HomeMy WebLinkAboutStaff Report 11328
City of Palo Alto (ID # 11328)
City Council Staff Report
Report Type: Action Items Meeting Date: 6/16/2020
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Summary Title: Various FY 2020 Budget Adjustments to Address COVID-19
Impacts & Q3 Financial Report
Title: Review of the Third Quarter Financial Report and Approval of Various
FY 2020 Budget Adjustments to Address Projected COVID-19 Impacts
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the City Council review the financial report for the third quarter of Fiscal
Year 2020 and amend the Fiscal Year 2020 Budget Appropriation for various funds and various
capital projects, as identified in Attachment C (requires five votes for approval).
Executive Summary
On March 16, 2020, the State of California and the County of Santa Clara ordered a Shelter in
Place and the City of Palo Alto transitioned a majority of its workforce to remote (telework)
status in order to slow the spread and contain the novel coronavirus (COVID-19). The financial
impacts of this public health emergency are presenting challenges not only for the City but
worldwide.
The third quarter financial results are not yet materially affected but significant impacts on the
coming months and potentially years are expected. The revenues for categories such as
transient occupancy tax, sales tax, documentary transfer tax, and revenue from licenses,
permits, and charges for services are forecasted to decrease. This has prompted the City to
defer non-essential spending such as travel, training, meals, and others expense categories in
FY 2020.
This report differs from the normal quarterly financial report by also providing the 4th quarter
revised forecast to show the most likely actual performance for FY 2020 and recommended
budget amendments in the General Fund for FY 2020 based on current projections. These
projections address the impacts of COVID-19 including a recommended $23.7 million reduction
in estimated revenues. These adjustments will bring various revenue sources in-line with
current year-end projections for FY 2020 as well as account for expense savings to partially
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offset the revenue reductions and minimize the impact to the General Fund Budget
Stabilization Reserve (BSR).
Overall, this report recommends a draw on the General Fund Budget Stabilization Reserve of
$11.6 million in FY 2020, a decrease to $32.7 million or 14.2 percent of the FY 2020 budgeted
expenses.
Background
Considering the disruptions caused by the current COVID-19 public health emergency, staff has
been working with the City Council on a modified budget process for the development of the FY
2021 proposed operating and capital budgets. Based on the action approved by the City Council
on March 23, 2020, CMR #11208, and in accordance with the City Charter, staff provided a
baseline budget on April 20, 2020 for both the operating and capital budgets. At the time of the
development of the FY 2021 budget, the world continues to grapple with the global
ramifications of the COVID-19 pandemic. The financial implications of this public health
emergency are significant, with regional, national and global impacts on economies in response
to shelter in place orders required by the State of California and the County of Santa Clara and
related social distancing restrictions.
Staff provides quarterly financial reports to provide information on the financial condition of
the City’s General Fund and Enterprise Funds. During the third (3rd) quarter of fiscal year (FY)
2020, the City Manager, acting as the Director of Emergency Services, issued a Proclamation of
Local Emergency regarding the presence and community spread of COVID-19 in Santa Clara
County and our region on March 12, 2020. On Sunday, March 15, 2020, the City Manager
activated the Emergency Operations Center (EOC) and since that time, the City has managed
the EOC virtually through a cross-functional multi-departmental team. On March 16, 2020, the
City Council ratified the Proclamation of Local Emergency which continues today.
This quarterly financial report has been augmented and includes information and
recommended actions based on forecasted performance in the fourth (4th) quarter of FY 2020
in addition to the normal quarterly reporting. Staff initially provided an estimated FY 2020
financial impact of $15 million to $20 million in the General Fund as a result of preliminary
estimated impacts due to COVID-19.
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Discussion
This report summarizes the actual financial activity of the General and Enterprise Funds for the
nine-month period from July 1, 2019 through March 31, 2020, which includes the initial weeks
of the Shelter in Place orders as issued by the State and Santa Clara County, and compares
those amounts to the FY 2020 Adjusted Budget and to the report for the same period in FY
2019. In addition, this report recommends budget adjustments in the General Fund and several
other funds to address impacts of COVID19 in FY 2020. These adjustments will bring various
revenue sources in-line with current year-end projections for FY 2020 as well as accounting for
expense savings to partially offset the revenue reductions and minimize the impact to the
General Fund Budget Stabilization Reserve (BSR).
General Fund revenues (excluding operating transfers) for the 3rd quarter FY 2020 total $133.1
million, which is 3.1 percent higher than the same period in FY 2019 and comprises 62.5
percent of the current year Adjusted Budget. The 4th quarter or year-end revised operating
revenue forecast for FY 2020 total is estimated to fall $23 million to $25 million below budgeted
levels of $233.6 million, which is approximately 10 percent lower than the Adjusted Budget.
General Fund expenses (excluding operating transfers) for the 3rd quarter total $138.6 million,
which is 4.4 percent higher than the prior year. The expenses are in line with the Adjusted
Budget at 65.6 percent of the full-year budgeted amounts which is similar to the prior year
trend. The 4th quarter revised operating expenditure forecast for FY 2020 is expected to fall
below budgeted levels as a result of prudent management, through a hiring freeze,
management of capital contributions, as well as savings due to the pausing or canceling of
specific initiatives. Overall, this report recommends recognition of a net $12.0 million reduction
in expense budget in the General Fund.
Following is a detailed discussion of:
1) General Fund significant revenue and expense items for the 3rd quarter actual financial
activities and the 4th quarter or year-end projections in FY 2020;
2) A summary of the recommended budget adjustments in FY 2020 to address the current
year-end projected forecasted revenues and expenses; and
3) Enterprise Fund 3rd quarter actual activity and year-end projections summary
Attachment A provides a breakdown of revenues by source and expenses by function, with
separate columns for the Adopted Budget and the Adjusted Budget. The Adjusted Budget
column includes prior year commitments that were carried forward into this fiscal year and
Council approved budget amendments to the FY 2020 Adopted Budget through March 31.
Encumbrances and actual expenses for the nine-month period are also reported.
Attachment B provides details on public safety overtime through the 3rd quarter.
Attachment C provides details on the specific transactions recommended to amend the FY 2020
budget by department and program.
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GENERAL FUND
Revenue Highlights for 3rd Quarter Actual Activities and Year-end Projections in FY 2020
Following is a table which highlights the City’s major revenue sources for the 3rd quarter,
compared to the same quarter of the prior year. The first three quarter’s revenue is expressed
as a percentage of the Adjusted Budget for each year.
% change FY 2020 %FY 2019 %
Property Tax 2.1% 50,576$ 59.4%$46,232 63.7%
Sales Tax (4.7%)36,085 57.2%31,746 68.3%
Charges for Services 10.6% 30,267 59.0%28,419 56.9%
Transient Occupancy Tax 7.4% 26,555 61.7%25,390 60.1%
Utility User Tax 2.4% 17,572 67.8%16,092 72.2%
Permits and Licenses (26.2%)9,027 49.9%8,545 71.5%
Documentary Transfer Tax 20.2% 8,100 71.2%8,034 59.8%
All Other Revenue Sources 8.1% 34,629 74.9%32,875 73.0%
Total Revenue 3.1% $212,811 62.5%$197,333 65.4%
(000's)
Table 1
City of Palo Alto
General Fund Revenue
FY 2020 3nd Quarter Actuals
3rd Quarter Actuals Adjusted Budget
FY 2020 FY 2019
30,054$ 29,429$
20,645 21,674
17,872 16,157
16,378 15,251
11,908 11,626
$133,064 $129,031
4,506 6,107
5,770 4,801
25,931 23,984
Property tax revenue – at the close of 3rd quarter Property Tax Revenue received was $30.1
million, an increase of 2.1 percent over the same period in the prior year. Property tax is
received from the County of Santa Clara during the 2nd, 3rd and 4th quarters of the year. The
receipts are at 59.4 percent of the adjusted budget which is lower than prior year due to mid-
year adjustment of $1.9 million attributable to excess ERAF to be collected in 4th quarter. The
past five-year compound annual growth rate (CAGR) for this revenue has been 6.4 percent due
to higher assessed values because of continued robust commercial and residential real estate
markets prior to the COVID-19 impacts materializing.
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FY 2019 actual property tax revenue was $47.3 million which included unusual receipts of $2.7
million for Excess Educational Revenue Augmentation Fund (ERAF)1 distributions from the
County of Santa Clara. Though Excess ERAF receipt has steadily grown the last five years, it’s not
considered a permanent local revenue source.
Historically, during an economic downturn such as a recession and/or COVID-19, impact to
property tax are delayed by at least a year. As a result, the pre-COVID-19 projected receipts for
FY 2020 is not expected to be impacted so the revised forecast is $50.9 million, $0.3 million or
0.6 percent higher than the adjusted budget.
The FY 2020 adjusted budgeted amount is $50.6 million which include $3.9 million in Excess
ERAF, 7.0 percent higher than the prior year’s actual revenue. Though the expectation is the
budgeted revenue estimate will be met, there remains uncertainty on the horizon. The State is
asserting the five counties (Marin, Napa, San Francisco, San Mateo, and Santa Clara) that have
Excess ERAF are calculating excess ERAF in ways that are contrary to state law and shift too
much property tax revenue from schools to other local agencies. Per the County of Santa Clara,
if the State were to prevail and in a worst-case scenario, the loss of Excess ERAF could be up to
40 percent or $1.5 million for Palo Alto. The resolution of this dispute is expected to occur in FY
2021.
Sales Tax revenue – as of the 3rd quarter Sales Tax revenue is down by $1.0 million or 4.7
percent, from the same period last year. Due to the timing delay in sales tax collection by the
State and remittance to the City, this only represents seven months’ sales tax activity. The
seventh and eighth-month’s payments (the latter received in April) were estimated advance
payments and not based on actual sales tax collection. Actual performance for this fiscal year
will not be known until August/September.
As of the writing of this report, April sales tax is down by $2.4 million or 9.9 percent. Though
there remain many uncertainties in future sales tax performance resulting from COVID-19, the
current forecast for the FY 2020 receipts anticipates a decline by $5.5 million, reducing the
adjusted budget to $30.6 million, approximately $5.9 million below the FY 2019 receipts. The
full impact of COVID-19 will occur in the 4th quarter for which the actuals will not be fully known
until next fiscal year. This estimate reflects significant reductions of up to a 75 percent loss in
revenues in certain tax categories during the 4th quarter. This estimate has been developed in
collaboration with the City’s sales tax consultant. A portion of this decline is due to timing
difference in receipts rather than performance. For example, FY 2019 receipts are higher by
$0.7 million due to delay of distribution in sales tax in fiscal year 2018 from California
Department of Tax Fee Administration (CDTFA) resulting from transition of the new technology
and collection process.
1 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. When the state shifts more local property tax
than required to support schools these funds are returned and known as excess ERAF.
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Transient Occupancy Tax (TOT) – TOT revenues reached $16.4 million through the end of the 3rd
quarter, an increase of $1.1 million or 7.4 percent over the prior year. Due to the timing delay
in receipts, this represents 7.5 months of TOT receipts. The increase is solely attributable to the
1.5 percent TOT rate increase that began in April 2019. The base TOT, which began to decline
almost a year ago, has declined by 3.1 percent in the current fiscal year. As a result, a
downward mid-year budget adjustment of $2.8 million was recommended and approved. In
comparison, most northern California regions have also seen TOT declines during this period.
The following table contains average room rates and occupancy percentage for northern
California regions in December 2019 as well as the City of Palo Alto’s December data. For Palo
Alto, daily average room rates increased by 1.5 percent from $277.13 per day to $281.36 per
day while the occupancy rate declined by 1.2 percent from 76.5 percent to 75.6 percent during
the first eight months of FY 2020 (July 2019 to February 2020). This is in line with a similar trend
reported in December for local northern California regions.
Table 2
Month of December only
Avg. Daily Room Rate Occupancy Percentage
2019 ($) 2018 ($) Chg. 2019 2018 Chg.
San Francisco $244.80 $229.03 6.9% 79.6% 77.8% 1.8%
San Francisco Airport 175.39 173.29 1.2% 78.4% 77.2% 1.2%
San Jose/Peninsula 199.44 195.08 2.2% 62.8% 64.2% -1.4%
Oakland/East Bay 155.76 153.69 1.3% 66.9% 67.0% -0.1%
Monterey/Carmel 238.53 234.85 1.6% 64.6% 60.8% 3.8%
Central Valley 112.67 109.26 3.1% 62.7% 62.2% 0.5%
Sacramento 138.59 138.28 0.2% 66.2% 72.5% -6.3%
Marin County 171.37 159.59 7.4% 58.9% 64.0% -5.1%
Napa County 200.82 199.78 0.5% 59.3% 56.8% 2.5%
Sonoma County 170.37 169.24 0.7% 60.8% 62.3% -1.5%
Other Northern California 142.72 134.76 5.9% 58.8% 65.5% -6.7%
Overall Average 186.74 179.58 4.0% 68.2% 68.9% -0.7%
City of Palo Alto (December only) 243.70 234.42 4.0% 60.6% 58.5% 3.6%
Source: CBRE Hotels December 2019 report, Trends in the Hotel Industry except for Palo Alto
As the most significant revenue source impacted by COVID-19, the year-end forecast for TOT is
expected to be $19.6 million, a decline of $7.0 million or 26.2 percent over the adjusted budget,
which is $5.8 million below FY 2019 receipts. As of May 2020, the City has received TOT
revenue and related performance through March 2020. Therefore, staff used information from
the San Mateo County/Silicon Valley Convention and Visitors Bureau, outreach to local hotels,
and looking at regional and state actuals and projected performance.
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Almost a dozen hotels, which represent 30 percent of available rooms, have fully suspended
operations (see list below) while the remaining hotels’ occupancy rate are in the single digit and
average room rates have dropped by nearly 2/3 prior levels. As such TOT receipts in the last
three months are expected to decline by over 95 percent over the prior year.
Palo Alto Hotels That Have Suspended Operation as of April 17, 2020 # of Rooms
1 Cardinal Hotel 63
2 The Clement Hotel 23
3 Cowper Inn 16
4 Garden Court Hotel 62
5 Glass Slipper Inn 25
6 Hotel Keen 42
7 The Nest 54
8 Nobu Hotel 72
9 Stanford Terrance Inn 55
10 Travel Lodge 29
11 The Westin 184
Utility User Tax revenue for the nine months ended March 31, 2020 totals $11.9 million, an
increase of $282,000, or 2.4 percent, from the prior year. The utility commodity rate increases
(e.g. electric, gas and water) have contributed to this growth while the telephone UUT has
slightly declined. However, due to the COVID-19, the year-end results are expected to be below
the adjusted budget and the prior year’s receipts. Utility User Tax revenue’s revised forecast for
FY 2020 is $16.1 million, a decline of $1.4 million or 8.2 percent over the adjusted budget. Both
the utility commodity and telephone UUT have declined.
Documentary Transfer Tax cash receipts total $5.8 million, or 71.2 percent of the FY 2020
budgeted amount, and are $969,000 million higher than prior year receipts for the same
period. Though cash receipts are up due to higher average sales price; the number of property
sales is down by 3.3 percent. This revenue source is volatile since it is highly dependent on sales
volume and the mix of commercial and residential sales. For example, in FY 2018, receipts were
boosted due to large commercial sales resulting in total annual receipts of $9.2 million while FY
2019 had fewer and smaller commercial sales resulting in annual receipts of only $6.9 million.
However, the COVID-19 impact in the last four months of the fiscal year is expected to result in
a FY 2020 decline over (both) the adjustment budget and prior year’s actual. The year-end
forecast for FY 2020 is $6.7 million, a decline of $1.4 million to the adjusted budget and $1.3
million below the prior year’s actuals. Besides the lower cash receipts, the number of property
sales is down by 11.4 percent. Thus far, initial data suggests a 50 percent decline in these
revenues during the shelter in place order. Again, this revenue source is volatile since it is
highly dependent on sales volume and the mix of commercial and residential sales.
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Charges for services reached $17.9 million through the end of the third quarter, an increase of
$1.7 million or 10.6 percent from prior year. This increase is mainly due to the following items:
• $1.8 million resulting from timing difference in the billings to Stanford University for fire
and emergency services
• Zoning plan check fees, inspection fees, and plan check fees for the 3rd quarter have
increased by $742,000 from same period prior year due to a higher volume of activity.
• Paramedic service fees have increased $211,000 over the same period last year due to
an increased number of trips billed and increased average amount billed per account.
• The increases explained above were partially offset by a $1.1 million decrease in class
program fee and registration fee. This was due to change in income recognition this
year which is set to be deferred until the respective activities commences. However due
to COVID-19 some of the fees have been refunded in the 4th quarter.
Permits and Licenses revenue for 3rd quarter is down $1.6 million, or 26.2 percent from prior
year, primarily due to a $1.3 million and $300,000 decrease in new construction permit and
street open permit revenues, respectively. The new construction revenue category will be
adjusted at year-end to defer a portion of revenue to FY2021 that are in progress and to
recognize revenue for those permits issued in prior years that are completed at June 30.
Between Charges for Services and Permits and licenses, year-end revenues are projected to fall
by $7.6 million and several department budget adjustments are recommended to align with
anticipated FY 2020 actual revenue:
• Community Services will be reduced by $3.6 million to account for reduced programs
and classes ($2.3 million) as well as the closure of the golf course ($1.3 million) during
the initial phases of the COVID19 Shelter in Place order and limited operations during
the more recent phases.
• Planning and Development Services will be reduced by $3.8 million to account for fewer
plan reviews and inspections being performed as a result of the COVID-19 Shelter in
Place order.
• Revenue in the Administrative Services Department is recommended to be reduced by
$0.2 million as a result of the Council’s decision to reimburse all business registration
fees in FY 2020 (CMR 11289).
Overall, staff is recommending reducing the FY 2020 revenue in the General Fund by $23.7
million which will bring the adjusted budget excluding transfers in to $189.1 million. The
adjustments by department and revenue category are detailed further in Attachment C.
Expense Highlights for 3rd Quarter Actual Activities and Year-end Projections in FY 2020
Following is a table which highlights the City’s expenses by function for the 3rd quarter,
compared to 3rd quarter of the prior year. Each quarter’s expense is expressed as a percentage
of the Adjusted Budget for each year.
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FY 2020 FY 2019 % change FY 2020 %FY 2019 %
inc (dec)
Police 32,974$ 31,546$ 4.5% 45,249$ 72.9%42,336$ 74.5%
Fire 26,859 24,511 9.6% 35,984 74.6%33,950 72.2%
Community Services 21,649 21,659 (0.0%)32,517 66.6%30,314 71.4%
Public Works 12,493 12,236 2.1% 19,983 62.5%18,440 66.4%
Planning and Development Services 13,575 14,445 (6.0%)22,597 60.1%23,511 61.4%
Library 7,388 6,814 8.4% 10,582 69.8%9,786 69.6%
Administrative Services 5,985 5,600 6.9% 9,050 66.1%7,860 71.2%
All Other Departments 17,668 15,982 10.5% 35,258 50.1%30,490 52.4%
Total Expenses 138,591$ 132,793$ 4.4% 211,220$ 65.6%196,687$ 67.5%
City of Palo Alto
Table 3
3rd Quarter Actuals Adjusted Budget
General Fund Expenses
FY 2020 3rd Quarter Actuals
(000's)
Total expenses (excluding operating transfers) for the 3rd quarter of the fiscal year is 65.6
percent of full year budgeted and represents a $5.8 million, or 4.4 percent increase from the
same quarter last year due to the following:
• Disability / workers compensation expenses increased by $829,000
• Employer Pension expenses increased by $1.8 million
• Additional $2.9 million pension contribution to Section 115 irrevocable Pension
Trust (In prior years Section 115 contribution was recorded as Operating Transfer
Out). This is based on a 6.2 percent discount rate for the Normal Cost approved by
the City Council.
• Retiree Premium expenses increased by $198,000.
In FY 2020, the Office of Transportation was established as its own office in the City Manager’s
Office: it was a division of the Planning and Community Environment Department. Additionally,
the Development Services Department was combined with the Planning and Community
Environment Department to form the Planning and Development Services Department. These
reorganizations are reflected in the FY 2020 figures by reporting the Office of Transportation
under “all other departments” and combining the two prior departments of Development
Services and Planning. This is causing much of the year over year variances in that department.
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Police and Fire comprises 43.2 percent of the total General Fund expenditures for the 3rd
quarter, which is comparable to the prior year. Police and Fire expenses are up mainly due
increase of pension expenses and the proactive funding strategy to Section 115 to contribute to
the City’s Pension Trust assuming a normal cost for contribution with a 6.2 discount rate
(CalPERS is currently at 7.0 percent discount rate).
In order to partially offset the $23.7 million reduction in General Fund revenue and reduce the
impact on the Budget Stabilization Reserve (BSR), reductions of $12.0 million in expenses are
recommended. These reductions are detailed by department and category in Attachment C. Of
this, approximately $3.8 million is expected as a result of departmental salary and non-salary
savings. The remaining adjustments reflect reductions in transfers to the capital improvement
fund and non-departmental expenses and are detailed below.
Public Safety Overtime
Following is a table which highlights Police and Fire salaries and overtime expenditures for the
3rd quarter.
Police and Fire
Salaries and Overtime Expense
FY 2020 3rd Quarter YTD
(000's)
FY 2020 FY 2019 % change FY 2020 %FY 2019 %
Inc (Dec)
Police - Salaries 13,425$ 13,180$ 1.9% 19,484$ 68.9% 18,991$ 69.4%
Police - Overtime 2,224 1,921 15.8% 1,842 120.7% 1,813 106.0%
Total Police 15,649 15,101 3.6% 21,326 73.4% 20,804 72.6%
Fire - Salaries 10,589 9,770 8.4% 14,131 74.9% 14,356 68.1%
Fire - Overtime 1,749 2,580 (32.2%)2,087 83.8% 2,094 123.2%
Total Fire 12,338 12,350 (0.1%)16,218 76.1% 16,450 75.1%
Total Public Safety
Salaries & Overtime 27,987$ 27,451$ 2.0% 37,544$ 74.5% 37,254$ 73.7%
3rd Quarter YTD Actuals Adjusted Budget
Table 4
Police overtime has increased $303,000, or 16 percent from prior year due to the following:
• Backfill for the workers’ compensation vacancies which is higher during the same period
in FY 2019.
• Additional patrol services for a shopping center and one retailer in the area in response
to spikes in retail theft. This increase in overtime is offset by the increase in
unbudgeted revenues from this activity.
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• President of the United States (POTUS) visit ($26,000) and a major incident in first
quarter.
The department continues to manage its overtime in the fourth quarter with the suspension of
the Parent Project and Citizen’s Academy. This will likely be offset by increased overtime due to
the most recent protests for black lives matter. On a combined basis, salaries and overtime are
75 percent of the budget through the 3rd quarter of the fiscal year. The Department’s overtime
analysis is included in Attachment B.
Fire overtime is 33 percent lower than FY 2019 primarily due to fewer vacancies this year than
the same period in prior year. On a combined basis, salaries and overtime are 76 percent of the
budget through the 3rd quarter of the fiscal year. The Department’s overtime analysis is
included in Attachment B.
The Fire and Police salaries increases are due to new labor contracts and an increased number
of filled positions when compared to this period in FY 2019.
FY 2020 RECOMMENDED BUDGET ADJUSTMENTS
As a result of the impacts of COVID-19 discussed in the year-end projections above,
adjustments to the FY 2020 budget appropriations are recommended to more closely align
revenues and expenses with projections. Overall, staff is recommending reducing the FY 2020
revenue in the General Fund by $23.7 million. In order to partially offset the reduction in
General Fund revenue and reduce the impact on the Budget Stabilization Reserve (BSR),
reductions of $12.0 million in expenses are recommended. These reductions are detailed by
department and category in Attachment C. This results in a recommended draw on the General
Fund Budget Stabilization Reserve (BSR) in the amount of $11.6 million in FY 2020, decreasing
the reserve to $32.7 million or 14.2 percent of the FY 2020 budgeted expenses.
General Fund revenue reductions, discussed in detail earlier in this report, are summarized
below. These are in line with expectations shared with the City Council earlier when the Shelter
in Place order was executed, and staff began revising the assumptions behind the FY 2021
proposed budget. At that time, staff estimated a net impact of $15 million to $20 million deficit
in FY 2020 General Fund financial activities. With the limited additional data over the past
month, staff has updated those early estimated and recommend this $23.7 million adjustment
downward to revenues in the following categories. Details are outlined in Attachment C.
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FY 2019
Actual
Revenues
FY 2020 Adjusted
Budget
FY 2020 Recommended
Budget Adjustment
Property Tax $47,327 $50,576 277
Sales Tax 36,508 36,085 (5,468)
Transient Occupancy Tax 25,649 26,555 (6,959)
Utility User Tax 16,402 17,572 (1,439)
Charges for Services / Permits and Licenses
& Other Revenue 35,756 39,294 (8,695)
Documentary Transfer Tax 6,923 8,100 (1,424)
Working diligently to closely manage expenses and the prioritization of projects and
investments, staff recommends that we reduce FY 2020 General Fund expenses by $12.0
million to assist in offsetting the impact to the BSR as a result of the loss of revenues due to
COVID-19. Below is a summary of the major actions recommended to recognize savings due to
vacancies, lower than expected costs, or project cancellations.
• Departmental salary and non-salary expense savings as a result of delays in projects, a
citywide hiring freeze, and judicious management of non-essential services resulting in a
reduction of $3.8 million. These projected expenses include current costs through May,
including administrative leave usage and forecasts the final month of costs. Overall,
citywide 27,800 hours of administrative leave have been used between March and May,
$1.5 million across all funds.
• Reduce the transfer to the capital improvement fund by $6.7 million, due to reduced
TOT revenue dedicated for infrastructure improvements ($3.2 million) and a reversal of
a FY 2020 Mid-Year action to transfer $3.5 million of FY 2019 savings to the Capital
Improvement Fund. These were both assumed in the development of the FY 2021
proposed budget and are not expected to have an adverse impact on the current FY
2021 Proposed Capital Budget.
• Reduce operational reserves in the amount of $1.6 million, specifically: eliminate
remaining funding set aside for operations in FY 2020 ($0.5 million), eliminate and
correspondingly stop work on a Retention and Recruitment Initiative ($0.5 million) and
liquidate Development Services Reserve ($0.6 million) to help partially offset revenue
losses from development related activities.
• Recognize savings from the City Manager Employment contract (housing; CMR 10925)
of $0.6 million, reducing the original appropriated level of $4.0 million that was
approved by the City Council.
These reductions will be slightly offset by two investments. The first is an allocation of
$500,000 for the advancement of racial equity. In light of the current national and local
movement, the recently approved resolution supporting racial equity, and the expected
workplan to address system inequities for the Council review, this funding will be set aside to
help fund these initiatives as directed by the City Council in the future. The second adjustment
is $0.1 million in additional funding needed to be transferred to the Downtown Business
Improvement District (BID) Fund. This funding is needed to offset expenses in that fund that
City of Palo Alto Page 13
already occurred prior to the Council’s decision to rescind the levy of assessments for the
Downtown BID and reimburse all business registration fees in FY 2020 (CMR 11289).
General Fund Budget Stabilization Reserve (BSR) Balance
The Fiscal Year 2020 General Fund Adopted Budget reflected a surplus position of $1.3 million.
Based from the Fiscal Year 2019 Comprehensive Annual Financial Report (CAFR) there was
$13.4 million of savings in Fiscal Year 2019 than previously anticipated (CMR 10644). As
detailed in Attachment A, after giving effect to Budget Amendments including adjustments
from the Mid-Year Budget Review (CMR 10959) approved by the City Council, the projected
ending BSR balance was $44.4 million, or 19.2 percent of the Fiscal Year 2020 General Fund
Adopted Budget. As a result of the impacts of COVID-19, and the recommended adjustments
included in this report, the BSR would be reduced by $11.7 million to $32.7 million. This is
below the City Council targeted range of 15 percent to 20 percent of General Fund budgeted
expenses and is 14.2 percent.
ENTERPRISE FUNDS
Following is a summary of change in net position for each of the Enterprise Funds for the nine
months ended March 31, 2020, including a comparison of results from the same period last
year.
City of Palo Alto
Enterprise Funds Change in Net Position
FY 2020 3rd Quarter
3rd Qtr 3nd Qtr Increase
FY 2020 FY 2019 (Decrease)% Change
Water 9,625$ 9,149$ 475$ 5.20%
Electric 17,921 12,227 5,693 46.56%
Fiber Optic 1,175 2,278 (1,103)-48.42%
Gas 4,995 5,121 (126)-2.46%
Wastewater collection 1,596 2,126 (530)-24.92%
Wastewater treatment 5,278 14,547 (9,269)-63.72%
Refuse 1,609 5,751 (4,142)-72.02%
Storm Drainage 2,152 1,973 179 9.06%
Airport 361 1,458 (1,097)-75.22%
Total Change in Net Position 44,711$ 54,629$ (9,919)$ -18%
Table 6
Water Fund increased $0.5 million from prior year due to a 4 percent rate increase effective
July 1, 2019 and an increase in service connection fees offset by the increase in operating
expenses.
City of Palo Alto Page 14
Electric Fund increased $5.4 million from prior year as a result of 9 percent rate increase
effective July 1, 2019, a decrease in interest expense and a refund from the Northern California
Power Agency (NCPA) for FY18 and FY19 debt service payments offset by the increase in
operations and maintenance costs and operating transfers out for supplemental pension costs.
Fiber Optics Fund decreased $1.1 million from prior year due to a decrease in operating
revenues mainly from the Dark Fiber Backbone Commercial Lease.
Wastewater Collection Fund decreased $0.5 million from prior year due to an increase in sewer
and treatment costs and operating and capital costs.
Wastewater Treatment Fund decreased $9.3 million from prior year as a result of the decrease
in State Revolving Fund Loan cost reimbursement of $8.5 million for the Dewatering & Loadout
Facility Project and an overall increase in operating costs.
Refuse Fund decreased $4.1 million from prior year due to a decrease in operating revenues
and an increase in GreenWaste costs and vehicle replacement costs.
Airport Fund decreased $1.1 million from prior year due mainly to operating and grant
revenues for the Airport’s Apron Reconstruction Project. There is a lag in the collection of grant
revenues as it is a reimbursement grant where the revenues are collected after the expenses
are submitted to the granting agencies for reimbursement. In addition, increased operating
costs and operating transfers out also contributed to the decrease in net position.
Coronavirus (COVID-19) Impacts on Utilities and Public Works Enterprise Funds
Due to shelter in place, the City of Palo Alto Utilities (CPAU) is projecting a 10% decrease in
electric sales for the remainder of FY 2020. The revenue loss for the electric utility is roughly
$3.75 million, which is partially offset by $2.25 million in supply cost savings for a net loss of
$1.5 million. Other utilities (gas, water, and wastewater collection) have not seen significant
decreases in sales, so CPAU is not projecting any revenue or expense decreases for FY 2020.
Additional details for CPAU FY 2020 Financial Projections will be presented to Council on June
22, 2020 (CMR 11341).
For the other Enterprise Funds, Wastewater Treatment, Storm Drain, Refuse and Airport funds,
it was projected that there are no significant decreases in revenues for FY 2020. Refuse Fund
revenues for FY 2020 are expected to be about 2% less than budgeted due to the pandemic
impact on construction projects and debris box service including commercial service.
Stakeholder Engagement
This report has been prepared by the Accounting Division and reviewed by partner
departments, the Treasury team and the Office of Management and Budget for certain
sections.
City of Palo Alto Page 15
Resource Impact
The recommended actions in the report reflect a recommended $11.7 million draw on the
General Fund BSR, funding of $500,000 for racial equity initiatives, a $70,000 subsidy to ensure
financial solvency of the Downtown BID fund, and a reduction of $6.7 million in the General
Capital Improvement Fund. These have all been assumed and included as part of the planning
and balancing of the FY 2021 proposed budget scheduled for Council adoption on June 22,
2020.
Environmental Review
This is not a project for purposes of the California Environmental Quality Act (CEQA).
Attachments:
• Attachment A General Fund Third Quarter Financial Report
• Attachment B Public Safety Overtime Analysis for Q3FY 2018 - 2020
• Attachment C Recommended FY20 Q3 Clean-up Actions
CITY OF PALO ALTO
GENERAL FUND THIRD QUARTER FINANCIAL REPORT
FISCAL YEAR ENDING JUNE 30, 2020
(in thousands)
BUDGET ACTUALS (as of 3/31/2020)
Adopted Adjusted Pre % of Adj
Categories Budget Budget Encumbr Encumbr Actual Budget*
Revenues & Other Sources
Sales Tax 34,346$ 36,085$ - - 20,645 57%
Property Tax 48,634 50,576 - - 30,054 59%
Transient Occupancy Tax 29,309 26,555 - - 16,378 62%
Documentary Transfer Tax 8,369 8,100 - - 5,770 71%
Utility Users Tax 17,581 17,572 - - 11,908 68%
Motor Vehicle Tax, Penalties & Fines 2,032 2,032 - - 1,036 51%
Charges for Services 30,127 30,267 - - 17,872 59%
Permits & Licenses 8,667 9,027 - - 4,506 50%
Return on Investment 1,388 1,388 - - 1,117 80%
Rental Income 16,326 16,326 - - 12,824 79%
From Other Agencies 2,756 3,302 - - 2,039 62%
Charges To Other Funds 10,908 10,908 - - 8,457 78%
Other Revenues 587 672 - - 458 68%
Total Revenues 211,030 212,811 - - 133,064 63%
Operating Transfers-In 20,999 20,840 - - 15,626 75%
Encumbrances and Reappropriation 6,469 - - - -
Contribution from Budget Stabilization Reserve - - - - - -
Total Sources of Funds 232,029 240,120 - - 148,690 62%
Expenditures & Other Uses
City Attorney 3,387 3,896 60 302 2,632 68%
City Auditor 1,235 1,347 41 36 681 51%
City Clerk 1,346 1,451 - 51 820 57%
City Council 498 542 - 89 236 44%
City Manager 4,546 5,253 50 460 2,999 57%
Administrative Services 8,519 9,050 55 488 5,985 66%
Community Services 30,913 32,517 172 3,235 21,649 67%
Fire 34,864 35,984 104 373 26,859 75%
Human Resources 3,902 4,097 6 120 2,862 70%
Library 10,314 10,582 7 220 7,388 70%
Office of Emergency Services 1,728 1,853 6 186 950 51%
Office of Transporation 2,312 3,044 174 420 1,262 41%
Planning and Development Services 20,356 22,597 95 2,291 13,575 60%
Police 44,666 45,249 4 476 32,974 73%
Public Works 19,142 19,983 569 2,354 12,493 63%
Non-Departmental 9,024 13,775 - 80 5,226 38%
Total Expenditures 196,752 211,220 1,343 11,181 138,591 66%
Operating Transfers-Out 5,023 7,978 - - 6,877 86%
Transfer to Infrastructure 28,962 31,023 - - 23,267 75%
Total Use of Funds 230,737 250,221 1,343 11,181 168,735 67%
Net Change to BSR 1,292 (10,101)(20,435)
ATTACHMENT A
Q3
2018 2019 2020
POLICE DEPARTMENT
Overtime Expense
Adopted Budget $1,700,000 $1,776,500 $1,842,231
Modified Budget 1,700,000 1,812,931 1,842,231
Net Overtime Cost - see below 347,677 185,811 545,596
Variance to Budget 1,352,323 1,627,120 1,296,635
Overtime Net Cost
Actual Expense $2,286,527 $2,604,366 $2,224,116
Less Reimbursements
California OES/FEMA (Strike Teams)- 36,431 -
Stanford Communications 75,275 91,001 92,956
Utilities Communications Reimbursement 38,227 46,158 45,752
Local Agencies (A)11,431 12,172 7,264
Police Service Fees 73,600 125,025 172,284
Total Reimbursements 198,533 310,787 318,256
Less Department Vacancies 1,740,318 2,107,768 1,360,265
Net Overtime Cost $347,677 $185,811 $545,596
Department Vacancies (number of days)5,777 7,538 4,790
Workers' Compensation Cases 8 24 2
Department Disabilities (number of days)219 217 183
Attachment B
Public Safety Departments
Overtime Analysis for Fiscal Years 2018 through 2020
FIRE DEPARTMENT
Overtime Expense
Adopted Budget $1,396,436 $1,911,761 $1,672,872
Modified Budget (B)1,571,436 2,093,761 2,086,872
Net Overtime Cost - see below 2,675,517 2,403,254 1,590,041
Variance to Budget (1,104,081) ($309,493)496,831
Overtime Net Cost
Actual Expense $3,839,426 $3,047,510 $1,749,230
Less Reimbursements
Stanford Fire Services (C)-
California OES/FEMA (Strike Teams) (B)489,062 182,000 114,000
Total Reimbursements 489,062 182,000 114,000
Less Department Vacancies 674,847 462,256 45,189
Net Overtime Cost $2,675,517 $2,403,254 $1,590,041
Department Vacancies (number of days)5,293 1,229 103
Workers' Compensation Cases 4 26 2
Department Disabilities (number of days)732 343 109
NOTES:
(A)Includes Animal Control Services contract with Los Altos and Los Altos Hills.
(B)FY 2020 includes overtime adjustments recommended as part of the FY 2020 Mid-Year review for Strike Team
reimbursements ($114,000) and to extend the cross-staffing of Medic 61 for six months ($300,000).
Department Adjustment Adjustment
GENERAL FUND (102)
Administrative
Services Permits and Licenses ‐ Business Registration Fee (175,000) ‐$
Administrative
Services Non Salary General Expense Savings ‐ (50,000)$
Administrative
Services Salaries & Benefits Savings ‐ (150,000)$
City Auditor's
Office Salaries & Benefits Savings ‐ (190,000)$
City Clerk's Office Non Salary Contract Services Savings ‐ (50,000)$
City Manager's
Office Salaries & Benefits Savings ‐ (185,000)$
Community
Services Salaries & Benefits Savings ‐ (475,000)$
Community
Services Charges for Service and Rental Income Revenue/Non Salary Savings (Excluding Golf) (2,600,000) (500,000)$
Community
Services Charges for Service ‐ Golf Course Revenue (1,300,000) ‐$
Library Salaries & Benefits Savings ‐ (350,000)$
Library Penalties and Fines & Other Revenue/Non Salary Savings (115,000) (45,000)$
Non‐
Departmental Transient Occupancy Tax/Transfer to Capital Improvement Fund (6,959,000) (3,179,000)$
Non‐
Departmental Property Tax 277,000 ‐$
Non‐
Departmental
Sales Tax (5,468,000) ‐$
Non‐
Departmental Utility Users' Tax (1,439,000) ‐$
Non‐
Departmental Documentary Transfer Tax (1,424,000) ‐$
Non‐
Departmental Transfer to Capital Improvement Fund (FY 2019 year‐end BSR surplus)‐ (3,500,000)$
Non‐
Departmental Transfer to Business Improvement District (BID) Fund ‐ 70,000$
Non‐
Departmental Eliminate Operations Reserve ‐ (475,000)$
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2020 BUDGET
Revenues Expenses
ATTACHMENT C
Department Adjustment Adjustment
GENERAL FUND (102)
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2020 BUDGET
Revenues Expenses
ATTACHMENT C
Non‐
Departmental Eliminate Reserve for Recruitment and Retenion Initiatives ‐ (500,000)$
Non‐
Departmental City Manager Employment Contract (Housing)‐ (600,000)$
Non‐
Departmental Advancing Racial Equity ‐ 500,000$
Office of
Emergency
Services
Non Salary Contractual Expense Savings ‐ (275,000)$
Office of
Transportation Salaries & Benefits Savings ‐ (170,000)$
Office of
Transportation Non Salary Contractual Expense Savings ‐ (140,000)$
Planning &
Development
Services
Charges for Services ‐ Planning (750,000) ‐$
Planning &
Development
Services
Salaries & Benefits Savings ‐ Planning ‐ (290,000)$
Planning &
Development
Services
Charges for Services ‐ Development Services (3,000,000) ‐$
Planning &
Development
Services
Salaries & Benefits Savings ‐ Development Services ‐ (300,000)$
Planning &
Development
Services
Development Services Reserve Fund (DSRF)‐ (595,000)$
Police Taxes, Penalties, and Fines (875,000) ‐$
Police Salaries & Benefits Savings ‐ (150,000)$
Police Non Salary Contractual Expense Savings ‐ (200,000)$
Public Works Salaries & Benefits Savings ‐ (250,000)$
Public Works Charges for Service ‐ Street Cut Fees 30,000 ‐$
Public Works Other Revenue ‐ EV Chargers 70,000 ‐$
Public Works Permits and Licenses ‐ Encroachment Fees 20,000 ‐$
Fund Balance Adjustment to Budget Stabilization Reserve ‐ (11,659,000)$
GENERAL FUND (102) SUBTOTAL (23,708,000) (23,708,000)$
Department Adjustment Adjustment
CAPITAL IMPROVEMENT FUNDS
GENERAL FUND CAPITAL IMPROVEMENT FUND (471)
Capital Transfer from General Fund (6,679,000)$ ‐$
Fund Balance Adjustment to Infrastructure Reserve (6,679,000)$
GENERAL FUND CAPITAL IMPROVEMENT FUND (471) SUBTOTAL (6,679,000)$ (6,679,000)$
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2020 BUDGET
Revenues Expenses
ATTACHMENT C
Department Adjustment Adjustment
SPECIAL REVENUE FUNDS
BUSINESS IMPROVEMENT DISTRICT FUND (220)
Administrative
Services
Department
Transfer from General Fund 70,000$ ‐$
Fund Balance Adjustment to Fund Balance ‐$ 70,000$
BUSINESS IMPROVEMENT DISTRICT FUND (220) SUBTOTAL 70,000$ 70,000$
CITY OF PALO ALTO
RECOMMENDED AMENDMENTS TO THE CITY MANAGER'S FY 2020 BUDGET
Revenues Expenses
ATTACHMENT C