The year-end budget report is an opportunity to pause and take note of how the City’s budgeted targets compare to actual revenues and spending. While City department staff carefully manage their spending throughout the year, external forces that require intensified service delivery or changes in the economy can negatively impact our fiscal performance.
For several years, we have anticipated and prepared for flattening revenue growth in the General Fund. FY 2018-19 marks the point at which our actual General Fund spending and income is tracking very closely along budgeted numbers; we are no longer realizing significant revenue overages as a result of that anticipated flattening. Similarly, this year marks a turning point where spending tracked closely to the budget without leaving major expenditure savings. This report summarizes the performance of the City’s past fiscal year and highlights areas that we will need to further analyze and address, potentially through adjustments, as we enter our exception-based budget process for the FY 2020-21 Budget.
The General Fund ended FY 2018-19 with revenues $1.4 million greater than estimated actuals and operating expenditures $0.2 million under budget, for a net $1.6 million positive impact as compared to budget. As a comparison, in the past 5 years, the City has realized an average positive impact of $12.9 million as compared to budget (annual surplus amounts have been decreasing steadily since FY 2013-14, due to reallocations to new programs, increased pension, healthcare and workers’ compensation costs, and moderation of revenue growth). Ultimately in FY 2018-19, total General Fund revenues exceeded expenditures by $6.4 million, as had been forecast. $4.5 million of this amount was previously tagged to offset the first two payments of the City’s accelerated unfunded pension liability paydown. These reflect unaudited year-end results.
As in past years, staff recommends that surplus funds, the majority of which are one- time, be appropriated or set-aside as assignments in the fund balance for one-time capital and operating project contingencies.
Non-General funds ended the year with revenues $2.6 million more than estimated actuals, and operating expenditures $25.3 million below budget, for a $27.9 million positive impact compared to budget. These funds will build reserves, fund ongoing operations, and support future capital projects.
Staff recommends a net total of $14.4 million in citywide expenditure adjustments to the FY 2018‑19 Revised Budget to align the budget with accounting actions taken during the year. Approximately $10 million of these adjustments are appropriating funds previously set aside in General Fund reserves pending actual spending, for a total net impact on the City’s finances of $4.4 million. Staff also recommends $2.1 million in expenditure adjustments in FY 2019-20. These changes include re-appropriation of one-time funds and staffing and classification-related adjustments.
The year-end report provides Council with an overview of the City’s financial performance as compared to budget, and aligns budget with operational shifts and accounting actions whose impacts were not known until recent months. The information gathered during staff’s review of year-end budget performance will inform the upcoming financial status update, to be presented to Council in January 2020, as well as the exception-based budget process that will be completed in June 2020.
FY 2018-19 Budget Year-End Status
The City ended the year with slightly greater than anticipated revenues than budgeted. Excluding year-end Governmental Accounting Standards Board (GASB) Statement No. 31 adjustments for unrealized gains/losses from investments and restricted interest on bond proceeds, General Fund revenues were $1.4 million, or 0.3%, greater than the FY 2018-19 most recent budget target (the “estimated actual”). Notably, a large portion of the over-realized revenue was one-time in nature and was offset by an under-realization of $600,000 in key ongoing revenue streams including transient occupancy taxes and utility user taxes.
Including the adjustments requested in this report, General Fund actual operating expenditures were under budget by approximately $0.2 million. A number of departments achieved expenditure savings; however, these were offset by overages in Police and Fire Department overtime. Police Department overtime reflects the Department’s deliberate changes to respond to a three-year rise in crime. These include the continuing impact of Proposition 47, a 14% increase in arrests requiring officers to appear in court outside of their patrol duty, time required to transition a number of newly-hired officers in training to the Police force, and coverage for personnel who are recovering from injuries. The Fire Department exceeded its budget due to mutual aid strike team deployments for which the City was fully reimbursed, and unbudgeted expenses for a recruitment academy and a pilot program focusing on the City’s homeless population.
Total General Fund revenues exceeded expenditures by $6.4 million, as had been forecast (the City follows the fiscally-prudent practice of not appropriating the entire anticipated revenue amount to expenditures). While year-end savings, by default, revert to fund balances, re-appropriating a portion of the funds to the next year’s budget, or assigning fund balance for future uses, provides an opportunity to address unfunded critical or emerging needs. Staff recommends that $4.5 million of the $6.4 million in FY 2018-19 General Fund savings be appropriated to cover portions of the FY 2019-20 and FY 2020-21 payments for the accelerated paydown of the City’s unfunded pension liability, and the remainder be set aside as an assignment in the fund balance to provide a contingency for unanticipated one-time costs.
Significant revenue variances in other funds in FY 2018-19 include:
· Airport Fund – FY 2018-19 revenues were $5 million less than the estimated actual, primarily due to the City not assuming control of the Fixed Based Operator at the Airport. These were accompanied by $5 million in expenditure savings.
· Big Blue Bus Fund – The Big Blue Bus’s capital revenue budget is based on projected reimbursable expenditures associated with capital projects. FY 2018‑19 revenues were $7.6 million less than the estimated actual primarily due to timing changes associated with capital improvement projects.
· Housing Authority Fund – FY 2018-19 revenues were $1 million greater than the estimated actual primarily due to the receipt of new program revenues and prior year revenues for the Section 8 Housing Assistance program.
· Miscellaneous Grants Fund – FY 2018-19 revenues were $2.1 million greater than the estimated actual, reflecting the timing of the receipt of funds for certain grants.
· Pier Fund – FY 2018-19 revenues were $1.1 million greater than the estimated actual primarily due to higher than expected percentage of sales rent revenue.
· Special Revenue Source Fund – FY 2018-19 revenues were $5.1 million greater than the estimated actual primarily due to timing of receipt of certain developer fees.
· Wastewater Fund – FY 2018-19 actuals were $1.9 million greater than estimated actuals primarily due to greater than anticipated sewer service charges, capital facility fees, and investment income.
· Water Fund – FY 2018-19 actuals were $2.5 million greater than estimated actuals primarily due to greater than anticipated development related fees and more investment income.
Other funds ended the fiscal year with expenditures $25.3 million, or 13%, below budget. Savings in other funds were primarily due to approximately 55 vacant positions throughout the year; savings from the Fixed Based Operator in the Airport Fund ($5 million); savings due to lower than anticipated water purchases from Metropolitan Water District and water conservation rebates in the Water Fund ($4.8 million); less use of Liquid Natural Gas (LNG) fuel and savings from outside repairs in the BBB Fund ($4.4 million); and timing of grant expenditures ($1.7 million). These savings were offset by higher than anticipated liability claim payments in the City’s self-insurance funds and higher than anticipated expenses in the Pier Fund. The Housing Authority Fund required a subsidy of $0.3 million from the affordable housing set-aside funds, which is less than the projected subsidy of $0.7 million.
FY 2018-19 Operating and Capital Budget Changes
Recommended changes detailed in Attachment A include $14.4 million in adjustments: a $63.9 million increase in the General Fund and a $49.5 million decrease in the other funds. Significant General Fund changes include an adjustment of $53.4 million to reflect the Council’s November 27, 2018 decision to transfer Gillette/Boeing settlement funds from the General Fund to the Water Fund to restore the Olympic Sub-basin, which would allow additional water production from that sub-basin to support achievement of water self-sufficiency; appropriation of $5.5 million in fund balance previously set aside for various legal expenses to departments based on actual spending; and appropriation of $1.8 million in fund balance previously set aside to reinforce the fund balance of the Workers’ Compensation Self Insurance Fund.
In other funds, significant budget adjustments include the transfer of the same $53.4 million in Gillette/Boeing settlement funds noted above to the Water Fund, and an appropriation of $2.8 million for payment of liability claims from the City’s self-insurance funds.
Recommended changes to the FY 2018-19 capital budget detailed in Attachment A include a net budget increase of approximately $0.6 million, $0.52 million of which is in the Miscellaneous Grants Fund.
FY 2019-20 Operating and Capital Budget Changes
Recommended changes detailed in Attachment B include $2.1 million in adjustments: a $1.8 million increase in the General Fund and a $0.3 million increase in other funds. General Fund budget changes reflect personnel changes, MOU changes, computer equipment replacement program contributions, and re‑appropriation of FY 2018-19 operating unspent funds to address homelessness and payment of utility bills.
Other fund budget changes reflect personnel changes and an operating transfer from the Big Blue Bus Fund to reimburse the General Fund for costs of two police officers who will provide security services on BBB buses and bus stops as part of a 19-month pilot program.
Staff recommends that the City Council adopt a resolution supporting and setting the reimbursement rate for the Santa Monica Police Department’s provision of transit security and law enforcement services to the BBB (Attachment E).
This report includes staffing adjustments to reflect ongoing operational changes and results of classification and compensation studies. To control compensation costs, staff repurposed existing or vacant positions to areas needing additional attention. Attachment C is a Salary Resolution detailing new classifications and salary rates, and Attachment D details the staffing adjustments.
Recommended General Fund position changes include the addition of 2.0 Full Time Equivalent (FTE) police officers to provide transit security and law enforcement services to the BBB, 1.0 FTE Community Justice Legal Fellow to assist with victim advocacy, prevention, education and prosecution (offset by the deletion of another position in the City Attorney’s Office and reallocation of other funds), a 0.5 FTE Community Services Program Coordinator to provide specific oversight to the programming of contractors for the CREST Enrichment program (offset by the deletion of another position in Community and Cultural Services, and a 1.0 FTE Chief Operations Officer – Airport Director (offset by the deletion of two other positions in Public Works, one in the Airport Fund, as well as Airport and Vehicle Management Fund reimbursements of the position’s proportional share of work supporting those funds).
In other funds, staff recommends the addition of 2.0 FTE Resource Recovery and Recycling (RRR) Crew Leaders to begin a succession plan for interested line staff (offset by the deletion of 2.8 FTE RRR positions).
These changes result in a net increase of 0.1 FTE employees – a 1.9 FTE net increase in the General Fund and a 1.8 FTE decrease in other funds. Together, position changes result in a net decrease of approximately $105,000 in FY 2019-20 in the General Fund and a net increase of approximately $180,000 in other funds primarily due to an ongoing reimbursement from the Big Blue Bus Fund to the General Fund.
Update on City’s Fiscal Health and Fiscal Sustainability Measures
As part of the FY 2019-21 Biennial Budget process, staff prepared a 10-year forecast that showed looming budget shortfalls due to flattening revenue growth, significant pension cost increases, and a probable recession. Council proactively approved the elimination of 28 full time equivalent positions and $17.3 million in efficiencies, a commitment by staff to identify and implement $2 million in additional efficiencies by FY 2022-23, and a plan for a Budget Task Force of community and City staff members to review and make recommendations on another $4 million in efficiencies that would take place over a period of 6 years. These steps allowed the City to maintain a positive General Fund balance through FY 2021-22 but additional measures will be needed to erase shortfalls after this point, including consideration of new revenue sources. In addition, Council approved an accelerated, 13-year paydown of the City’s unfunded pension liability that would save over $100 million in interest costs over 30 years; the first payment, for $9.3 million, was made on October 31, 2019.
Year-end numbers are showing an accelerated downward trend in key revenue sources—namely transient occupancy taxes and utility user taxes. We are seeing the early indications of a trend that, if it continues, may negatively impact the General Fund by as much as $5-6 million in FY 2019-20. This will change previous projections and require additional near-term adjustments to ensure that the General Fund balance remains positive in FY 2019-20 and beyond. Staff will continue to report on these measures to Council through the next 7 months as part of the Midyear and Adopted Budget reporting. In the meantime, staff is recommending that Council approve the following measures to mitigate shortfalls.
· The City’s Fiscal Policy allows General Fund departments to retain one-third of their year-end non-salary savings (the Expenditure Control Program). Staff recommends a suspension of this program for one year.
· Staff is recommending a new strategic approach for the FY 2020-22 Biennial CIP Budget and Ten-Year Plan (through FY 2029-30). The approach will seek to address financial challenges and staff capacity by assessing current efforts and focusing on priorities. New project applications will need to consider what is currently-funded in the existing CIP Budget and continue to prioritize project completion. Identifying highest priorities will result in a more focused CIP that allocates resources to the key City, Council and Community priorities. Staff will provide the Council with more details on this process, and potential impacts on the long-term capital plan, as part of the January 2020 Midyear Budget report.
Past Council Actions
Adoption of FY 2018-19 Budget and Adoption of FY 2018-19 CIP Budget and Approval of FY 2019-20 CIP Budget Plan
Adoption of FY 2019-20 Budget and Approval of FY 2020-21 Budget Plan and Adoption of FY 2019-20 CIP Budget
Financial Impacts and Budget Actions
The budget changes recommended for FY 2018-19 result in a $14.4 million, or 1.9%, net increase over the FY 2018-19 Revised Budget. Detail for these changes is in Attachment A. Recommended FY 2019-20 expenditure changes result in a $2.1 million, or 0.3%, increase over the FY 2019-20 Adopted Budget. Recommended FY 2020-21 changes result in a $0.8 million expenditure increase from the FY 2020-21 Budget Plan. Detail for FY 2019-20 and FY 2020-21 changes is in Attachment B.