REPORT TO COUNCIL
SUBJECT
Title
Receive and File the FY 2023/24 Budgetary Year-End Financial Report, Annual Comprehensive Financial Report (ACFR), the Sunnyvale Financing Authority Financial Report, Agreed Upon Procedure Reports, and the Report to the City Council Issued by the Independent Auditors, and Approve Budget Modification No. 12
Report
REPORT IN BRIEF
This report provides the year-end financial condition of the City of Sunnyvale on a budgetary basis for the fiscal year ended June 30, 2024. In addition, the City’s audited Annual Comprehensive Financial Report (ACFR), Agreed Upon Procedure Reports (AUP) and Sunnyvale Financing Authority Financial Report for FY 2023/24 are being presented for Council and the Authority Board’s information.
The City’s ACFR and Sunnyvale Financing Authority Financial Report were independently audited by the firm of Maze & Associates (Maze) who rendered an unmodified (or “clean”) opinion and found no material weaknesses in internal control during the financial audit of the City. Receiving an unmodified opinion is the optimal result from the independent audit.
In addition, Maze performed three agreed upon procedures (AUP) related to Fiscal Administration of Public Funds. No material findings were noted in these reports.
Overall, the General Fund ended FY 2023/24 in a positive fiscal position when compared against the final position anticipated in the FY 2023/24 Budget. There is a net positive impact of $6.1M to the Budget Stabilization Fund (BSF) Reserve when Educational Revenue Augmentation Fund (ERAF) funds are excluded. General Fund revenues finished the year with a favorable variance of $6.6M. Major revenues, such as Property Tax, Sales Tax, and Transient Occupancy Tax (TOT), represented most of the favorable variance with Construction Tax and Real Property Transfer Tax also contributing to the positive performance. Utility Users Tax and Franchise Fees came in just under final revised estimates as did Service Fees. General Fund expenditures ended the year slightly over the budgeted amount at approximately $0.6M, which represents 0.2% of the General Fund budget net of project carryovers.
The City also received $12.2M in one-time ERAF funds. Prior to the FY 2024/25 Budget, these revenues were reserved by policy for capital projects or other one-time uses. For the FY 2024/25 Budget, 50% of ERAF funding was treated as ongoing revenue, with the remainder continuing to be treated as one-time. With the transition of this practice in FY 2023/24, $7.8M was transferred to the Infrastructure Fund with the FY 2023/24 Adopted Budget and $4M was programmed as an ongoing source. The additional $0.4M is recommended to be used to fund future pension obligations.
A budgetary summary of the Sunnyvale Financing Authority is also included in this report as is a summary of approved Administrative Budget Modifications made in FY 2023/24.
Staff recommends the approval of Budget Modification No. 12, which includes General Fund clean-up items as well as appropriation of $4M in savings and one-time revenues towards funding pension obligations. The remaining $2.3M in net surplus would fall to the Budget Stabilization Fund to be programmed in upcoming budget cycles.
BACKGROUND
Each year, staff provides a report to Council detailing the year-end financial condition of the City on a budgetary basis. The results are compared with the most recent revenue projections updated with development of the FY 2024/25 Budget. Staff also reviews General Fund operating expenditures and status of projects to date in order to identify expenditure savings, if applicable, to provide the best estimate for the FY 2023/24 financial position of the fund.
Additionally, each year, staff coordinates and facilitates completion of the annual audit with an independent auditor. For the annual audit process, staff prepares several audit schedules and responds to audit queries. the auditor examines the City’s financial transactions and reviews records. The independent auditor conducts the audit, according to the auditing standards generally accepted in the United States of America and the Governmental Auditing Standards issued by the Comptroller General of the United States. Along with completion of the audit, each year, staff prepares the City’s ACFR and Sunnyvale Financing Authority Financial Report, which includes the auditor’s opinion and audited financial statements. Staff also engaged with the independent auditor Maze to perform Agreed Upon Procedures (AUP) to evaluate the City’s custody and control of the public funds.
EXISTING POLICY
City Charter, Article XIII, Fiscal Administration, Section 1305 (Budget Appropriations): All appropriations shall lapse at the end of the fiscal year to the extent that they shall not have been expended or lawfully encumbered. However, approved appropriations for Capital Improvement Projects shall not lapse at the end of the fiscal year unless the Capital Improvement Project has been completed and closed out or the City Council takes affirmative action to modify the budget appropriation for the Capital Improvement Project).
Pursuant to Sunnyvale Charter Section 1305, at any meeting after the adoption of the budget, the City Council may amend or supplement the budget by motion adopted by affirmative votes of at least four members so as to authorize the transfer of unused balances appropriated for one purpose to another, or to appropriate available revenue not included in the budget.
City Charter, Article XIII, Fiscal Administration, Section 1318 (Independent Audit): Requires that an independent audit be conducted of the City’s financial transactions at the end of each fiscal year. A final audit and report shall be submitted by a Certified Public Accountant to the City Council.
City Council Resolution No. 878-18, Section 5: All appropriations shall lapse at the end of the fiscal year to the extent that they shall not have been expended or lawfully encumbered. Pursuant to Sunnyvale City Charter section 1305, approved appropriations for Capital Improvement Projects shall not lapse at the end of the fiscal year unless the Capital Improvement Project has been completed and closed out or the City Council takes affirmative action to modify the budget appropriation for the Capital Improvement Project. Unobligated Special Project appropriations in existence on June 30, 2024, shall carryover into FY 2024/25. The City Council shall be provided a complete listing of Special Project funds carried over in the FY 2023/24 Budgetary Year-End Report for City Council approval no later than December 31, 2024.
Council Policy 7.1.1, Fiscal - Long Range Goals and Financial Policies G.1.7: The City Council shall be provided with periodic summary financial reports, by fund, comparing actual revenues and expenditures to budgeted amounts.
Council Policy 7.1.1, Fiscal - Long Range Goals and Financial Policies E.4.3 In years where there are one-time savings in the General Fund operating budget, a portion of those savings shall be prioritized to pay for unfunded Pension and OPEB Liabilities except where replenishing the Budget Stabilization Fund to maintain fiscal sustainability is needed.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” with the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378 (b) (4) in that it is a fiscal activity that does not involve any commitment to any specific project which may result in a potential significant impact on the environment.
DISCUSSION
Fiscal Year 2023/24 Year-End Financial Update
Staff has reviewed the City’s year-end financial results. The following is an analysis of the changes between the final budgetary amounts with the actual year end results.
General Fund
Revenues
Comparison with Prior Year
When ERAF revenue is excluded, the City collected $254.7M in General Fund revenue in FY 2023/24, which exceeded the final budget by $6.6M.
Property Tax revenue net of ERAF in FY 2023/24 came in at $488K above the FY 2023/24 Final Budget. Property Tax revenue growth reflects increases in the assessed valuation of both the residential and commercial/industrial sectors across the City as well as change of ownership and new construction. Year-over-year growth in Secured Property Tax revenue, the largest component of total property taxes, was $5.5M. The net change in Secured roll growth was 7.6% when compared to FY 2022/23.
Sales Tax exceeded its revised projection by $3.8M when compared against the Final FY 2023/24 Budget of $37.0M. While most categories performed better than FY 2022/23, Building and Construction dropped significantly due to the decrease in construction projects. The City’s automobile sales and medical/biotech activity continue to be significant sources of growth. Additionally, some of the gains can be attributed to the economic activity from employees continuing to return to work in the City.
It should also be noted that the Public Safety Sales Tax (Proposition 172) is included in the Sales Tax category. This sales tax provides for a half-cent public safety tax that is set by a pro-rata factor determined by the County’s ratio of sales tax collections to the statewide total and came in at $2.2M.
At $18.9M, Transient Occupancy Tax (TOT) came in at $1.6M above its revised estimate of $17.3M. TOT continued to return to pre-pandemic levels; while the average room rate took a slight dip (2.3%) from $139 to $136, occupancy experienced a significant increase from FY 2022/23 to FY 2023/24 (4.9%). Also, there were fewer tax exemptions for long term and other tax exempted stays compared to previous years.
Utility Users Tax came in less than its revised estimate of $11.0M by $0.2M. PG&E lowered gas rates for a portion of the year resulting in an unanticipated reduction. With revenue of $7.8M, Franchise Fees netted $0.1M more than prior year ($7.7M) largely due to PG&E fees.
Construction Tax was $0.3M above its budget of $2.9M due to moderated development activity in FY 2023/24. Other development related fees (i.e., General Plan Maintenance Fees, etc.) came in $90K above revised projections.
Grants and Contributions also came in over budget by $0.3M, however it is common for grant receipts to cross fiscal years.
In addition, Transfers In/In Lieu Fees were under their revised projection by $1.6M. This is primarily due to accounting process changes related to leave benefit transfers as a result of implementing the Oracle Human Capital Management module of the City’s Enterprise Resource Planning (ERP) system. The budgeted transfer in from the Employee Benefits Fund was not practical as the fund no longer received revenue from other funds for leave costs due to the process change. This transfer is not included in the FY 2024/25 Adopted Budget or in future years in the 20 year Resource Allocation Plan.
There were no General Fund real property sales in FY 2023/24. The Sale of Property revenue represents disposal of minor equipment.
ERAF is local property tax revenue that is shifted to public school systems in each county to ensure a baseline level of funding. When the county auditors determine that the fund has enough money to meet the minimum state funding requirements for its public schools and community colleges, the remaining funds are returned to local governments. ERAF was originally budgeted at 70% of the County’s projection given variability in the final remittance and the uncertainty around a possible state claw back of this revenue source. The City received $12.2M this fiscal year, which is $0.4M over the Revised budget of $11.8M.
Given that a portion of the revenue from Excess ERAF is considered one-time, the revenue comparison excluding this source provides a more accurate picture when comparing against the Revised Budget.
Expenditures
General Fund expenditures for the fiscal year ending June 30, 2024, are shown in Table 2.
The details of FY 2023/24 expenditures as compared to the budget are contained in Attachment 1 of this report, by fund.
General Fund department operating expenditures finished the fiscal year at $1.1M over budget. Several departments exceeded their budgets within the General Fund. The Department of Public Safety exceeded its operating budget by $3.9M due to overtime salaries and benefits. The Finance Department exceeded its budget by $80K due to temporary staffing needed for accounting and payroll following the implementation of the ERP payroll module. The Office of the City Manager and the Office of the City Attorney exceeded by $154K and $60K, respectively, primarily due to a change to the benefit costing methodology following the implementation of the ERP payroll module, which shifted towards actual costs, rather than an additive rate estimate. In the Public Works Department, the Parks program ran over budget by $0.4M mainly due to utility costs and higher usage of water and electricity.
In addition to funding operations, the General Fund also provides funding for numerous capital, infrastructure, and special projects. Due to the long-term nature of these projects, unspent budget amounts are committed to the next fiscal year for those projects that are still in progress. Approximately $46.3M is being carried forward to FY 2024/25 to cover expenditures related to projects and equipment.
The General Fund project carryover is largely associated with Public Safety Recruitment ($9.8M), Pavement Rehabilitation and Sidewalk, Gutter, and Curb Replacement ($6.8M), replacement of the emergency generator at the Department of Public Safety ($2.5M), as well as $2.4M for transportation and other sustainability-related grant matching.
Project 831340 - Civic Center Modernization shows a $1.8M negative actual expenditure as a result of a cleanup transfer to move costs into more restrictive available funding sources to free up General Funds.
The annual transfers to the Employee Benefits Fund cover the cost of the City’s unfunded accrued liability for pension costs and retiree medical costs. Prior to FY 2021/22 these costs were captured as part of salaries and benefits in department operating budgets. Given the costs are primarily associated with former employees, these costs are now accounted for as a fund-to-fund transfer, though still an ongoing operating cost for the City. The planned transfers for FY 2023/24 were $41.9M and occurred as planned.
Overall, expenditures in the General Fund ended $0.6M over budget.
Final Fund Results
The final position of the General Fund is a positive variance of $6.4M, excluding ERAF and Sale of Property. It is important to note that the Final Budget figures include all approved Council adjustments through June 30, 2024. Due to the timing of the production of the FY 2024/25 Adopted Budget, these figures may differ slightly from the estimates for FY 2023/24 assumed during the development of the budget.
Table 3 summarizes FY 2023/24 General Fund revenue/expenditure results:
The details in Table 4 summarize the available fund balance for re-appropriation. Table 4A summarizes the impact on the BSF Reserve balance and Table 4B summarizes the impact of availability for one-time purposes, such as capital projects.
$6.1M is available from the BSF Reserve balance for re-appropriation. With persistent economic uncertainty, the City will continue to approach budget development with a balance of resource availability and service delivery evaluation, strategic use of reserves, identifying additional revenue, and a disciplined approach in the allocation of resources over the short and long-term.
The availability of ERAF funding over the long-term is still in question and is not a reliable ongoing revenue source. Conservatively, the City budgets ERAF at 70% of the County of Santa Clara’s estimate in FY 2024/25 and 50% for subsequent years with no added growth factors. Per Council Policy, the City does not appropriate one-time revenues for ongoing costs and services. The $0.4M in Table 4B represents the net available ERAF revenue and Sale of Property that was not already realized or transferred for infrastructure per the FY 2023/24 Adopted Budget. Staff recommends contributing these funds fund pension obligations as the City has done in past years.
Other Funds
In addition to the General Fund, other funds that warrant further discussion are highlighted below:
Youth and Neighborhood Services Fund
The Youth and Neighborhood Services Fund exceeded their budget by $100K due to higher than expected maintenance and repair costs for Columbia Neighborhood Center.
Park Dedication, Gas Tax, Capital Projects, and Infrastructure Funds
The Park Dedication, Gas Tax, Capital Projects, and Infrastructure Funds are utilized for funding capital, infrastructure, and special projects as well as for the maintenance of capital assets throughout the City. These projects are usually long-term in nature and take several years to complete. Therefore, every year many of these projects have unspent appropriations that will be used in the following fiscal year. Project costs are expensed directly from each associated funding source for its part of the project.
Ongoing projects in the Capital Projects Fund had unspent funds of approximately $53.6M, of which most is being carried forward to be spent in FY 2024/25. The major ongoing projects utilizing this carryover funding include the Lakewood Branch Library Facility ($25.2M), Peery Park Area Transportation Improvements ($3.9M), Evelyn Avenue Multi-use Trail ($3.9M), and other various transportation projects. Also note that many of the grant revenues budgeted for this year were not received as these funds are on a reimbursement basis and will only be available to the City once the expenditures have been incurred. The projected grant revenues, therefore, will also be received in the following year.
In the Infrastructure Fund, there is $29.1M in unspent project funds being carried over, primarily associated with Fire Station 2 - New Construction ($22.3M), Renovate Median Landscaping to Low Maintenance ($2.9M), and Civic Center Modernization ($1.0M). Additional funding for the first phase of the Civic Center Modernization project was through the issuance of the 2020 Lease Revenue Bonds that are captured in the 2020 Civic Center Capital Project Fund (Fund 3300). With the project nearing completion, $1.6M in unspent funds remain to carry forward and have already been drawn down during FY 2024/25.
Ongoing projects funded by Park Dedication Fee revenues account for almost $49M that will be carried forward to be spent in future years. Revenues in the Park Dedication Fund came in at $3M, which is $12.3M under the planned $15.3M, primarily due to delays in development projects yielding revenue. It is expected that this revenue will be realized in current and future fiscal years. Revenue in the Park Dedication Fund that was collected in FY 2023/24 is accounted for in fund balance as part of the two reserve accounts: Capital Projects Reserve and Land Acquisition Set-Aside Reserve accounts. The City’s practice is to set aside 20% of the Park Dedication Fee revenue into a reserve specifically designated for land acquisition to acquire land and to construct new parks, open space, trails, and other recreational facilities.
Development Enterprise Fund
The Development Enterprise Fund accounts for the revenues and expenditures associated with development activity throughout the City. The operating programs that support development activity span across multiple departments, with the largest programs in the Community Development and Public Works departments. Development activity continued to moderate in FY 2023/24.
Revenue ended the year at $18.5M ($1.5M under the FY 2023/24 revised budget), and actual expenses were $21.0M, which is $2.2M under the original budget. The net fiscal impact is less growth in the Development Enterprise Reserve by approximately $0.2M (after accounting for project carryover of $0.9M) when compared with the FY 2023/24 revised budget. However, reserves remain robust and maintaining a continued positive fund position.
Water Supply and Distribution Fund
The Water Supply and Distribution Fund accounts for the operations and capital expenditures for the City's water system. This fund receives the majority of its revenue from user fees collected from the City's water customers, with the remainder coming from development related connection fees. Total water revenues were $62.1M, which is $2M lower than the revised projection, primarily due to lower than projected connection fee revenue.
Overall expenditures in the water fund were over budget by approximately $0.4M due to an increase in water purchases as a result of resurging water usage due to the end of the drought. After adjustments for ongoing project costs, the net position of the fund decreased by $2.4M to $80.4M. The high level of available reserve funds will be beneficial should the drought resume in future years.
Solid Waste Management and SMaRT Station® Funds
The Solid Waste Management Fund accounts for the operation of the City's solid waste collection and disposal system. Revenues are received from user fees and from the sale of recyclable materials. This fund's expenses primarily consist of charges for the Sunnyvale Materials Recovery and Transfer (SMaRT) Station operations, disposal fees at Kirby Canyon Landfill, and the contractor payment to Bay Counties Waste Services (Specialty Solid Waste and Recycling) for collection of garbage, food waste, yard trimmings, and recyclable materials. Revenues in this fund are driven primarily by the volume of material collected, and to a lesser extent, curbside recyclables and recyclables diverted from the general waste stream. Fund expenses are driven partially by quantities of garbage but are largely fixed costs for the collection system and SMaRT Station equipment and infrastructure.
Overall, the Solid Waste Management Fund revenues finished FY 2023/24 at $62.8M, approximately $1M higher than projected, which is accordingly offset by expenditures at approximately $0.9M over budget. Accounting for ongoing project requirements, the reserve balance for this fund finished the year $0.1M higher than expected when compared to the Final Budget. Increased costs related to the implementation of new recycling services offset higher solid waste revenues for FY 2023/24.
The SMaRT Station fund accounts for revenues and expenses related to operation of the SMaRT Station by the partner cities - Sunnyvale and Mountain View. Each city makes quarterly contributions to the fund on a budgetary basis. At the end of the year, the fund is reconciled and each of the cities either owes more, or receives a refund based on each city’s individual use of the facility. The SMaRT Station Operating Fund net position for the year ended as expected.
Wastewater Management Fund
The Wastewater Management Fund accounts for operations of the City's wastewater collection and treatment facilities. User fees account for the bulk of the revenues, with the remainder coming from connection fees and fees from the small area outside the City served by the wastewater system. Total revenues (including loan proceeds in FY 2023/24) were $70.5M, which was $0.2M higher than anticipated. This is attributable to higher than projected service fees, which were partially offset by lower than projected revenue from connection fees.
The fund remains in good fiscal condition and ended $2.7M better than planned when accounting for ongoing project costs due to positive revenues as well as short-term operating and project savings. There are, however, significant ongoing capital projects in this fund with the Sunnyvale Cleanwater Program (SCWP) and other Wastewater infrastructure needs that will continue to put pressure on expenditures.
Golf and Tennis Operations Fund
The Golf and Tennis Operations Fund accounts for revenues and expenditures related to the two City-operated golf courses and the tennis center. Activity in the fund continues to be strong with golf, tennis, and pickleball. Golf and Tennis revenues ended at approximately $7.5M (including the $2.1M transfer from the General Fund), which is $51K over the revised projection. Expenditures totaled $6.3M, which is $470K higher than budgeted, primarily due to higher than anticipated need for casual staffing, credit card fees and utilities. With the General Fund transfer, the fund operated at an approximately $1.2M surplus.
The fund’s ending position of $5.5M will serve as a needed reserve balance for the fund. One of the significant actions taken by Council with the FY 2024/25 Budget was to stabilize the golf fund over the long term. FY 2023/24 was the final year for the originally planned General Fund transfers. Reserves will be needed until the transfers resume in FY 2029/30 in the amount of $1.5M.
General Services Fund
The General Services Fund accounts for the expenditures associated with the internal services provided by the City to user departments such as fleet management, building maintenance, technology/communication services, project administration, and the print shop. These activities are funded by charging rental rates to the operating programs that use the services. Overall, after considering project carryovers and project funds returned to fund balance for re-programming across the 20-year Financial Plan, the General Services Fund finished better than planned primarily due to project savings in the Technology and Communications Services Fund that will be re-programmed in future years to better align with expected project delivery.
Employee Payroll & Benefits Fund and Liability and Property Insurance Fund
These two internal service funds provide a mechanism to cover expenditures related to pension costs, insurance plans, workers’ compensation costs, leave time, and liability and property insurance while applying the principles of full-cost accounting. It should be noted that year-over-year variances in collections, either over-collections or under-collections, are expected, and annual rate adjustments take this into account.
Revenues to the Employee Benefits Fund to cover the cost of employee benefits come from the operating departments in the form of a benefit rate that is charged to actual salary costs based on hours worked. The Employee Benefits Fund ended FY 2023/24 with reserves of $44.7M, approximately $3.2M more than the $41.5M projected, primarily due to increased Workers Compensation revenues in the fund as a result of increased salaries and overtime, as well as the change in leave costing methodology due to the ERP payroll module implementation.
In FY 2023/24, the Liability and Property Insurance Fund slightly exceeded its budget due to settlement claim costs being greater than planned. Because there can be significant variances in claims year-over-year, the City budgets based on the long-term historical average and anticipated upcoming claim settlement expenses. Additionally, the long-term financial plan ensures sufficient reserve levels to be drawn down and replenished on an annual basis.
Annual Comprehensive Financial Report
City Charter Section 1318 requires that “At the end of each fiscal year, a final audit and report shall be submitted by a Certified Public Accountant to the City Council. The City’s Annual Comprehensive Financial Report (ACFR) is prepared annually to meet this requirement and is submitted to Council as Attachment 8 to this report.
The ACFR, which is prepared in the format prescribed by the Governmental Accounting Standards Board (GASB), contains the Independent Auditor’s Report, Management’s Discussion and Analysis, Basic Financial Statements with Notes and Required Supplementary Information, Supplementary Information, and the Statistical Section.
The City’s independent audit was performed by the firm of Maze & Associates (Maze) who rendered an unmodified opinion on the City’s ACFR. Receiving an unmodified opinion is the optimal result from the independent audit.
Pursuant to GASB Statement No. 68, the City’s net pension liability represents unfunded pension obligations and is presented as a liability on the statement of net position. The Net Pension Liability line totaled $468.5 million as of June 30, 2024, which increased by $22.1 million from the prior fiscal year. The increase was mainly due to a higher employee population as well as a rate of return that was slightly lower than the discount rate (6.1% vs 6.8%). The City, like most other local agencies, has had a significant unfunded pension liability for several years; however, the reporting of this liability does not require the City to change its approach to fund its pension liability.
Through the City’s long-term financial planning process, Sunnyvale began to address the liability many years ago, with higher than required contributions to CalPERS and funding of a pension uncertainty reserve to continue to address the liability into the future. In addition, continuing to address the pension liabilities on a long-term basis, a Section 115 Pension Trust established in May 2018 is managed by investment professionals and owned by the City. The Trust received contributions in the amount of $4.8 million during FY 2023/24, including an annual payment $1 million and an additional $3.8 million from the General fund budget savings resulting from higher tax revenue collections. Furthermore, the City contributed $5.2 million (a payment of $2.6 million to each plan - Miscellaneous Plan, Safety Plan) to CalPERS to pay off selected individual balances of investment losses amortized over 17-20 years. The interest is accrued over the amortization period of those losses. Early payoff will help yield long term savings, aid in reducing future pension liabilities and result in lowering the annual required pension contributions going forward.
The current twenty-year plan includes a contribution of $2 million annually to the Trust through FY 2025/26 to accumulate monies to fund future pension liabilities. Pension costs are expected to peak in FY 2028/29, and we anticipate drawing down the Pension Trust funds to help cover these liabilities at that time. Each year, staff revisits pension costs with Council during the annual budget process to make adjustments based on the most recent financial performance of CalPERS. This process will continue with the FY 2024/25 Recommended Budget.
The GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions went into effect in FY 2017/18. Consequently, the City began reporting its net OPEB liability on the Statement of Net Position. With the requirement to disclose the OPEB liability, the City began funding the OPEB Trust Fund in 2011. An audited stand-alone report of the Sunnyvale Retiree Healthcare Trust Plan was issued at the end of June 30, 2023. The Report had the OPEB Trust fund balance of $146.7 million that was used in the calculation of the net OPEB liability. As of June 30, 2023, the outstanding balance of net OPEB liability was $37.8 million, which decreased by $7.4 million from prior year. The OPEB liability reporting standard is parallel to the pension liability reporting standard (GASB Statement No. 68) and does not require changes to the City’s plan to fund its OPEB liability. Nonetheless, the City continues to budget the full annual required contribution in the short term and over the long-term plan until the OPEB liability is fully funded, which is anticipated to occur in FY 2033/34.
Auditor’s Report to the City Council
As part of the City’s annual external audit, Maze reviews and comments on the City’s internal control over financial reporting for the purpose of the audit of the financial statements. The comments are intended to advise management of the existence of any material weaknesses in the City’s internal controls. In addition, the report aids City staff in improving its records for operations and communicates other advisory information, such as future accounting and reporting requirements that may affect the City.
No material weaknesses were noted by Maze in the City’s internal control. A material weakness is a significant deficiency, or combination of deficiencies in internal controls such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected and corrected on a timely basis. The report is provided as Attachment 7.
Agreed Upon Procedure Reports
City Finance staff engaged Maze to perform Agreed Upon Procedures (AUP) to evaluate internal control related to the fiscal administration of public funds. The AUP was conducted in accordance with attestation standards established by the American Institutes of Certified Public Accountants. Six cash collection sites and three programs were selected for review in FY 2023/24. Accordingly, Maze issued three AUP reports (Attachments 4, 5, and 6). Three programs - 1) Cash Investment Policies and Procedures, 2) Below Market Rate (BMR) Housing Policies and Procedures, and 3) Fire and Hazmat Fees - were selected for review. Maze conducted the review based on the agreed upon procedures. No exceptions were noted for these three programs.
Surprise cash counts were conducted on six sites. No material exceptions were noted for the cash counts.
Sunnyvale Financing Authority Report
The Joint Exercise of Powers Agreement creating the Sunnyvale Financing Authority by and between the City of Sunnyvale and the former Redevelopment Agency of the City of Sunnyvale requires that “the Controller of the Authority shall either make, or contract with a certified public accountant or public accountant to make, an annual audit of the accounts and records of the Authority…a report thereof shall be filed as a public record with each of the Member Agencies.” The Sunnyvale Financing Authority Report is prepared annually to meet this requirement and is submitted to Council as Attachment 3 to this report.
The Sunnyvale Financing Authority Report, which is prepared in the format prescribed by the Governmental Accounting Standards Board (GASB), contains the Independent Auditor’s Report, Management’s Discussion and Analysis, Basic Financial Statements, and the Notes to Basic Financial Statements.
Administrative Budget Modifications
Administrative budget modifications are a set of specific budget modifications that do not need to be publicly approved and appropriated by City Council. The City Manager may appropriate grants up to $100,000 that are also free of local match requirements and do not obligate the City to ongoing expenses not already planned in the City’s Resource Allocation Plan. Attachment 2 summarizes the Administrative Budget Modifications approved by the City Manager in FY 2023/24, which total $399,257 in unanticipated grant revenue.
FISCAL IMPACT
Receipt of the ACFR, Sunnyvale Financing Authority Report, AUP reports and the Report to Council issued by the Independent Auditors has no fiscal impact.
The fiscal impact of each fund’s results is discussed in detail in the body of this report. While General Fund revenues were largely positive, the General Fund continues to face economic pressure and uncertainty. As is the City’s long-standing practice, the 20-Year Financial Plan will be rebalanced based on actual FY 2023/24 performance as part of FY 2025/26 budget development.
Budget Modification No. 12 provides for General Fund clean-up items related to Public Safety mutual aid and reappropriation of Housing grant funds in addition to reallocation of General fund savings and one-time revenues.
General Fund Clean-Up Items
Public Safety Mutual Aid Response
In FY 2019/20, DPS created two special projects: 835150 - DPS Reimbursable Mutual Aid to capture the cost of mutual aid response and 835160 - DPS Police Services Contract Overtime to capture police contract overtime. The projects mitigate the impact of mutual aid deployment and contract overtime costs on the DPS operating budget. They also provide a mechanism to effectively track and verify reimbursement, particularly when the cost is incurred in one fiscal year and the reimbursement is received in another.
Because actual costs are unknown and funding for the project is in the form of reimbursement, there is no budget appropriation. DPS completes an annual reconciliation of project costs versus revenue in support of a budget modification that will appropriate expected revenue and expenditures annually to the project to “true up” budget versus actual revenue and expenditures. The amounts requested are $43,714 and $56,312, respectively for 835150 and 835160. These amounts also include some clean-up from prior fiscal years that have made the projects unbalanced.
Re-Appropriation of Regional Early Action Planning (REAP) Grant Funds and SB 2 Planning Grants Program (PGP) Funds
On September 1, 2021, the City was awarded grant funds in the amount of $105,059 in REAP to the Department of Community Development for Housing Strategy Implementation and Housing Element Preparation. On March 9, 2021, the City was awarded grant funds in the amount of $310,000 in SB2 Planning Grants Program (PGP) to the Department of Community Development for Creation of Objective Citywide Design Guidelines and Landscape Design Guidelines.
As the projects that were identified to use the above grant funding were finalized and excess grant funding was available, staff was able to use excess funding to cover higher than expected costs for the Housing Element update, completed in early 2024. Those costs are reflected in this budget modification. The 2023-2031 Housing Element Update project (835720) was funded with a variety of grants, including the Regional Early Action Planning (REAP) Grant and Local Early Action Planning (LEAP) Grant. Preparation of the 2023-2031 Housing Element required extensive research and community engagement as well as preparation of a sites inventory and accommodation of the Sixth Cycle RHNA. Given the scope of work and recent drastic changes to land use and Housing Element law, the City procured a consultant, Ascent Environmental, to prepare an updated document.
Over time, the project costs grew due to unforeseen review cycles and challenges from the State. Because of this, the Community Development Department identified unspent grant funds that could be moved to help cover Housing Element overages.
This budget modification has been prepared to reappropriate HCD REAP Funds in the amount of $64,976 from Project 835850 - REAP Housing Strategy Implementation and appropriate PGP SB2 Funds in the amount of $36,134 from Project 835690 - Creation of Objective Citywide and Specific Area Plan/Citywide Landscape Design Guidelines to Project 835720 - 2023 Housing Element Update.
General Fund Reallocation of Budget Stabilization Fund (BSF) Reserve Savings and One-Time Revenues
Staff recommends appropriating a total of $4M ($3,643,565 of savings in addition to the $356,435 in one-time ERAF and sale of property revenues) towards one of the following, pending the completion of an actuarial valuation to determine the most favorable option:
1. Funding the City’s Section 115 Pension Trust
2. Making a payment directly to CalPERS to reduce the City’s unfunded liability, or
3. A combination of the two options.
The transfer to the Pension Trust would allow the City to retain control of those funds, and for the accrual of interest earnings in the trust through investments made under the City’s policies.
The additional contributions to CalPERS would represent payments to the individual balances of losses amortized over 17-to-20-year periods. CalPERS amortizes losses in the fund annually over long-term periods in order to moderate the impact on near term employer contributions. However, like any amortization, interest accrues on these funds. Therefore, while these payoffs don’t provide immediate significant relief, they do yield long-term savings.
If it is determined that the most favorable course of action requires supplemental contributions from other major funds, staff will return to Council with a separate budget modification to appropriate contributions from those funds.
The remaining balance of $2,324,477, after funding the clean-up items, would fall to the General Fund BSF Reserve to be considered with development of the FY 2025/26 budget.
Budget Modification No. 12
FY 2024/25
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Current |
Increase/ (Decrease) |
Revised |
|
|
|
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|
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General Fund |
|
|
|
|
Funding Sources |
|
|
|
|
Project 835850 - REAP Housing Strategy Implementation |
$64,976 |
($64,976) |
$0 |
|
|
|
|
|
|
Project 835690 - Creation of Objective Citywide and Specific Area Plan/Citywide Landscape Design Guidelines |
$52,040 |
($36,134) |
$15,906 |
|
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|
|
|
|
|
|
|
|
|
Funding Uses |
|
|
|
|
Project 835720 - 2023 Housing Element Update - Reap Grant Funding |
$0 |
$101,110 |
$101,110 |
|
|
|
|
|
|
Project 835150 - DPS Reimbursable Mutual Aid (Out of County) |
$0 |
$43,714 |
$43,714 |
|
|
|
|
|
|
Project 835160 - DPS Police Services Contract Overtime |
$0 |
$56,312 |
$56,312 |
|
|
|
|
|
|
Additional CalPERS contribution |
$0 |
$4,000,000 |
$10,000,000 |
|
|
|
|
|
|
General Fund Budget Stabilization Reserve |
$88,794,599 |
$2,324,477 |
$91,119,076 |
PUBLIC CONTACT
Public contact was made by posting the Council meeting agenda on the City's official-notice bulletin board at City Hall, at the Sunnyvale Public Library and in the Department of Public Safety Lobby. In addition, the agenda and this report are available at the NOVA Workforce Services reception desk located on the first floor of City Hall at 456 W. Olive Avenue (during normal business hours), and on the City's website.
ALTERNATIVES
City Council:
1. Receive and File the FY 2023/24 Budgetary Year-End Financial Report, Annual Comprehensive Financial Report (ACFR), the Sunnyvale Financing Authority Financial Report, Agreed Upon Procedure Reports, and the Report to the City Council Issued by the Independent Auditors, and Approve Budget Modification No. 12 in the Amount of $6,525,613.
2. Other action as directed by Council.
Sunnyvale Financing Authority:
3. Receive and File the FY 2023/24 Sunnyvale Financing Authority Financial Report.
4. Other action as directed by the Financing Authority.
STAFF RECOMMENDATION
Recommendation
Staff Recommends Alternative 1 for the City Council, and Alternative 3 for the Sunnyvale Financing Authority:
City Council
1. Receive and File the FY 2023/24 Budgetary Year-End Financial Report, Annual Comprehensive Financial Report (ACFR), the Sunnyvale Financing Authority Financial Report, Agreed Upon Procedure Reports, and the Report to the City Council Issued by the Independent Auditors, and Approve Budget Modification No. 12 in the Amount of $6,525,613.
Sunnyvale Financing Authority
3. Receive and File the FY 2023/24 Sunnyvale Financing Authority Financial Report.
Levine Act
LEVINE ACT
The Levine Act (Gov. Code Section 84308) prohibits city officials from participating in certain decisions regarding licenses, permits, and other entitlements for use if the official has received a campaign contribution of more than $250 from a party, participant, or agent of a party or participant in the previous 12 months. The Levine Act is intended to prevent financial influence on decisions that affect specific, identifiable persons or participants. For more information see the Fair Political Practices Commission website: www.fppc.ca.gov/learn/pay-to-play-limits-and-prohibitions.html <http://www.fppc.ca.gov/learn/pay-to-play-limits-and-prohibitions.html>
An ”X” in the checklist below indicates that the action being considered falls under a Levine Act category or exemption:
SUBJECT TO THE LEVINE ACT
___ Land development entitlements
___ Other permit, license, or entitlement for use
___ Contract or franchise
EXEMPT FROM THE LEVINE ACT
___ Competitively bid contract*
___ Labor or personal employment contract
_X_ General policy and legislative actions
*“Competitively bid” means a contract that must be awarded to the lowest responsive and responsible bidder.
Staff
Prepared by: Kurtis Mock, Acting Budget Manager
Prepared by: Inderdeep Dhillon, Acting Assistant Director of Finance
Reviewed by: Dennis Jaw, Acting Director of Finance
Reviewed by: Sarah Johnson-Rios, Assistant City Manager
Approved by: Tim Kirby, City Manager
ATTACHMENTS
1. Year-End Budgetary Report by Fund
2. Administrative Budget Modifications Summary
3. FY 2023/24 Sunnyvale Financing Authority Report
4. FY 2023/24 Sunnyvale Cash Investment and Cash AUP
5. FY 2023/24 Sunnyvale BMR Housing and Cash AUP
6. FY 2023/24 Sunnyvale Fire & Hazmat Fees and Cash AUP
7. FY 2023/24 Auditor’s Report to City Council
8. Annual Comprehensive Financial Report