c i a l R e p o r t ( 1 4 1 0 6 : F i s c a l Y e a r 2 0 2 2 T h i r d Q u a r t e r F i n a n c i a l S t a t u s R e p o r t ) Attachment B Q3 2020 2021 2022 POLICE DEPARTMENT Overtime Expense Adopted Budget (A)$1,842,231 $944,186 $944,186 Modified Budget (B)1,842,231 944,186 1,244,186 Net Overtime Cost - see below 441,197 366,045 492,181 Variance to Budget 1,401,034 578,141 752,005 Overtime Net Cost Actual Expense $2,566,590 $1,431,959 $1,580,917 Less Reimbursements California OES/FEMA (Strike Teams) - - - Stanford Communications 110,177 64,906 79,470 Utilities Communications Reimbursement 54,086 33,191 41,175 Local Agencies (C)9,329 2,412 3,842 Police Service Fees 205,126 467,167 118,767 Total Reimbursements 378,717 567,676 243,253 Less Department Vacancies (A)1,746,677 498,238 845,483 Net Overtime Cost $441,197 $366,045 $492,181 Department Vacancies (number of days)6,192 1,494 2,477 Workers' Compensation Cases 30 14 4 Department Disabilities (number of days)700 1,007 709 FIRE DEPARTMENT Overtime Expense Adopted Budget (D)$1,672,872 $1,931,121 $1,931,121 Modified Budget (E)2,086,872 2,971,460 2,703,621 Net Overtime Cost - see below 1,831,059 1,792,228 3,247,965 Variance to Budget 255,813 1,026,424 (544,344) Overtime Net Cost Actual Expense $2,018,548 $2,840,968 $3,584,536 Less Reimbursements California OES/FEMA (Strike Teams) 114,000 887,531 - Total Reimbursements 114,000 887,531 - Less Department Vacancies (D)73,489 161,208 336,571 Net Overtime Cost $1,831,059 $1,792,228 $3,247,965 Department Vacancies (number of days)173 1,942 891 Workers' Compensation Cases 33 14 27 Department Disabilities (number of days)227 387 1,048 NOTES: (A)The FY 2021/22 Police Department budget was reduced by 11.0 Police Officers and $900,000 in overtime. (B)The FY 2022 Modified Budget includes $300,000 for backfill overtime related to support for the unhoused. (C)Includes Animal Control Services contract with Los Altos and Los Altos Hills. (D)The FY 2021/22 Fire Department budget was reduced by the equivalent of 8.0 sworn positions. The overtime budget was increased over the prior year by approximately $250,000 to extend the cross-staffing of Medic-61. (E)The FY 2022 Modified Budget includes $90,000 for backfill overtime related to the paramedic certification pilot program and $682,500 for backfill overtime related to SAFER grant positions. Public Safety Departments Overtime Analysis for Fiscal Years 2020 through 2022 1.b Packet Pg. 12 At t a c h m e n t : A t t a c h m e n t B : F Y 2 0 2 2 Q 3 P u b l i c S a f e t y O v e r t i m e A n a l y s i s ( 1 4 1 0 6 : F i s c a l Y e a r 2 0 2 2 T h i r d Q u a r t e r F i n a n c i a l S t a t u s R e p o r t )