HomeMy WebLinkAbout2003-10-08 City CouncilCity of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
ATTENTION: FINANCE COMMITTEE
FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE
SERVICES
DATE:OCTOBER 8, 2003 CMR: 450:03
SUBJECT:PRELIMINARY (UNAUDITED) FISCAL YEAR ENDING
JUNE 30, 2003 ANALYSIS AND FIRST QUARTER (Q1)
FISCAL YEAR 2003-04 FINANCIAL RESULTS
RECOMMENDATION
Based on the state of the economy and declining City revenues, staff recommends the
Finance Committee review this preliminary report on the financial condition of the City
as of June 30, 2003 and as of September 30, 2003.
BACKGROUND
The purpose of this report is to provide the Finance Committee and Council with
preliminary insights into the financial condition of the City’s General Fund (GF) for
2002-03 and the first quarter of 2003-04. Continuing pressure on key City revenue
sources caused by the weak local and State economies merit early and continuous
monitoring. In addition, this report responds to Council direction and City Auditor
requests for more periodic or quarterly revenue and expenditure analyses. Given the
caveats cited below, staff will present a fairly high level analysis of the data that focuses
as much as possible on key GF financial issues. Information in this report should be
viewed in the context of the City’s Long Range Financial Plan (CMR:444:02) and the
recent Strengthening the Bottom Line budget process that resulted in the 2003-04 and
2004-05 budgets.
It is critical to note that the 2002-03 numbers contained in this report are un-audited and
potentially subject to change. Traditionally, Council receives an assessment of prior year
fiscal results through the audited Comprehensive Annual Financial Report and a Year-
End Report. These will be transmitted to the Finance Committee in December.-They will
contain more detailed analysis and a final picture of the City’s financial condition as of
June 30, 2003. In addition, comparisons of actual revenue and expenditure data for the
CMR:450:03 Page 1 of 7
first quarter of 20.03-04 to the annual budget must be done with caution. The first
significant property tax payment from the county, for example, is not received until
October. Transient Occupancy Taxes only reflect 2 months of receipts due to collection
procedures. Actual expense information for the first quarter also is not complete. As a
result of accounting staff working on the prior year-end close, information such as
allocated expenses, interest earned on investments and transfers are not reflected in this.
report. In the next several quarters, staff anticipates refining the quarterly report and
having more complete data by which to identify issues and trends. Typically, the City’s
overall budget is not adjusted until the Mid-Year report when five to six months of data
are available. Nevertheless, staff will discuss issues emerging from 2002-03 and 2003-04
results to provide a picture of the challenges that lie ahead.
DISCUSSION
Economy
The primary key to the City’s current and immediate future financial condition is the state
of the local economy. While recent national economic data on productivity,
manufacturing, and business conditions show some signs of improvement, local job data
provides a sobering counterpoint. Since March of 2001, Santa Clara County has lost
180,100 jobs (California Employment Development Department statistic). The County’s
unemployment rate hovered around 8.5 percent in 2002-03, its highest level since 1983.
Palo Alto’s rate has risen dramatically from 1.0 percent in 2000 to a current 4.4 percent.
The State and national unemployment rates have ranged over the past year from 6.4 to
7.1 percent and from 5.7 to 6.4 percent, respectively. The Federal Reserve’s September
16 Open Market Committee meeting acknowledged concern about the effect of stubborn
unemployment figures on the economy by keeping interest rates stable and observing that
"the labor market has been weakening." A recent layoff of over one thousand employees
by Sun Microsystems supports this view.
These statistics are disquieting in that consumer spending supports key local revenues
such as sales tax, transient occupancy, and property tax revenues. Compounding the loss
of jobs from the technology downturn is the burgeoning practice of moving technology
jobs overseas. As a result of technology companies struggling to cut costs and remain
competitive, a consulting firm estimates that by the end of 2004, one in 10 of U.S.
technology jobs will move overseas (S.F. Chronicle article dated 9/17/03). With
technology companies accounting "for nearly 32 percent of the total value of payrolls in
the Bay Area" (UCLA’s Anderson Forecast, 2002), the shifting of jobs can have a deep
and long-lasting effect on the structure of City finances. When the employment situation
is combined with other challenges such as the State’s fiscal crisis, rising health care costs,
and competitive threats to the City’s revenue base, continuing, financial discipline will be
necessary.
CMR:450:03 Page 2 of 7
Overall Financial Results for 2002-03
Attachment II shows a GF net surplus of $3.0 million for 2002-03. This excess of
revenues over expense consists of: 1) $1.5 million in unrealized gains on City
investments; 2) $.8 million resulting from a transfer from the Utilities for an Equity
Transfer Stabilization Reserve; and 3) $.7 million from the City’s ongoing
"Strengthening the Bottom Line" (SBL) effort that began in 2001-02. The 2002-03
operating gain of $3.0 million translates into positive results for the City’s Budget
Stabilization (BSR) and Infrastructure (IR) Reserves. Per Council policy, the BSR will
be fully funded at 18.5 percent of the 2003-04 operating budget expenditures or $21.4
million. In addition, the IR is expected to increase by $3.3 million to $33.5 million. This
addition fulfills the City’s goal of contributing $2.0 million annually to the IR and to
maintain its existing assets.
The principal underpinning for this success was the concerted SBL effort. From 2000-01
to 2002-03, sales and transient occupancy taxes combined fell by $11.8 million or 33.6
percent. This dramatic decline along with rising healthcare, retiree and negotiated salary
increases presented the City with considerable obstacles to balancing its budget. Through
a series of permanent and one-time expenditure reductions and revenue enhancements,
the City was able to close projected deficits for 2001-02 through 2003-04. During 2002-
03, for example, the City kept frozen 36 GF vacant positions to reduce expenditures.
Yearend results show departments exercising budgetary restraint through positive
expenditure variances: Community Services ($1.4 million), Planning ($1.5 million),
Public Works ($1.1 million), Police ($1.2 million), and Fire ($1.2 million). These efforts,
along with those of the Council and community, made the 2002-03 contribution to
reserves possible.These figures do not include outstanding encumbrances and
reappropriations.
Revenues Highlights for 2002-03
Excluding the unrealized gain on investments and operating transfers-in, total GF
revenues came in $2.9 million under budget. Sales and transient occupancy taxes,
charges for services, and the utility users tax were the principal causes for the shortfall.
Revenues in other taxes and fines and property taxes were above budget and somewhat
offset the negative performers.
Sales tax revenues in 2002-03 underwent a second year of decline and at a higher rate
than anticipated. After accounting for a one-time negative, prior year adjustment of $.5
million, revenues fell 5.0 percent or $1.0 million under budget and 7.5 percent or $1.5
million from the prior year. Receipts fell across all economic segments (e.g., autos,
electronics, and restaurants) as well as across all geographic areas (e.g., Stanford Mall,
Research Park, and University Avenue). The economy, increased competition from new
malls, and the exodus of a key auto dealer contributed to the drop.
CMR:450:03 Page 3 of 7
Transient Occupancy Taxes (TOT) in 2002-03 continued to erode. Year-end revenues
were 19.2 percent or $1.3 million below budget and 19.4 percent or $1.3 million below
the prior year. Vacancy rates dropped for the second consecutive year, falling from an
average of 73 percent in 2000-01 to 58 percent in 2001-02 to 54 percent in 2002-03.
Average revenue per day fell from $156 to $136 to $122 during the same period. Both
occupancy and room charges per day have fallen well below projections indicating a
longer and deeper economic malaise than expected.
Charges for services fell below budget by $1.0 million with negative variances
concentrated in paramedic, zone plan checking, architectural review board, and green
fees. With the exception of paramedic fees, the above fees are sensitive to economic
conditions and have consequently been weak.
Utility users tax revenues were $.3 million or 4.1 percent under budget and $.6 million
or 9.5 percent over the prior year. Both the phone and utility components were under
budget for 2003. Less business activity accounted for telephone revenues being $.1
million under budget, while conservation, closing businesses, and a slower economy
contributed to lower utility related revenues. The increase compared to the prior year
was a consequence of the rebate program in 2001-02.
Other taxes, fines and penalties were nearly $1.0 million over budget because of
positive variances in documentary transfer taxes and in motor vehicle license fees (VLF).
Documentary transfer taxes performed surprisingly well in 2002-03. They came in $.5
million or 16.9 percent over budget and $.6 million or 22.2 percent over the prior year. A
number of sizable commercial transactions such as one for $350,000 contributed to the
positive results. Low mortgage rates and a slowing of home prices also appear to have
caused the rise in transfer taxes. Motor fees also showed an increase over the prior year.
Negative impacts from the State not backfilling VLF during a three-month period will not
be felt until fiscal year 2003-04.
Property taxes came in $.2 million or 1.3 percent over budget. The rate of growth in
actual revenues, however, has slowed from 9.9 percent in 2001-02 to 2.1 percent in 2002-
03. In addition to revising the assessed value of "high-end" homes for 2002-03, the
county received appeals from commercial and residential property owners that reduced
revenues. Pressure on property values and revenues will continue into 2002-03, although
revenues are expected to be close to budget.
Expenditure Highlights for 2002-03
The City’s proactive freezing of vacant positions contributed significantly to
departments’ positive expense variances. Salary and benefit savings were realized in
nearly all City departments with major savings in Police ($.9 million), Fire ($.5 million),
Community Services ($.5 million), and Public Works ($.5 million). Additional savings
were found in contract services and to a lesser extent in supplies and materials. In the
CMR:450:03 Page 4 of 7
former category there were noteworthy savings in Administrative Services ($.5 million),
Human Resources ($.3 million), Fire ($.3 million), (Planning $.2 million), Public Works
($.2 million), and City Manager’s Office ($. 1 million).
Revenue Highlights for 2003-04
The uneven flow of GF revenues throughout the year makes it difficult to project annual
actual to budget results based on first quarter data. Attachment III shows total revenues
at 14 percent of budget while three months or 25 percent of the year has passed. This is
principally due to the timing of revenue receipts and not to performance. There are,
however, preliminary indications that sales tax and TOT revenues will be weaker than
expected and these are discussed below. The greatest revenue uncertainty for the City is
what the State will do to balance its budget, particularly with a recent court decision that
negated one "solution." In 2003-04, State actions resulted in a $1.0 million reduction in
City revenues (reduction was factored into the adopted budget). Rolling back the VLF to
pre "trigger" levels has been a recall/election issue and may result in additional
takeaways.
In the Long Range Financial Plan and in developing the current year budget, staff
incorporated a modest rebound in revenues for the second half of the fiscal year. While
property, documentary transfer, and utility user taxes are anticipated to perform as
projected, other areas such as sales, TOT, charges for services, and interest income may
not. Staff will return at midyear with adjustments if the economy and revenues do not
rebound.
Sales tax receipts for the second calendar quarter of 2003 (collected and booked in fiscal
year 2003-04) were disappointing. Compared to the prior year quarter, they fell 6.5
percent or $.3 million. This is in addition to the 12.0 percent or $.6 million drop
experienced in the second quarter of 2002-03. It is noteworthy that at the State level,
sales tax receipts increased by 5.0 percent for the quarter and that Southern California
also registered a gain. Although the rate of sales tax decline in Palo Alto appears to be
diminishing, these results indicate that Silicon Valley is at the eye of the economic storm
and that it will take a longer period to rebound from the "technology bubble."
TOT revenues, based on two months of available data, show mixed results. Customarily
a busy month, the occupancy rate in July of 2003 stood at 59 percent compared to 60
percent in the prior year. The average rate per day, however, dropped from $125 last
year to $115 this year. This caused a $54,000 or 10 percent drop in revenues compared
to the prior July. The deterioration in pricing power in 2002-03 appears to be continuing
into 2003-04 and may force revisions to revenue projections at midyear.
Other economically sensitive revenue sources such as charges for services (green, review
and permit fees) and interest income may be lower than budgeted if the economy does
CMR:450:03 Page 5 of 7
not revive in the near future. Weakness witnessed toward the end of 2002-03 appears to
be continuing into this fiscal year. Interest income, for example, may need to be adjusted
at midyear since the Federal Reserve has kept rates low to spur business and employment
growth.
Property, utility user, and documentary transfer taxes are expected to be on target
this fiscal year. In fact, the latter category may exceed budget due to a sizable and
unexpected commercial transaction.
Expense Highlights for 2003-04
As a result of SBL, the City-has enacted a balanced budget for 2003-04. A central
linchpin in this budget was the permanent elimination of 30 positions. Building on the
cost containment efforts of the past two years, departments are working on ways to
restructure current operations and to gain further efficiencies. Salaries and salary related
benefit costs will be blunted in 2003-04, given no salary increases and a mandatory three-
day unpaid leave for Management and Professional staff. A potential, upcoming one-
year agreement with Fire union personnel may yield additional savings.
Attachment III shows total expenditures reaching 26 percent of budget for the first
quarter. Although this percentage may appear to be on target, it actually overstates the
percentage of budget used since carryover encumbrances and re-appropriations from the
prior year have not yet been entered into the budget column. It is premature at this time
to reach any conclusions about expenditures for 2003-04. Instead, the City must continue
to focus on its cost containment and restructuring efforts to obtain a balanced budget at
year-end and beyond.
Conclusions
As a result of the sustained work of the Council, community, and staff, the City’s
financial results are positive for 2002-03. In addition to maintaining a high level of
service to the community, the City has met its budget stabilization and infrastructure
reserve goals. Short and long-term challenges to the General Fund as identified in the
Long Range Financial Plan remain. These include: State takeaways to balance its
budget, erosion of the City’s economic base and revenues, pension costs, the retiree
medical liability, rising health care costs, the steadily increasing Storm Drainage subsidy,
and the need for new infrastructure. To meet these challenges, the City must continue to.
monitor and prioritize its resources.
RESOURCE IMPACT
Since this report consists of un-audited, preliminary data and there are no recommended
changes to the budget, there is no resource impact.
CMR:450:03 Page 6 of 7
POLICY IMPLICATIONS
The recommendation is consistent with Council direction and policy.
ENVIRONMENTAL REVIEW
The action recommended is not
Environmental Quality Act.
a project for the purposes of the
ATTACHMENT
Attachment I:
Attachment II:
Attachment III:
General Fund Reserve Summary - Fiscal Year 2002-03
Statement of Revenue, Expenditure, and Fund
Changes for Year Ended June 30, 2003 (Unaudited)
2003-04 First Quarter Financial Report
California
Balance
PREPARED BY:
TRUDY EIKENBERRY
Accounting Manager, Administrative Services
Deput~ Director, Administrative Services
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
CARL
BENEST
City Manager
Services
CMR:450:03 Page 7 of 7
Attachment I
CITY OF PALO ALTO
2002-03 PRELIMINARY-UNAUDITED REPORT
GENERAL FUND RESERVE SUMMARY
(in thousands of dollars)
Budget Stabilization Reserve
Reserve For Infrastructure Improvements
Jnrealized Investment Gain/Loss Reserve
~,eserve For Equity Transfer Stablization
Reserve For Encumbrances
22,673 (1,279)21,394
30,189 3,270 33,459
1,523 11 1,534
756 779 1,535
4,502 351 4,853
Attachment II
CITY OF PALO ALTO
2002-03 PRELIMINARY-UNAUDITED REPORT
GENERAL FUND
(in thousands of dollars)
Revenues & Other Sources
Sales Tax
Property Tax
Transient Occupancy Tax
Utility Users Tax
Other Taxes and Fines
Charges for Services
Permits and Licenses
Return on Investment
Rental Income
From Other Agencies
Charges to Other Funds
Other Revenues
Total Revenues
19,542
13 644
6 600
7 370
8 439
17 749
3319
4 102
12,935
315
1,420
2,188
97,623
18,041 92%
13,821 101%
5,333 81%
7,067 96%
9,398 111%
16,800 95%
3,162 95%
5,467 133%
13,224 102%
533 169%
1,337 94%
2,103 96%
96,286 99%
Operating Transfers-In 15,381 16,092 105%
Encumbrances & Reapprop 3,851
From Infrastructure Reserve 3,346
Total Sources of Funds 120,201 112,378 93%
Expenditures & Other Uses
City Attorney 3,192 2,110 66%
City Auditor 920 660 72%
City Clerk 750 656 87%
iCity Council 250 235 94%
City Manager 1,911 1,632 85%
Administrative Services 10,969
Community Services 21,217
Fire 18,034
Human Resources 2,320
Planning and Community Environment 9,255
Police 20,950
Public Works 10,962
Non-Departmental 8,201
Total Expenditures 108,931
Operating Transfers-Out 10,905
Total Uses of Funds 119,836
10 250
19 797
16 842
1 990
7 720
19 704
9 857
7 441
98,894
10,528
109,422
93%
93%
93%
86%
83%
94%
90%
91%
91%
97%
91%
Net Surplus (Deficit)365 2,956
Net To (From) Reserves 365 2,956
Beginning Reserves 63,434
Projected Ending Reserves 66,390
-1,501
177
-1,267
-303
959
-949
-157
1,365
289
218
-83
-85
-1,337
711
-3,851
-3,346
-7,823
1,082
26O
94
15
279
719
1,420
1,192
33O
1,535
1,246
1,105
760
lO,O37
377
10,414
Attachment III
CITY OF PALO ALTO
2003-04 FIRST QUARTER FINANCIAL REPORT
GENERAL FUND
(in thousands of dollars)
Revenues & Other Sources
Sales Tax
Property Tax
Transient Occupancy Tax
Utility Users Tax
Other Taxes and Fines
Charges for Services
Permits and Licenses
Return on Investment
Rental Income
From Other Agencies
Charges to Other Funds
Other Revenues
Total Revenues
19 335
13 556
6 300
7 498
6 724
17 678
4 721
3 600
11 658
102
8,816
1,691
101,679
617
83
873
1,625
781
2,190
665
8
4,960
49
1,896
287
14,034
3%
1%
14%
22%
12%
12%
14%
O%
43%
48%
22%
17%
14%
City Attorney 2,304 648 28%
City Auditor 766 146 19%
City Clerk 1,010 234 23%
City Council 279 18 6%
City Manager 1,637 640 39%
Administrative Services 6,479 2,280 35%
Community Services 24,946 6,517 26%
Fire 18,917 5,005 26%
Human Resources 2,263 572 25%
Planning and Community Environment 8,946 2,113 24%
Police 23,609 5,684 24%
Public Works 11,348 2,480 22%
Non-Departmental 6,459 1,499 23%
TotalExpenditures -108,963 27,836 26%
Operating Transfers-Out 11,747 -0%
Total Uses of Funds 120,710 27,836 26%
Expenditures & Other Uses
Net Surplus (Deficit)513
Adjust intra-fund reserve transfer (5,068)
Net To (From) Reserves (4,555)
Beginning Reserves 59,850
Projected Ending Reserves 55,295
Operating Transfers-In 14,476
Encumbrances & Reapprop
From Infrastructure Reserve 5,068
Total Sources of Funds 121,223 14,034 12%