Mid-year status update regarding the Fiscal Year 2020-2021 Adopted Budget; budget amendments to the Fiscal Year 2020-2021 Adopted Budget; and direction to staff regarding the Council discretionary grant program for Fiscal Year 2021-2022

1. Receive a mid-year status update regarding the Fiscal Year 2020-2021 Adopted Budget; 

2. Adopt Resolution 2021-008 approving budget amendments to the Fiscal Year 2020-2021 Adopted Budget; and

3. Provide direction to staff regarding the Council discretionary grant program for Fiscal Year 2021-2022

On June 16, 2020, Council adopted the Fiscal Year 2020-2021 (“FY 20-21”) budget. The budget is a planning document that identifies a community’s priorities and provides a framework for the programs, projects and services that the organization is able to fund based upon available resources.  The adopted budget sets an appropriation limit for expenditures, which may be considered as a “ceiling” on the amount each department or function may spend within the fiscal year, unless a budget amendment is approved by Council to increase this spending limit.  In order to achieve a balanced budget, projected new revenue, plus prior years’ savings (“fund balance”) if needed, need to equal or exceed planned expenditures.  The FY 20-21 Budget included $19.7 million in expenditures balanced by $18.5 million in projected new revenue and just under $1.1 million in fund balance.

Given the fluidity of the FY 20-21 Budget, staff have presented Council with monthly updates regarding the budget status as feasible. The purpose of this agenda item is to provide a mid-year budget status update to Council based upon actual revenues received and expenses incurred over the last six months of July 1-December 31, 2020. With six months of the fiscal year elapsed, the mid-year review provides an opportunity to analyze revenue and expenditure assumptions used in developing the budget and make adjustments to the budget as needed.  

General Fund (Fund 101)

The General Fund includes revenues that may be used for any general governmental purpose, such as property tax, the City’s share of the statewide sales tax, business license tax and franchise fees.  The local sales tax (“Measure C”) and transient occupancy tax (“TOT”) are housed within separate funds for tracking and transparency, and then transferred to the General Fund as needed to support citywide daily operations, services and programs. On the expenditure-side, the General Fund includes City departments and other functions that support ongoing citywide operations.

Revenues

The City’s top three revenue sources are property taxes, sales and use taxes and transient occupancy taxes. Together, these three revenues are budgeted at $14.3 million, or 76% of citywide revenues. Table 1, “FY 20-21 Major General Fund Revenues Received to Date", summarizes the major revenues received through December 31, 2020 for the General Fund.    Both the timing and the amount of revenue is paramount as the receipt of revenue helps with monitoring both the budget and cash flow projections. Revenue may be considered akin to the City’s income and the timely receipt of revenue enables the City to pay its required expenses pertaining to payroll and payment of vendors for services and supplies.  With six months of the fiscal year elapsed, staff is able to provide a better estimate of whether these revenues are likely to meet the budget target that was developed in spring 2020.  

Table 1: FY 20-21 Major General Fund Revenues Received to Date

Property Tax

Property taxes are budgeted at $6.8 million, or 36% of citywide revenues, in FY 20-21 and include secured, unsecured, unitary and transfer taxes. The largest component of property taxes is secured taxes, which make up $6.3 million, or 93%, of budgeted property tax revenues.  Secured property tax revenues are collected by Monterey County and remitted to the City each calendar year at the end of December and the end of April respectively.

Due to the timing associated with developing the budget, staff assumed 3% growth over the FY 19-20 Estimated Actual of $6.2 million in setting the FY 20-21 budget target of $6.8 million. Staff anticipated receiving approximately 53% of the total budgeted revenue for all property taxes by December 31, 2020.  The City actually received $4.2 million of property taxes, or 62% of the FY 20-21 Budget of $6.8 million, in December 2020. The breakdown of the types of property taxes received through 12/31/20 are shown below in Table 2, “FY 20-21 Property Tax Revenue Received to Date and Projection”. 

The property taxes remitted to the City in December 2020 included $3.8 million in secured taxes, which is the largest category of property tax revenue.  Last fiscal year, the City received 56% of the FY 19-20 actual secured property tax revenue in December 2019. Thus, if FY 20-21 trends are similar to FY 19-20, then the FY 20-21 property tax revenue would be approximately $598,000 more than budgeted as illustrated below in Table 2.

Table 2: FY 20-21 Property Tax Revenue Received To Date and Projection

Sales and Use Taxes

Together, the City’s allocation of the statewide sales tax (Bradley Burns) and the local sales tax (Measure C) are budgeted at $5.0 million, or 28% of total citywide revenues in FY 20-21. As of 12/31/20, the City has received $608,000 in Bradley Burns and $1,049,000 in Measure C. Similar to TOT, typically sales tax returns are higher during the summer months in part by the increased number of visitors in town.  The year-to-date actual reflects remittance from the State through October 31, 2020. Staff anticipated receiving 25% of the budgeted sales tax revenue by 12/31/20 based upon the State’s typical disbursement cycle. Currently sales tax revenues are meeting projections.  

However, staff recently received an update from HdL Companies, the City’s sales tax consultant, that a potential change in the State’s methodology regarding the allocation of the countywide pools could decrease the City’s Bradly Burns projection by $80,000. In addition, HdL is currently updating its economic forecast to reflect changing conditions, such as the State’s recent shelter in place restrictions, and actual third quarter sales tax data and will be providing updated projections to City staff at the end of February. As a result, staff do not recommend adjusting the FY 20-21 Estimated Actual for sales tax revenues at this time as shown in Table 3, “FY 20-21 Sales Tax Revenue Received to Date and Projection”, below.

Table 3: FY 20-21 Sales Tax Revenue Received To Date and Projection

Transient Occupancy Taxes

Transient occupancy taxes (“TOT”) are budgeted at $2.5 million, or 13% of total citywide revenues in FY 20-21. Transient occupancy tax is based upon 10% of gross room rental revenue and is remitted to the City on a bi-monthly basis.  Therefore the next remittance cycle  of November-December 2020 will be due to the City on January 31, 2021. As of 12/31/20, the City has received $2.0 million, which reflects taxes collected through October 31, 2020.

TOT has been challenging to forecast as the impact of the coronavirus on travel and leisure is unprecedented.  As staff were developing the projected revenue for FY 20-21, the March 2020 statewide shelter in place had been imposed and local hotels were nearly vacant.  Staff assumed a significant decrease in TOT based on decreased summer travel due to a consumer’s willingness and financial ability to travel and the elimination of events such as Car Week.  The forecast accompanying the FY 20-21 Adopted Budget assumed incremental revenue for most of the fiscal year with a ramping up of revenue in May and June.  Consumer demand for travel and hotel lodging was far greater than expected and taxes collected in the summer and autumn months generated $2.0 million.   

However, in addition to approaching the winter months and the usual low season, a second wave of the pandemic has emerged and the State issued a more restrictive shelter in place order in December 2020.  These factors have the potential to curtail travel and overnight stays in the upcoming months.  Alternatively, the timing associated with the vaccine process could also impact travel in the latter months of the fiscal year. Based upon the original projection developed by staff in the spring of 2020 for TOT for January through June, then TOT could generate close to $3.5 million by June 30, 2021 as illustrated below in Table 4, “FY 20-21 Transient Occupancy Tax Revenue Received to Date and Projection”.  While unknown at the time, the FY 20-21 projection for these latter months actually mirrors the performance for the period of January-June 2020 totaling approximately $1.2 million. When considering whether to adjust the budget target upward, Council should consider the fluidity of the impact of COVID-19 on travel as well as timing as the May-June 2020 TOT will not be received by the City until FY 21-22.

Table 4: FY 20-21 Transient Occupancy Tax Revenue Received To Date and Projection

Charges for Services

Charges for Services are budgeted at $2.1 million, or 12%, of total citywide revenues in FY 20-21.  Revenue for charges for services is based upon the demand by the particular user for the service and, thus, the timing for the receipt of revenue varies.  As of 12/31/20, $954,000 has been received as shown below in Table 4, “FY 20-21 Charges for Services Received to Date and Projection”.  Administrative services includes business license administration fees, which are largely received in the first quarter, and overall this category is on track with projections.  Public safety, which includes ambulance transport fees, is also on track with budget projections. The FY 20-21 Adopted Budget for planning charges assumed a decrease of approximately $100,000 compared to the FY 19-20 Adopted Budget.  This assumption was based upon the year-to-date actual at the time and the projected FY 19-20 Estimated Actual.  Should demand for planning permits remain on par with the first six months of the fiscal year, then revenue may exceed the budget target by approximately $81,000.  Building services on the other hand, are not likely to meet the budget target.  Again, assuming that the last six months mirrors the first part of the fiscal year, then building services may be under budget by $377,000. City staff factored in a decrease in special events due to the impact of COVID-19 when setting the FY 20-21 budget target for community activities, reducing the FY 20-21 budget to $40,000 compared to $174,000 in FY 19-20.  It is however unlikely that special event permits will be issued for the remaining part of the fiscal year. While Table 4 illustrates the projected fiscal year-end estimated actual based on performance to date, staff does not recommend changing the budget target until additional revenue receipts are received.

Table 5: FY 20-21 Charges for Services Received To Date and Projection

Expenditures

Salaries and Benefits

The FY 20-21 Adopted General Fund Operating Budget totals $18.5 million. Of this amount, $9.6 million, or 49%, is attributed to expenses associated with salaries and benefits.  As of 12/31/20, salaries and benefits expenditure, inclusive of worker compensation premiums, totaled approximately $4.8 million This is 50% of the budget and spending is on target with projections.

Services and Supplies

Services and supplies are budgeted at $7.4 million, or 37% of total citywide expenditures in FY 20-21.  As of 12/31/20, services and supplies expenditures were approximately $3.6 million.  This is 49% of the total budgeted services and supplies and spending is on target with projections.

Departmental

As a general proxy for budget accuracy, with six months of the fiscal year elapsed, departmental expenditures should be at, or below, 50% of the budget (conversely, the remaining budget would be 50% or more). This accounts for the remaining budget allocated for personnel costs as well as services and supplies. Many expenditures are related to timing, with some expenses paid in the beginning of the fiscal year, other costs paid on a monthly or quarterly basis and other expenses paid toward the end of the fiscal year. While there may be timing factors that impact spending projections, overall departmental spending is aligning with the budget as illustrated in Table 5, “FY 20-21 General Fund Expenditures by Department and Available Budget”, below.  A synopsis of departmental spending is provided below for reference.

Table 6: FY 20-21 General Fund Expenditures by Department and Available Budget

Council

The FY 20-21 Adopted Council budget is $187,000.  As of 12/31/20, $113,000 has been spent, primarily related to the payment of regional memberships, discretionary grants and mail service.  Due to the timing related to the expiration of the mail service contract, a budget amendment was approved by Council in January.   Council spending is projected to be on track with the amended budget of $203,000.

City Attorney

The City Attorney budget of $285,000 assumes monthly costs of just under $24,000.  As of 12/31/20, $133,000 has been spent on legal services, which reflects invoices paid through the end of November.  While the services rendered by the City Attorney are currently meeting budget expectations, there are other unanticipated costs for specialized legal services in the areas of personnel and telecommunications, which may require a future budget amendment.

Administration

The Administration budget of $1.8 million includes the functions of the City Administrator, Clerk, Finance, Human Resources and Information Technology. As of 12/31/20, $936,000 has been spent on such items as staffing, software and system licenses, auditing services and telecommunications.  The Department is on track with spending projections.

Non-departmental (Citywide)

The non-departmental budget of $2.8 million includes various citywide expense, such as insurance premiums, utilities, property tax assessments and the City’s share of retiree healthcare costs. The largest expense within this category is the City’s payment of $1.6 million to the California Public Employees’ Retirement System (CalPERS) for the unfunded actuarial liability (“UAL”). The UAL is intended to address any shortfall between the amount CalPERS needs to pay for retirement benefits when people retire compared to the amount that CalPERS currently has on hand to pay for the estimated costs of these benefits. As of 12/31/20, $1.6 million has been spent, or 66% of the budget, due to the timing of payments that are made in the first six months of the fiscal year.  

One such payment is the premium for the City’s general liability insurance policy.  The City budgets the amount of this payment based upon an estimate it receives from CSAC Excess Insurance Authority.  The actual premium paid was less than the estimate, resulting in savings of $41,000.  Of these savings, approximately $16,000 was transferred to the Council budget in January 2021 and an additional $25,000 is proposed to be transferred to the Ambulance budget.

Economic Development

The Economic Development budget of $824,500 includes contractual payments to the Sunset Center and other marketing entities including the Chamber of Commerce, Visit Carmel and the Monterey County Convention and Visitors Bureau. As of 12/31/20, $404,000 has been spent based upon the timing of scheduled payments. Spending is on track with the budget target.

Library

The Library budget of $676,000 includes funding of library staff.  As of 12/31/20, $364,000 has been spent and spending is on track with the budget target.

Community Activities 

The Community Activities budget of $90,000 includes funding to cover expenses related to City-sponsored special events.  As of 12/31/20, $53,000 has been spent.  The Community Activities Commission is implementing its strategic plan and developing creative ways to engage the community in lieu of social gatherings. It is likely there will be incremental savings within the department. However, the amount of savings is contingent on the number and types of events the City will provide to the community within the next six months.

Community Planning and Building 

The Community Planning and Building budget of $1.2 million funds planning, building and code enforcement activities. As of 12/31/20, $517,000 has been spent on staffing and contract services.  A portion of the remaining budget includes $186,000 in service and supplies, which includes funding allocated for consultant costs associated with the reimbursable State housing grant. Departmental spending is on track with budget projections.

Public Works

The Public Works budget of $2.5 million includes funding to support the functions of environmental compliance, facility maintenance, forestry, and public works. As of 12/31/20, $1.3 million has been spent, including janitorial service for City facilities and public restrooms, tree services, materials and supplies, gas and vehicle maintenance, including the repair of the street sweeper. Absent any additional large vehicle repairs and any winter storms that may require tree removals, the Department is on track to meet the budget projection.  The City has received additional donations for Mutt Mitts and a budget amendment is proposed to increase the Department’s materials and supplies budget to allow for the additional purchase of these supplies.

Ambulance 

The Ambulance budget of $1.5 million includes funding for expenses such as staffing, medical supplies and vehicle maintenance, the latter budgeted at $17,000 in FY 20-21. As of 12/31/20, $628,000 has been spent.  Recently the eleven year old ambulance experienced an engine failure, which required a complete replacement of the engine at a cost of $25,000. The vehicle age, high miles and accumulated engine hours contributed to the engine failure.  The new engine will extend the life of the current vehicle and allow it to remain operable for service. 

While 58% of the Ambulance budget is available at this time, it is intended to cover the costs of operations for the next six months and there are no savings projected at this time to cover the unanticipated engine repair. Therefore, a budget amendment is required to transfer savings from another department in order to pay for the cost of this repair.  It is worth noting that the cost of a new vehicle is estimated at $250,000.

Fire

The Fire budget of $2.7 million largely includes the cost of the fire service contract with the City of Monterey.  As of 12/31/20, $1.4 million has been spent. Spending is on track with projections as the available budget is largely committed to the remaining monthly payments for fire services as well as the wildfire assessment study. The budget includes $49,000 for the FY 19-20 fire true-up and, depending on the outcome of the true-up, there may be savings within this line item account that could be re-allocated to other programs or projects.

Police

The Police budget for FY 20-21 is $3.9 million.  As of 12/31/20, $1.8 million has been spent on staffing and other operational items.  The Department is anticipated to achieve savings of approximately $45,000 due to the deferral of the July 1, 2020 negotiated salary adjustment by the Police Officers Association.

Budget Amendments

Process and Timing

While the mid-year review provides an opportunity to make adjustments to the budget based upon six months of performance, often budget amendments are brought forth for Council’s consideration at different times of the fiscal year.  The timing of budget amendments helps to mitigate overspending by adjusting the adopted appropriation limit for various line item accounts that are or projected to be over budget. Or, in the case of the approval of an agreement for service, the budget amendment helps ensure there is sufficient funding available before entering into a contractual obligation with a vendor. 

The budget amendment process allows for an opportunity to ‘course correct’ the budget typically if either revenues are anticipated to be significantly below budget projections (and thus require reductions on the expenditure-side) and/or expenditures are expected to increase over the adopted spending limit.  Regarding increased expenditures, in order to keep overall expenditures at the adopted level, an increase in the budget of one line item is offset with known savings in another area of the budget whenever feasible.  Another option is to increase revenue to match the increased expenditure.  Revenue estimates are not usually adjusted upward unless there is a high degree of confidence that the additional revenue will materialize.  Using this approach, the overall budget appropriation will increase, but remain balanced as the increased revenues equals increased expenditures.  The third option to address increased expenses is to use fund balance.  However, additional use of fund balance now will minimize the amount available for future use and the FY 20-21 Budget already assumes the use of $1 million in fund balance.

While six-months provides some indication of how revenues will likely perform for the full fiscal year, there is still a high degree of uncertainty related to the next six months, particularly in light of economic implications related to the coronavirus.  Staff does not recommend changing the budget target for the major revenue sources at this time.  If the budget targets are not adjusted upward during the fiscal year and perform better than expected, then either: 

1. If all revenues outperform their respective budget targets and all expenses are at, or under, budget, then the fiscal year will end with a savings that will mitigate the planned use of $1 million in fund balance, leaving funds available for future use; or

2. If some revenues, such as property taxes or TOT, outpace their budget targets, then these particular revenues may offset anticipated decreases in other areas of revenue. At this time, staff anticipates that some charges for services, and possibly sales taxes, are likely to fall short of current projections. Again, if together, all combined revenues equal or outpace expenditures, then the fiscal year will finish balanced or with savings.

However, there are known expenditures that require the budget to be adjusted to remain balanced as summarized below.

Proposed Amendments

1. Ambulance Vehicle Repair: As previously noted within the Ambulance narrative, the cost of the engine replacement of $25,000 exceeds the vehicle maintenance line item budget of $17,000 and no additional savings are anticipated within the Ambulance budget to offset this expense.  It is recommended that $25,000 of savings from the City’s general liability insurance premiums be transferred to the Ambulance budget for the engine replacement. 

2.  Mutt Mitt Donations: The City received numerous donations to support the purchase of pet waste disposal supplies. On October 6, 2020, Council approved a budget amendment to increase the Public Works materials and supplies budget by $18,850, which was offset by revenue (Public Works donations).  Similarly, the proposed budget amendment recognizes $3,150 in new donations and increases the Public Works budget by an additional $3,150 for this specific purpose.

Other Funds

In addition to the General Fund, the City also uses other funds to account for specific types of restricted revenues, such as transportation-related funds, and specific types of expenditures, such as capital projects and debt service.  The FY 20-21 Adopted Budget includes $1.2 million for debt service for the Next Generation Countywide Radio Project, the Sunset Center, and the Pension Obligation bonds. The debt service is to be funded by anticipated Measure C revenues.  Part of the $1.2 million budget included $509,000 for the payment for the Sunset Center Lease Revenue bond.  Due to a combination of factors, including decreased cash flow resulting from diminished revenues, and low interest rates, Council approved the refinancing of the bond in September 2020.  This action resulted in both immediate and long-term savings, including the deferral of most of the payment that was scheduled for November 2020.  The City will have a payment of $82,230 due in May 2021, which will result in projected savings of $427,000 as long as Measure C revenues meet budget projections. (The debt service of $1.2 million is to be paid from the $3.1 million of Measure C revenue budgeted for FY 20-21.)  Council has the option to:

1. Provide direction that all, or a portion, of Sunset Center budgeted funds be transferred to other General Fund operations or capital projects. However, while the debt service will result in budget savings, the City will need to realize revenue and have the appropriate cash on hand to pay for any new expenditures in lieu of making the budgeted debt service payment.

2.  Allow the debt service savings to remain within the Debt Service Fund and contribute toward the overall citywide fund balance on June 30, 2021.

3. Provide direction that all, or a portion, of the Sunset Center budgeted funds, be used toward pension mitigation efforts, particularly after the close of the 2020-2021 fiscal year.

Preparation for FY 21-22 Budget

Council Discretionary Grant Program

In addition to continuing to monitor the status of the current fiscal year budget, Finance staff will be updating the financial forecast and developing the framework for the FY 21-22 budget.  As part of the framework, staff is seeking direction regarding the City Council Discretionary Grant Program for Fiscal Year 2021-2022.

On January 3, 2017, Council adopted the City Council Discretionary Funds Grant Program (Policy C17-01) with the intent of providing a clear and consistent framework for both organizations seeking funding from the City as well as for the City Council in making funding decisions to various community organizations.  In order to align the grant program with the budget process, the grant application process typically commences in February.  The grant application process requires City staff time in preparing the application materials, reviewing submitted applications and providing recommendations to Council. In addition, the grant application process is quite extensive for the organizations seeking funding. 

Staff are currently in the process of developing the financial framework for the FY 21-22 budget. However, given the ongoing impacts of the coronavirus, revenues are not expected to fully rebound for several years. Therefore, in light of the fiscal constraints, staff is seeking direction from Council on whether to commence with the grant program for FY 21-22.  In fiscal year 2019-2020, the City received $22,000 in funding requests from organizations as part of the grant process, although the requests have been greater in prior years. The FY 20-21 Adopted Budget included funding of $9,000 for community organizations.

Budget amendments total $28,150. However, the proposed amendment of $25,000 is a transfer between line item accounts and has no impact in term of increasing the overall FY 20-21 Adopted Budget. The Mutt Mitt donations and corresponding increase to the Public Works budget will increase the FY 20-21 Adopted Budget by $3,150.

Council received a FY 20-21 budget status report on December 8, 2020.