TO:
Honorable Mayor and Members of the City Council
THROUGH:
Bruce Moe, City Manager
FROM:
Steve S. Charelian, Finance Director
Libby Bretthauer, Financial Services Manager
Julie Bondarchuk, Financial Controller
Marcelo Serrano, Budget and Financial Analyst
SUBJECT:Title
Fiscal Year 2023-2024 Quarterly Budget Update (Finance Director Charelian).
A) RECEIVE REPORT
B) APPROPRIATE FUNDS
C) APPROVE STAFFING ADJUSTMENTS
Body
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RECOMMENDATION:
Staff recommends that the City Council receive the report and: 1) appropriate $1,998,952 from the Insurance Fund and $6,741 from the Pension Fund for Fiscal Year (FY) 2022-2023; and 2) approve staffing adjustments.
FISCAL IMPLICATIONS:
Fiscal implications are discussed within this report.
BACKGROUND:
The City Council adopted the FY 2023-2024 Budget on June 6, 2023. In an effort to keep the City Council and community fully informed of the City's fiscal performance, staff is providing a presentation of financial information to the City Council ahead of the traditional mid-year report that will be presented in February 2024.
DISCUSSION:
The City Council and staff respond to the community’s needs in part through the budget. The budget is both a spending plan for the City’s available financial resources and the legal authority for the City’s various departments to spend available resources to meet the needs of Manhattan Beach residents.
Fiscal Year (YR) 2022-2023 Year-End Results and Budget Adjustments
City staff recently completed the FY 2022-2023 annual audit and are currently preparing the Annual Comprehensive Financial Report (ACFR). The audit results and the FY 2022-2023 ACFR financial statements will be presented and discussed with the Finance Subcommittee in December.
The City’s Financial Policies state in Section 9 - Operating Budget Policies that “in no case may total expenditures of a particular fund exceed that which is appropriated by the City Council without a budget amendment.” From time to time, extraordinary events cause total fund expenditures to exceed budgeted appropriations. With FY 2022-2023 now finalized, expenditures in two funds exceeded appropriations requiring a year-end budget adjustment. The excess expenditures in both funds were reimbursed through third party agreements.
In the Insurance Fund, an appropriation of $1,998,952 is needed to support overages for insurance claim payments in excess of the City’s self-insured retention, which were recovered from the City’s insurance pool.
In the Pension Fund, an appropriation of $6,741 is needed for increased retiree medical costs, which were reimbursed by the City’s CERBT plan.
Fiscal Year (FY) 2023-2024 First Quarter Activity
General Fund cash flows are impacted significantly by the typical pattern of Property Tax revenue received in the months of December, January, April and May. As a result, cash flow in the early months of each fiscal year is often negative, indicating that expenditures exceed revenues. This is fully expected and, normally, revenues have exceeded expenditures by year-end. Currently, revenues and expenditures are both higher than the previous fiscal year 2022-2023, with expenditures exceeding revenues as expected.
Revenues
Revenues in the first quarter of FY 2023-2024 are $2,040,785 (15.3%) above the previous year (excluding the adjustment for the unrealized investment gains/losses). Generally, the three largest contributors to the City’s General Fund revenue mix are Property Tax, Sales & Use Tax, and Transient Occupancy Tax.
Property Tax is the strong foundation of the City’s General Fund revenues. The City’s Property Tax consultant, HdL, has confirmed a 5.3% (about $1.3 billion) increase in net taxable assessed values for FY 2023-2024. Based on this increase, the City’s estimated secured Property Tax revenues are currently expected to total $34.7 million, which is about $175,000 above the amount currently budgeted. Despite an overall decline in the volume of home sales, several parcels that recently sold contributed significantly higher assessed values to the tax roll. Total receipts in the first quarter of 2023 are $71,450 (8.7%) higher than the same period in the previous year.
Sales & Use Tax received in the first quarter is higher than prior years due to robust tax receipts from general consumer goods, all eatery categories, and service stations. Total receipts in July, August and September of 2023 are $223,346 (7.7%) higher than the same period in the previous year.
Transient Occupancy Tax (TOT) is anticipated to exceed the total received in previous fiscal years. At the start of FY 2023-2024, a 2% increase to the TOT rate took effect on July 1, 2023, increasing the rate to 14%. Total receipts from Hotels/Motels in July, August and September of 2023 were $213,573 (11.4%) higher than the same period in the previous year. Additionally, TOT collected from Short-Term Rentals operating within the Coastal Zone increased by $209,282 or 1,455% from the prior year. The City now has over 100 licensed short-term rentals, with about 70 highly active over the summer months.
Business License Taxes received were $43,194 (10.0%) above the prior year quarter. This overall trend in Business License Taxes is due to the CPI increase in the tax rate as well as higher gross receipts reported by businesses.
Revenues received for both building permits and plan check fees are higher than the prior year quarter, although the volume of issued permits and plan checks both decreased. The number of demolition permits was slightly higher than the prior year, and, once rebuilt, these properties typically have higher assessed values than before. Building record requests also increased 9.7% year-over-year, which suggests home sales in the first quarter may be higher compared to the previous year. However, the number of building record requests remains about 20.3% lower than the five-year average reflecting the impact of higher mortgage interest rates and continued low inventory.
Revenue from other Service Charges (not including Plan Checks) increased by $453,269 (14.9%) compared to the same period last year. This category includes service charges related to Parks and Recreation registration fees as well as other cost recovery fees for ambulance transports, planning and building services, and public safety reimbursements. About half of the category’s increase is due to an anomaly in ambulance transport fees that occurred when the City switched ambulance billing vendors in August 2022, which pushed the timing of some cost recovery efforts to subsequent quarters in the prior year. Also, driving the overall increase are strong enrollments in recreation classes and activities, with increases in Youth & Teen Programs, Special Activity Classes, Arts & Education Classes.
The Interest and Rents category is trending $385,344 (58.8%) higher than the prior year quarter, primarily due to higher interest earnings received on the City’s cash and investments portfolio.
The Unrealized Investment Gain/Loss has been identified separately from the Interest and Rents category due to big market swings in the last few years. At the end of every fiscal year, an accounting entry is required to “mark-to-market” the City’s investments. Governmental Accounting Standards Board (GASB) Statement No. 31 states that “all investment income, including changes in the fair value of investments, should be reported as revenue.” As such, on June 30, the City’s investments were “marked-to-market” and a significant loss on investments of $1,589,861 was posted in FY 2022-2023. Then, since the City carries investments at cost (“book value”) throughout the year, the June 30 loss was reversed on July 1, which created the significant positive amount in Fiscal Year 2023-2024. This amount will be adjusted at the end of this fiscal year, when investments are again marked to new market values on June 30, 2024.
Parking Citation revenues decreased $208,537 (39.8%) compared to the same quarter in the previous year as a result of changes in contract services staffing that was being utilized in 2022 to temporarily supplement parking enforcement operations.
Operating Service Transfers include reimbursements to the General Fund from other funds per the Cost Allocation Plan adopted in February 2020. Additionally, increases in the Engineering staff time allocated to capital projects and grants is driving the increase of $180,635 (19.7%).
Lastly, in the Miscellaneous category, the decrease of $57,576 or 30.5% was mostly attributable to Workers Compensation Salary Continuation revenues, which is a reimbursement to the General Fund from the Insurance Fund for employees receiving Injury-On-Duty (IOD) leave. In the prior year quarter, more employees were out on IOD leave, resulting in higher reimbursements to the General Fund. Although there was a decline in General Fund revenue in this category, this also reflected lower costs incurred in the Insurance Fund.
Expenditures
General Fund expenditures are trending as expected, $2,077,911 (11.7%) higher than the same period last year.
Salaries and Wages are trending above the prior year by $823,607 (9.8%) in alignment with approved salary and wage increases per employee labor group Memoranda of Understanding as well as a net increase in the number of full-time positions, including eight sworn personnel in various stages of recruitment. Similarly, in the Benefits category, expenditures for Medical/Dental/Vision Insurance, Medicare, and CalPERS “Normal Cost” contributions for active employees are higher by $320,261 (9.6%) when compared to the prior year.
At the end of September, the City has about 32 unfilled positions budgeted in the General Fund, which is roughly the same as last year. When budgeted positions remain unfilled, year-end budgetary savings will result.
Contract & Professional Services expenditures are higher than the prior year by $21,661 (0.7%) and Materials & Services are higher by $61,601 (9.8%). These trends are indicative of higher costs in labor, materials, and supplies affecting all operations.
The increase of $184,675 (113.7%) in Utilities costs is primarily the result of internal Water service charges now being allocated more efficiently with the new Utility Billing system implemented in March 2023. In the prior year, the process to make these internal payments often caused delays, but the new software allocates City expenditures immediately with each utility billing cycle.
Internal Service Charges experienced an increase of $666,463 (29.9%), due to higher charge-outs budgeted to support internal service funds. Higher insurance premium costs in the Insurance Fund and necessary equipment replacement purchases in the Information Technology Fund contributed to the increases. Additionally, higher costs for fuel, materials and services, supplies, etc., have resulted in Fleet Maintenance and Building Maintenance operational cost increases.
With inflationary pressures continuing, cost containment and efficiencies will continue to remain a top priority for staff heading into next year’s budget cycle.
FY 2023-2024 Staffing Adjustments
The quarterly budget report is an opportunity to make adjustments to the City’s position allocation that are aligned with departmental and organizational needs. Accordingly, minor staffing adjustments are included, as follows. Please note that the recommended upgrades are not net new positions and do not increase the total number of employees:
1.) Upgrade of One Human Resources Technician to Human Resources Analyst ($5,222 annually)
The upcoming vacancy in one Human Resources Technician has caused the department to reevaluate their departmental needs. The upgrade of the position to a Human Resources Analyst will provide needed analytical support for payroll, benefits, systems, classification and compensation, and reasonable employee accommodation; and provide needed back up for the Senior Human Resources Analyst and Human Resources Technician assigned to the Administration (Human Resources) Division on an ongoing basis. Prior to determining the requested change to the position allocation, the HR Department conducted a recruitment for Human Resources Technician, which was unsuccessful.
2.) Upgrade One Police Services Officer (PSO) to Property and Evidence Officer ($3,656 annually)
Historically, the property and evidence function within the Police Department was staffed by one PSO assigned to the property room on a rotational basis. In the 2020-2021 fiscal year, a Property and Evidence Officer position was added to provide dedicated support to the property and evidence function and enable the PSO previously assigned to that function to be dedicated to the jail. Since the creation of a dedicated Property and Evidence Officer classification, an audit has been done of the property room which revealed the need for more than one person to be assigned to this function on an ongoing basis to keep up with the volume of work, ensure chain-of-custody protocols are followed, and reduce the potential for backlog. While this need has been fulfilled by providing assignment pay to an additional PSO, the preference is for two dedicated personnel with the career interest and training in this function to be assigned on a full-time basis. There is a current eligible list for Property and Evidence Officer, which will expedite the onboarding of an additional employee into this role.
Staff recommends the City Council receive this quarterly budget update and appropriate the requested funds in support of the operations as described. The next budgetary update for FY 2023-2024 will be with the Mid-Year Budget Report in February 2024. Results of the prior fiscal year will be provided with the presentation of the FY 2022-2023 Annual Comprehensive Financial Report in January 2024.
PUBLIC OUTREACH:
After analysis, staff determined that public outreach was not required for this issue.
ENVIRONMENTAL REVIEW:
The recommended action has been determined to be exempt from CEQA pursuant to State CEQA Guidelines Section 15061(b)(3), the common sense exemption (formerly the “general rule”) that CEQA applies only to projects which have the potential for causing a significant effect on the environment. Where it can be seen with certainty that there is no possibility that the activity in question can have a significant effect on the environment, the activity is not subject to CEQA, as is the case with this item.
LEGAL REVIEW:
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
ATTACHMENT:
1. Fiscal Year 2023-2024 Quarter 1 Comparison