Title
Workshop for Fiscal Year (FY) 2020-21 Mid-Cycle Budget Update to Provide Direction on Funding Changes that will be Incorporated into Budget Adoption Hearing Materials for City Council Consideration in June 2020. (Finance)
Body
To: Honorable Mayor and Members of the City Council
EXECUTIVE SUMMARY
This year represents a tale of two budgets. As we began the Mid-Cycle Budget review in January, it appeared that we would have about $3 to $4 million for additional services or capital projects for the year end for Fiscal Year (FY) 2019-20. However, as we enter the May study session, we have a very different budget outlook for FY 2020-21.
When the Mid-Year Report was presented to City Council on March 3, 2020, the City of Alameda (City) was projecting an estimated increase of $7 million in FY 2019-20 General Fund revenue. City Council had originally approved General Fund revenue of $100,809,888. With the economic impact of COVID-19 pandemic, it is now estimated that General Fund revenues will be closer to $100 million or $7.7 million below what was projected in the Mid-Year Report. In order to close the gap and ensure the City is able to end the year in a positive position, City Council approved altering the pension policy to not make the discretionary Pension/OPEB contribution in FY 2019-20.
The drop in revenues, due to the COVID-19 pandemic, is expected to continue and drastically changed staff’s approach in preparing the Mid-Cycle FY 2020-21 budget. While this is the second year of a two year budget, in order to ensure the City would have a balanced budget, staff reevaluated what had been recommended and approved by City Council in June of 2019. The recommended Mid-Cycle General Fund budget is close to $1.5 million below the amount approved by City Council in June 2019. This budget workshop provides the City Council with an opportunity to review staff’s proposal and provide direction. Based on that input, the Mid-Cycle Budget update will be presented to the City Council for adoption in June 2020.
Due to the budget projections showing a deficit in FY 2020 -21, the City Manager is presenting a proposed flexible mid-cycle based on the below values and approaches.
• First, the approach to the budget is to limit layoffs. Unfortunately, the City had to furlough many part-time employees this spring. We anticipate bringing back part-time employees as we open areas such as the Library and Rec and Parks.
• We are presenting a budget that does not lay-off any full-time employees at this time by following the below approaches.
• The budget reduces funding for anticipated capital projects.
• The budget proposes approximately $2 million in salary savings through vacancies in Police and Fire and holding positions vacant through quasi-soft freezes in non-public safety positions to save a minimum of $400,000.
• The fourth ambulance will be delayed in going on-line.
• Some capital projects are still budgeted, but will be delayed to later in the Fiscal Year to ensure revenues are available to start the project.
• $2 million expended from Fund Balance is proposed to stabilize the service level.
• An evaluation will be done at the end of the first quarter as a part of the flexible budget strategy with a report back in October.
While the above is the City Manager’s proposed approach, it does come with risk due to the unknowns of both revenues this Fiscal Year and potential future impacts to property taxes.
BACKGROUND
The May 20 Budget Workshop is designed to give the City Council and community an opportunity to look more closely into the factors that make up the Mid-Cycle Update to the overall City Budget. During the workshop, staff will provide highlights of the City Manager Proposed Mid-Cycle Budget and answer questions on budget projections, long-term financial obligations associated with pensions and benefits, and departmental funding changes that were outside of the baseline budget estimates. The City Council will then provide input to staff on the allocation of funding. The direction will be evaluated by staff and incorporated into a Mid-Year Budget adoption recommendation to the City Council in June 2020.
A summary of the proposed budget and forecast for the City for FY 2020-21 is attached in Exhibit 1. This report includes the Mid-Cycle Update for Year 2 of the FY 2019-21 Biennial Budget approved by City Council in June 2019.
DISCUSSION
The Mid-Cycle Budget provides the City Council with an update to the Baseline Budget, including: proposed workforce changes; non-labor related revenue and expenditure adjustments to account for staff’s understanding of the impacts of the COVID-19 pandemic on the City’s finances; and realigned spending with the City’s mission and the City Council’s stated goals for the FY 2020-21.
The Mid-Cycle Budget also outlines: requests submitted by each department, requests included in the City Manager proposed budget, and requests not included for the City Council’s review.
The proposed budget attempts to balance competing priorities such as critical capital improvements and staffing to meet service needs with the challenge of a downturn in revenues associated with the COVID-19 pandemic.
Staff has prepared a City Manager proposed budget for FY 2020-21 covering the General Fund and all other City and Successor Agency funds. As part of the proposed Mid-Cycle Budget, staff also included the proposed Capital Improvement Program (CIP) totaling approximately $16.3 million for FY 2020-21.
The City Manager’s total proposed budget for all funds, including transfers out, is $269 million, or $6.2 million less than the previously adopted budget of $275.4 million for FY 2020-21, excluding the budget for Alameda Municipal Power (AMP). The General Fund represents approximately $101.9 million, or 38% of the total budget in FY 2020-21. The attached budget summaries provide details by fund and department (Exhibits 1 and 2) and a 5-year forecast showing expected revenue and expenditure trends (Exhibit 3).
Revenue Performance
General Fund revenues, including transfers in, are estimated to decrease by $3.3 million from the previously approved FY 2020-21 budget, from $103.2 million to $99.9 million. Although Property Tax revenues are expected to be approximately $1 million higher than previously budgeted, Sales and Use Tax, Utility Users Tax, Transfer Tax, Transient Occupancy Tax, and Business Licenses are expected to generate less revenue than previously anticipated due to the economic downturn associated with the COVID-19 pandemic.
• Property Tax is expected to increase approximately 0.5% above the FY 2019-20 projection, to $44.2 million, or approximately $1.0 million higher than the previously adopted budget of $43.2 million.
• Sales and Use Tax revenue is dependent on consumer spending and on the economy overall. Given the downturn associated with the COVID-19 pandemic, staff is estimating that Sales and Use Tax will drop by approximately 9% in FY 2020-21, from $15.1 million to $13.8 million.
• Utility User Tax (UUT), which is generated on cable television, telephone services, natural gas, and electricity, is expected to decrease by $750,000 from $9.8 million to $9.0 million, largely due to decreasing cable television subscriptions.
• Property Transfer Tax, which is highly dependent on economic conditions, is expected to decrease by approximately 9%, from the baseline of $11.0 million to $10.0 million.
• Transient Occupancy Tax, which is generated by hotels and other visitor related accommodations, is expected to drop by approximately 43%, from $2.1 million to $1.2 million, due to decreases in travel and tourism associated with COVID-19.
• Business License fees are expected to decrease by 5%, from $2.3 million to $2.2 million.
Expenditures
Staff is proposing to reduce the General Fund expenditure budget by approximately $1.5 million to $101.6 million from the previously adopted budget of $103.1 million. These savings would be achieved by delaying hiring of vacant positions, reducing budgets for contractual services, reducing General Fund contributions to certain capital projects, and providing departments with a “rate holiday” for facility replacement charges.
The City Manager and staff recommend approving additional funding requests from various City Departments to be discussed during the budget workshop and summarized in Exhibit 4.
Ø Workforce Changes
When the Biennial Budget was approved by the City Council in June 2019, three new positions were recommended in the second year of the budget: a Gardener, a Library Technician, and a Procurement Analyst. In response to the downturn in the economy and reduction in General Fund revenue, only the Gardener position is recommended to be added starting July 1, 2021. The Library Technician is recommended to start January 1, 2021, which would result in six months of salary/vacancy savings, and the Procurement Analyst has been removed from the budget. In addition to the two position previously approved as part of the Biennial budget, a new Animal Control Officer and the upgrade of the Senior Fire Code Compliance Officer to Fire Apparatus Operator is recommended in January of 2021.
Staff has completed two classification studies and is recommending the following changes:
• Upgrade Management Analyst in the Community Development Department to Development Manager
• Reclassify, without changing hourly compensation, one Paralegal position in the City Attorney’s Office to Paralegal Investigator
• Establish the Paralegal Investigator Position and Assistant/Deputy City Prosecutor Positions as 37.5 hours per week positions, given the need of these positions to staff court room activities Monday through Friday.
Based on requests from several departments, staff is studying three existing positions to determine if they are correctly classified. This work is underway and if supported will be recommended in the FY 2020-21 Mid-Cycle Budget when it is presented in June.
The City Attorney’s Office may explore the potential of hiring part-time legal fellows, using existing budgets for contract legal services, to evaluate whether such part-time resources may be more cost effective than the use of contract legal services. No additional budget allocation is requested for any such hires.
Ø Capital Program Funding
Due to limited General Fund resources, the City Manager’s proposed budget includes adjustments to funding for certain capital projects. The funding allocations are based on critical needs, cost-effectiveness, and Council-set priorities. The FY 2020-21 original and proposed General Fund funding allocations are listed below. The full list of capital projects proposed in the FY 2020-21 budget are included in the Capital Improvement Program Budget (Exhibit 5).
|
Department |
Project |
Funding Source |
FY 2020-21 Original Allocation |
FY 2020-21 Proposed Allocation |
Difference |
|
Information Technology |
Financial and HR/Payroll System Replacement |
General Fund |
$262,000 |
$0 |
($262,000) |
|
Library |
Japan town Historical Markers |
General Fund |
$0 |
$25,000 |
$25,000 |
|
Parks and Recreation |
Park Maintenance Improvements |
General Fund |
$175,000 |
$300,000 |
($125,000) |
|
Parks and Recreation |
Playground Replacement |
General Fund |
$250,000 |
$0 |
($250,000) |
|
Public Works |
Urban Forest |
General Fund |
$250,000 |
$250,000 |
$0 |
|
Public Works |
Master Tree Plan |
General Fund |
$150,000 |
$0 |
($150,000) |
|
Public Works |
Veteran’s Court Seawall |
General Fund |
$650,000 |
$350,000 |
($300,000) |
|
Public Works |
Sea Level Rise |
General Fund |
$0 |
$110,000 |
$110,000 |
|
Public Works |
Streetlight Improvements |
General Fund |
$860,000 |
$740,000 |
($120,000) |
|
Public Works |
Traffic Calming |
General Fund |
$0 |
$200,000 |
$200,000 |
|
Total |
|
|
$1,597,000 |
$1,975,000 |
($622,000) |
The original General Fund allocation for capital projects in FY 2020-21 totaled $1,597,000, and the proposed allocation totals $1,975,000, for savings of $622,000.
Sources of Risk
Every budget has the risk that estimation will not accurately predict future performance for revenue and expenditures and that conditions will deviate from the assumptions used to make estimates. This is especially true with the unprecedented economic disruptions from the COVID-19 pandemic.
The magnitude of the impacts on Alameda’s funding sources cannot yet be fully estimated and the duration of the impacts is uncertain. The attached General Fund Budget Summary (Exhibit 1) presents a projection based on currently available information, along with a favorable estimate roughly equivalent to where staff would have expected revenues if the COVID-19 pandemic had not happened, and an unfavorable estimate that assumes larger decreases to Sales and Use tax, Utility User Tax, Transfer Tax, Transient Occupancy Tax, and departmental revenues. Under these scenarios, staff expects General Fund revenues to range between $86.8 million and $106.2 million in FY 2020-21, with a best estimate of approximately $99.9 million.
ALTERNATIVES
• Staff requests that the City Council provide direction regarding staff’s recommendations regarding funding changes for the Mid-Cycle Budget update. The City Council’s direction will be incorporated into a staff recommendation for the City Council’s consideration and adoption planned for June 2020.
• City Manager’s Office recommends not increasing fees by CPI in June, but to defer until January 2021 for CPI increase.
• Consideration of deferring payment of Fire Inspection fees for 90 days.
FINANCIAL IMPACT
There is no impact to the General Fund or other funds as a result of this informational item.
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 climate impacts associated with this action.
RECOMMENDATION
Receive Fiscal Year 2020-21 Mid-Cycle Budget report and provide direction to staff in preparation for the Mid-Cycle Budget update adoption planned for June 2020.
CITY MANAGER RECOMMENDATION
The City Manager recommends the proposed FY 2020-21 Mid-Cycle Budget. The Proposed Mid-Cycle Flexible Budget approach attempts to respond to the sudden decline in revenues anticipated without reducing services substantively. This approach contains risk in it that it may not go far enough. However, we anticipate a first quarter review in October to respond to any changes in forecasts.
Based on changes in the Study Session, the staff will be bringing back a final proposed budget in June.
In addition, to Budget changes based on Council direction, the City Manager has additional concerns regarding the Liability Fund. I believe, the City will need to address stabilizing this Fund in June or during the FY 2020-21.
I want to conclude by thanking all of the staff for its work on the proposed mid-cycle budget, and provide special thanks to Jennifer Tell and Nancy Bronstein.
Respectfully submitted,
Nancy Bronstein, Human Resources Director and Interim Finance Director
By:
Jennifer Tell, Budget Manager
Exhibits:
1. FY 2020-21 General Fund Budget Summary
2. Citywide Budget All Funds Summary
3. General Fund 5-Year Forecast
4. City Manager Recommended Adjustments
5. Capital Improvement Program Budget