Title
Adoption of Resolution Approving and Adopting the City of Alameda Operating and Capital Budget Mid-Cycle Update for Fiscal Year 2020-21;
Adoption of Resolution Approving Workforce Changes and Amending the Management and Confidential Employees Association Salary Schedule Effective July 1, 2020; and
Recommendation to Accept Report on Settlements Approved Between November 1, 2019 and May 1, 2020. (Finance 2410)
Body
To: Honorable Mayor and Members of the City Council
EXECUTIVE SUMMARY
Following the City Council’s direction at the May Budget Workshop, staff is recommending a balanced Mid-Cycle Update to the Fiscal Year (FY) 2020-21 budget. Because the full impacts of the COVID-19 pandemic are unknown at this time, the City Manager is recommending a flexible approach to the upcoming budget year. In order to ensure the City of Alameda’s (City) budget accurately reflects economic conditions, staff anticipates returning to the City Council in October 2020. At that time, staff will be able to provide information on the FY 2019-20 year-end close as well as the results from the first quarter of FY 2020-21. This update will include an update on program revenues and expenditures for the remainder of FY 2020-21. This update will also include recommended actions needed to ensure a balanced budget for the remainder of FY 2020-21.
Additionally and related, this report includes a discussion of recommended workforce and salary changes, and settlements approved between November 2019 and May 2020.
BACKGROUND
The City Council adopted the Biennial Budget for FYs 2019-20 and 2020-21 on June 18, 2019. After the first year of the budget cycle, staff has typically brought to the City Council for approval an update to the second budget year (Mid-Cycle Update). As part of the Mid-Cycle Update, the City Council held a Budget Workshop on May 20, 2020 during which departmental requests and cost-saving adjustments previously not included in the Biennial Budget were discussed and direction was given by the City Council for inclusion in the FY 2020-21 Mid-Cycle Update. In addition, the FY 2020-21 Mid-Cycle Update includes an updated revenue forecast based on staff’s current understanding of the impacts of the COVID-19 pandemic on the City’s revenue sources.
The FY 2020-21 Mid-Cycle Budget Update for the City is attached as Exhibit 1, and the list of budget adjustments is provided in Exhibit 2. The Mid-Cycle Update to the Capital Improvement Program Spending Plan is attached as Exhibit 3. Staff recommends the City Council adopt the changes to the operating and capital budgets for FY 2020-21. Given ongoing uncertainty about the effects of the COVID-19 pandemic on the City’s finances, staff intends to present an update on the City’s budget to the City Council in October. The October update may include additional recommendations for budget adjustments.
Staffing changes were also discussed during the May workshop and those changes along with salary adjustments have been further developed. Finally, earlier this year the City Council authorized the City Attorney to settle certain claims, with direction to submit a summary to the City Council.
DISCUSSION
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.
Prior to the onset of the COVID-19 pandemic, department staff submitted budget adjustment requests for optimizing service provision in FY 2020-21. Whereas staff previously expected General Fund revenues to come in higher than the previously adopted revenue budget for FY 2020-21, given the economic effects of COVID-19, revenues are now expected to be lower than previously budgeted. Therefore, the City Manager’s recommended budget adjustments include re-alignment of spending to meet service provision goals, as well as savings from holding positions vacant and reducing budgets for contractual services and capital projects.
The discussion below is presented in the following sections:
I. General Fund Revenues
II. General Fund Expenditures
III. Pension/OPEB Funding Status and Policy
IV. General Fund Forecast
V. Non-General Fund Programs
VI. Workforce Changes
VII. Report on Settlements
I. General Fund Revenues
General Fund revenues in FY 2020-21 are projected to decrease by $3.3 million compared to the original 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.
The projected revenues for this Mid-Cycle Budget Update represent staff’s current estimate based on a phased reopening of businesses and services. Given the current state of uncertainty, staff also developed favorable and unfavorable estimates for General Fund revenues.
Under a favorable scenario, in which economic effects from COVID-19 are minimal, staff estimate that General Fund revenues could be as high as $106.2 million. Should shelter-in-place continue well into the next fiscal year, with associated economic impacts, staff estimate that revenues could be as low as $86.8 million. Given the large range in these estimates and that the current best estimate of $99.9 million is closer to the favorable estimate than the unfavorable estimate, City Council directed staff at the May 20 budget workshop to present additional options for General Fund savings for City Council consideration, which are presented below under General Fund Expenditures.
II. General Fund Expenditures
Staff is proposing to reduce the General Fund expenditure budget by approximately $1.2 million to $101.9 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, as shown in Exhibit 2. Based on expected General Fund revenues of $99.9 million, the proposed Mid-Cycle Budget Update assumes reserve spending of approximately $2 million in FY 2020-21.
As discussed above, City Council directed staff to present additional options for savings of at least $2 million if General Fund revenues come in lower than expected in the last quarter of FY 2019-20 and the first quarter of FY 2020-21. City Council will have an opportunity to adopt additional budget adjustments, if necessary, when staff returns to City Council with a budget update in October 2020. In the event that further cuts are needed, staff have started to evaluate the following options.
One area where savings could be found is Capital Improvement Projects. There is the possibility of substituting different funding sources, reducing the scope, and postponing certain Capital Improvement Projects for a General Fund savings of $1.9 million.
Staff is not recommending moving forward with any changes to negotiated salary increases at this point but have evaluated potential savings from a delay in salary increases. The value of a 1% salary increase for all City labor groups is approximately $700,000 for 12 months.
Staff will continue to look for other options for reducing expenditures in order to prepare in the event that further cuts are needed during FY 2020-21.
III. Pension/OPEB Funding Status and Policy
In 2017, the City Council adopted a Pension/Other Post-Employment Benefits (OPEB) funding policy to address a growing unfunded liability for the City’s pension and OPEB (retiree medical) benefit programs. Through the City’s Pension/OPEB Funding Policy, the City commits additional funds as available each year to pay down pension/OPEB obligations in advance. Specifically, 50% of the available fund balance at the end of each fiscal year in excess of the reserve target of 25% of annual operating expenditures is committed to funding Pension/OPEB obligations. The City made advance payments to CalPERS in 2017 through 2019 totaling approximately $18.6 million, which reduced the City’s unfunded liability and realized immediate savings in required CalPERS payments totaling about $2 million.
Based on the FY 2018-19 year end results, the City set aside $7.4 million for the Pension/OPEB advance payment in FY 2019-20. With the onset of the COVID-19 pandemic, in April 2020 City Council adopted a resolution altering the Pension/OPEB Funding Policy for FY 2019-20 to not make the discretionary payment to CalPERS and to instead use the surplus funds for budget balancing purposes.
FY 2019-20 is projected to end with a General Fund available fund balance above the 25% operating reserve target. At fiscal year-end, approximately $8.2 million (pending actual year-end results) will be set aside for a potential future payment to CalPERS and allocation to the Section 115 trust, which is restricted to the payment of retiree medical benefits. Depending on the economic condition of the City in early 2021, City Council may decide whether to make the discretionary payment based on the Pension/OPEB Funding Policy, or to return the surplus to fund balance.
IV. General Fund Forecast
Under the proposed Mid-Cycle Budget Update, the City would have a General Fund budget deficit of approximately $2 million in FY 2020-21 and that deficit is projected to increase to approximately $12 million in FY 2023-24, as shown below. This forecast uses the expenditure growth assumptions that were included in the FY 2019-21 Biennial Budget, with revenues adjusted based on assumptions for the economic recovery following the COVID-19 pandemic. Future budget approvals will need to include expenditure adjustments to balance spending with expected revenues. Staff intends to present a more detailed long-term projection of City finances, covering a variety of potential future scenarios, to City Council later this year.
V. Non-General Fund Programs
In addition to the General Fund budget adjustments discussed above, the City Manager proposes a variety of adjustments to non-General Fund revenues and expenditures, as detailed in Exhibit 2. At the May 20 Budget Workshop, City Council directed staff to move forward with the planning process for DePave Park. Staff identified funding for this purpose under an existing non-General Fund budget allocation, and are requesting to transfer $25,000 from ARRA lease revenue (Fund 858 Base Reuse) to fund a new capital improvement project for De-Pave Park.
The City Manager is also recommending action on the promissory note for the Estuary Park Improvement Project, as discussed below.
The proposed budget adjustments to non-General Fund programs include $6,070,300 in new expenditures that would be offset by $9,125,100 in new revenues and expenditure reductions, resulting in a net budget reduction of $3,054,800.
Some non-General Fund revenue sources, such as Gas Tax and Local Streets and Roads Funding (Measures B/BB), are expected to come in lower than previously budgeted due to the economic impacts of COVID-19. At this time, the detailed effect of COVID-19 on the City’s allocation of these funding sources is uncertain. Therefore, staff intends to present potential revenue and expenditure adjustments for programs affected by these funding sources at the October budget update when more information will be available.
The City Manager’s total proposed budget for all funds, including transfers out, is $269.9 million, or $5.5 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.
Promissory Note for Estuary Park Improvement Project
On June 20, 2017, a promissory note was approved by City Council to finance the Estuary Park Improvement Project. This $1.4 million loan, to be repaid by Park Development Impact Fees, was equally funded by the General Fund and the FISC Lease Revenue Fund. The loan bears interest rate equivalent to Local Agency Investment Fund (LAIF) in effect at the end of FY 2019-20. The final payment is now due on the loan and it is recommended to eliminate the interest rate and to allow the last payment to be made with without interest.
VI. 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 (FY 2020-21): 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, 2020. The Library Technician is recommended to start January 1, 2021, which will result in six months of salary/vacancy savings, and the Procurement Analyst has been removed from the budget. In addition to the Gardener and Library Technician positions previously approved for FY 2020-21, two new positions and four classification changes are recommended:
Police Department
• Add an Animal Control Officer - January 2021.
Alameda Municipal Power
• Add a Computer Service Technician - Amp position to meet the increased needs of end users with project based and application requirements.
Staff have completed four classification studies and are recommending the following changes:
• Upgrade Management Analyst in the Community Development Department to Development Manager;
• Upgrade a Combination Building Inspector to Senior Combination Building Inspector;
• Reclassify, without changing hourly compensation, one Paralegal position in the City Attorney’s Office to Paralegal Investigator at 37.5 hours a week: and
• Upgrade a Utility Project Manager position to a Senior Electrical Engineer.
It is also recommended to allow the hours for the attorney(s) assigned to the City prosecution unit to be paid as 37.5 hours per week positions, given the need of these positions to staff court room activities Monday through Friday.
The City Attorney’s Office may explore 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.
VII. Report on Settlements
Consistent with Council direction to report settlements approved by the City Manager and the City Attorney every six month, once with the budget and once at year end, staff has attached settlements approved between November 1, 2019 and May 1, 2020. See Exhibit 4. In the interest of completeness, staff has also included settlements approved by the Council. Staff anticipates providing the next six month report, covering May 1, 2020 to November 1, 2020, in December of 2020.
ALTERNATIVES
• Authorize the budget amendments and workforce changes proposed in the staff report and accept the report on settlements approved between November 1, 2019 and May 1, 2020.
• City Council may take no action, in which case the previously adopted and revised FY 2020-21 budget and authorized positions would remain in effect.
• City Council may provide further direction on these proposed budget amendments and workforce changes.
FINANCIAL IMPACT
The proposed budget amendments to the FY 2020-21 Budget, as detailed in Exhibit 2, would reduce General Fund revenue by $3.3 million to $99.9 million, reduce operating expenditures by $1.2 million to $101.9 million and include reserve spending of $2 million.
The impact of the proposed amendments on all other funds will be a net reduction of approximately $3.0 million, comprised of $4.0 million in new expenditures offset by $7.0 million in revenue changes and expenditure reductions.
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; implementation of the Climate Action and Resiliency Plan continues to move ahead with available funding.
RECOMMENDATION
Adoption of resolutions (1) approving and adopting the City of Alameda Operating and Capital Budget Mid-Cycle update for fiscal year 2020-21; (2) approving workforce changes in the City Attorney’s Office, Community Development Department, Fire Department, Planning Building & Transportation Department, Police Department and Alameda Municipal Power; and (3) Accept the Report On Settlements Approved Between November 1, 2019 And May 1, 2020.
CITY MANAGER RECOMMENDATION
The City Manager recommends approval of the Proposed Budget. The recommendation takes into consideration the uncertainty of future of revenues and that there needs to be a financial review done at the end of the first quarter.
In addition, it was requested to have a concept on what it would take to reduce the budget another $2 million. If we needed to reduce another $2 Million in October when we review the budget status. I would recommend that we would split the proposed cuts equally between personnel cuts and capital reductions. We would propose options to defer further Capital projects to provide for approximately an additional $1 million in savings in the FY 2020 - 2021 Budget. We would additionally recommend that we reduce the budget by an additional $1 million through personnel savings of equal to approximately a 3% salary reductions in the last 6 months of the Fiscal Year. This source of how the personnel savings occurred would be determined in October.
Respectfully submitted,
Nancy Bronstein, Human Resources Director and Interim Finance Director
By:
Jennifer Tell, Budget Manager
Exhibits:
1. Mid-Cycle Budget Update
2. Proposed Amendments
3. Capital Program Spending Plan Update
4. Report on Settlements