Title
Recommendation to Accept the Report on the Long-Term Financial Forecast for the General Fund and Special Revenue Funds. (Finance 2410)
Body
To: Honorable Mayor and Members of the City Council
EXECUTIVE SUMMARY
This report provides an overview of the initial analysis and issues identified in the 10-year financial forecast model prepared by Urban Futures, Inc. (UFI). The model allows staff to consider longer-term financial trends in the General Fund and 11 special revenue funds. The 10-year forecast identifies a projected operating deficit and initial issues for the City Council and staff to begin to address.
BACKGROUND
In 2019, staff identified the need for a longer-term forecast of the City of Alameda’s (City) finances to better understand the risks associated with pension obligations, trends in operating deficits/surpluses, and the impact of these trends and potential recession scenarios on the City’s reserves, and/or fund balance. In May 2020, City Council authorized an agreement with UFI to complete a financial forecasting model and assist staff with scenarios and strategies, following a competitive solicitation process.
UFI has prepared a 10-year financial forecast model that includes the General Fund and 11 special revenue funds identified. The special funds were targeted, after being identified as higher risk for requiring General Fund support due to due to factors such as: potentially volatile revenues, labor obligations, transfers in/out, and allocated costs. The 10-year model includes a baseline forecast with revenue and expense trends, projections for annual operating deficit/surplus, projected fund balance, and the capacity to create and analyze “what-if” scenarios (i.e., what happens to the City’s forecast if certain decisions are made, and/or economic conditions change).
DISCUSSION
Projected early Operating Deficit which Balances over 10 Years
Across the General Fund and 11 special revenue funds, the City has an annual operating deficit of approximately $3 million when evaluating the 11 special Funds in conjunction with the General Fund. The City has sufficient reserves to cover the projected operating deficits. However, depletion of reserves would leave the City financially vulnerable to small changes in economic conditions, revenue shifts or other likely scenarios that modestly adjust the forecast.
Main Drivers:
Parking Funds
Of the special revenue funds studied, one of the initial main drivers of the operating deficit was the Parking Meter/Civic Center Garage Funds (224 & 224.1). Parking revenues have declined by approximately 52% over the last three fiscal years, and in Fiscal Year (FY) 2020-21, staff reduced parking revenue projections by 75% due to the impacts of the COVID-19 pandemic on street parking and garage usage. The budget for contractual services initially increased in FY 2020-21 over the prior year. In December 2020, City Council approved cost reductions for these funds including a $550,000 reduction to contractual services, canceling the $327,000 transfer to the Parking capital project (96016), and canceling the $380,000 transfer to the General Fund. With these adjustments, the Parking Meter/Civic Center Garage Funds is largely stabilized and is no longer a main driver of the operating deficit in the forecast. This stability, however, is largely reliant on the recovery and continued health of parking revenues (fees, fines, and permits).
Lease and Grant Revenue Risks
The other special revenue funds that are main drivers of the current operating deficit are the FISC Lease Revenue (256) and Tidelands (216) funds. Options for stabilizing these funds include reducing contractual services expenses and generating additional lease revenue, if supported by the market. Similar to the Parking Funds, staff is evaluating cost-saving and revenue-generating options for these funds to present to City Council as part of the FY 2021-23 biennial budget.
The Forecast Model also identifies significant risk over the forecast period in two additional special revenue funds. The Fire Grants (220) fund is at-risk because approximately $2 million in labor costs for firefighting positions are tied to continuing receipt of federal and state grants. The risk is that if these grants are discontinued or modified the fund would immediately generate a potentially significant operating deficit unless staffing was immediately cut. The Base Reuse (858) fund is at-risk because almost 100% of its revenue ($13 million annually) is from rents. While rents of unique government property are often stable sources of income, these properties and rents are tied to the commercial/office market and present market-based risks associated with this economic sector.
Recreation and Library Funding
The forecast notes that the Recreation (280) and Library (210) funds have increasing structural operating deficits because about half of the revenue for each fund is from an annual transfer-in from the General Fund. The forecast does not assume any growth rate for the transfers between funds. For the Recreation Fund, the other half of revenue comes from Fees, Permits, and Charges. These could be increased since they do not cover the full cost of services provided. For the Library Fund, the other half of revenue comes from Property Taxes, which cannot be increased, so new revenue sources would have to be considered in order to boost revenues. To address the structural deficits, the City could either cut back operating expenses, which could result in decreased service levels, or acknowledge that provision of these municipal services necessitates the commitment of additional General Fund tax revenues (similar to other municipal services such as police and fire) and potentially adopt a policy for proportionate funding for these services.
General Fund - Transfer Tax Volatility
The remaining $1-2 million projected operating deficit in the General Fund is sensitive to likely continuing volatility in Property Transfer Tax revenues. In the past three fiscal years, revenue from this tax source averaged $16 million per year, whereas in FY 2020-21, the City budgeted $10 million in revenue in anticipation of fewer property transactions during the pandemic (now projected to increase to $12 million as part of the Mid-Year Budget Update).
The challenge in budgeting and forecasting Property Transfer Tax revenues is the unpredictability of one-time receipts due to periodic sales of large commercial properties. The City expects ongoing baseline activity of about $10-11 million annually from the sale of residential property and small commercial property, but one-time sales of large private properties (>$10 million) which generate substantial receipts are not possible to predict. Since there is risk to balancing the budget on uncertain revenue, the City could adopt a policy governing the use of the one-time receipts from large properties and budget based on the ongoing baseline revenue expectation of approximately $11 million. Currently, the forecast model is using the assumption of $11 million annually as a baseline for Property Transfer Tax revenues.
Next Steps
Staff will continue to develop and use the model to assist with evaluating budget options. The model will be used to support workshops and decision-making going forward.
ALTERNATIVES
• Accept the report.
• Request additional information from staff.
FINANCIAL IMPACT
There is no financial impact from accepting the report on the long-term financial forecast for the City. The forecast and analysis highlights certain funds that may need to implement cost controls and/or additional revenue measures to address structural operating deficits. Staff will provide City Council with options for such measures as part of the budget workshops for the upcoming FY 2021-23 biennial budget.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This action is in conformance with the Alameda Municipal Code and all policy documents.
ENVIRONMENTAL REVIEW
This activity is not a project and is exempt from the California Environmental Quality Act (CEQA) pursuant to section 15378(b)(4) of the CEQA guidelines, because it involves governmental fiscal activities which do not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment.
CLIMATE IMPACT
There are no identifiable climate impacts or climate action opportunities associated with the subject of this report.
RECOMMENDATION
Accept the report on the long-term financial forecast for the General Fund and Special Revenue Funds.
CITY MANAGER RECOMMENDATION
The City initially was looking at the 10 year projection for two purposes. We initially began the work immediately prior to the COVID 19 pandemic. First, we wanted to evaluate our future financial positive attributes and vulnerabilities. Second, we were looking to evaluate our pension liability risk. The Pandemic has created more uncertainty to our forecast, however we can continue to refine in the future.
Respectfully submitted,
Annie To, Finance Director
By,
Jennifer Tell, Budget Manager
Financial Impact section reviewed,
Annie To, Finance Director
Exhibit:
1. UFI Presentation
cc: Eric Levitt, City Manager