REPORT TO COUNCIL
SUBJECT
Title
Receive and File the FY 2022/23 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. 8 in the Amount of $32,787,289
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, 2023 and recommends approval of Budget Modification No. 8. In addition, the City’s audited Annual Comprehensive Financial Report (ACFR), Agreed Upon Procedure Reports (AUP) and Sunnyvale Financing Authority Financial Report for FY 2022/23 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 2022/23 in a positive fiscal position when compared against the final position anticipated in the FY 2022/23 Budget. There is a net positive impact of $19.6M to the Budget Stabilization Fund (BSF) Reserve when Educational Revenue Augmentation Fund (ERAF) funds are excluded. General Fund revenues finished the year with a very favorable variance of $10.4M. Major revenues, such as Property Tax, Sales Tax, and Transient Occupancy Tax (TOT) represented most of the favorable variance with Utility Users Tax and Franchise Fees also contributing to the positive performance. Construction Tax and Real Property Transfer Tax came in just under final revised estimates as did Service Fees. General Fund expenditures ended the year favorably at approximately $9.3M below budgeted levels primarily due to vacancy savings and projects with unspent funds returned to fund balance.
The City also received $10.9 in one-time ERAF funds. These are reserved by policy for capital projects or other one-time uses. $7.2M was transferred to the Infrastructure Fund with the FY 2023/24 Adopted Budget. The additional $3.7M is recommended to be transferred to the Pension Trust 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 2022/23.
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 2023/24 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 2022/23 financial position of the fund. The Budget Modification included in the year-end budgetary report reconciles the BSF Reserve and the Contingency Reserve positions based on actual FY 2022/23 performance compared to the level planned.
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, 2023 shall carryover into FY 2023/24. The City Council shall be provided a complete listing of Special Project funds carried over in the FY 2022/23 Budgetary Year-End Report for City Council approval no later than December 31, 2023.
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 2022/23 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 $233.2M in General Fund revenue in FY 2022/23, which exceeded the final budget by $10.4M.
Property Tax revenue net of ERAF in FY 2022/23 came in at $2.0 above the FY 2023/24 Final Budget primarily due to better than forecast Secured Tax revenue - $72.5M compared to $71.1M planned. 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 $6.1M. The net change in Secured roll growth was 8.4% when compared to FY 2021/22.
Sales Tax exceeded its revised projection by $3.4M when compared against the Final FY 2022/23 Budget of $34.9M. All categories performed better than FY 2021/22, except Business and Industry. This category includes medical/biotech activity that was expected to slow as some of the revenue is related to pandemic response and is considered short-term. The County Pool also continued to grow (up 7.3% to $6.8M from $6.4M in FY 2021/22) though much slower than the pandemic induced growth in FY 2021/22. Elevated prices associated with restaurants and other goods and services also contributed to strong sales tax performance. Additionally, some of the gains can be attributed to employees continuing to return to work in the City.
One other aspect of Sales Tax revenue overperforming compared to the FY 2022/23 revised estimate is related to the City receiving a direct allocation of one-time sales tax associated with major construction projects in the city. The City collected $1.1M in FY 2022/23. As the precise timing of development activity is hard to predict, this revenue source is unbudgeted.
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 $17.0M, TOT came in at $2.8M above its revised estimate of $14.1M and $5.1M above the original estimate of $11.9M. While TOT is still recovering to pre-pandemic levels, occupancy was relatively steady from FY 2021/22 to FY 2022/23 (54.5% vs 57.8%). The average room rate increased 33% from $102 to $135.
Utility Users Tax came in greater than its revised estimate of $9.5M by $0.9M. Receipts for electricity and natural gas led this positive variance due to the elevated cost of these resources. With revenue of $7.7M, Franchise Fees netted $0.5M more than the prior year ($7.2M) largely due to PG&E fees for the same reasons driving UUT revenues.
Rents and Concessions also performed better than the final forecast of $6.2M by $1.3M due to more revenue than expected of the prorated first year of civic center rent from enterprise funds.
The positive performance of major revenues was slightly offset by shortfalls against revised budgets for Real Property Transfer Tax and Construction Tax. Real Property Transfer Tax underperformed by $0.4M against revised estimates due to high interest rates impacting the housing supply and slowing property sales of (primarily) residential homes.
Construction Tax was $0.3M below its budget of $4.1M due to moderated development activity in FY 2022/23 after rebounding in FY 2021/22 ($5.5M). The moderated development activity also led to development-related fees (i.e., General Plan Maintenance Fees, etc.) coming in $0.2M below the revised projection of $1.6M.
Recreation Fees continued to recover as one of the City’s most impacted service areas during the pandemic with a revenue low of $1.5M in FY 2020/21. At $4.1M in actual revenue, recreation fees performed better than FY 2021/22 revenue of $3.5M by $0.6M though slightly under the FY 2022/23 updated forecast of $4.2M.
Grants and Contributions also came in under budget by $0.3M, however it is common for grant receipts to cross fiscal years.
In addition, Transfers In/In Lieu Fees beat its revised projection by $0.3M. This is primarily due to the transfer from the Employee Benefits Leave Fund to the General Fund related to employee leave costing. The final transfer amount came in higher than forecast due to actual salaries being greater than estimated in the FY 2022/23 budget.
There were no General Fund property sales in FY 2022/23.
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 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 $10.9M this fiscal year, which is $3.7M over the final budget of $7.2M.
Given that revenue from Excess ERAF is considered one-time and does not impact the BSF Reserve, 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, 2023 are shown in Table 2.
The details of FY 2022/23 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 favorably at $4.8M below budget primarily due to salary savings associated with vacancies. The Department of Public Safety exceeded its modified operating budget (Budget Modification No. 25, RTC 23-0660) by $0.09M due to year end salaries and benefits being greater than estimated in the budget modification. The Office of the City Attorney also exceeded its budget by ($0.01M) due to salaries and benefits.
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 $33.2M is being carried forward to FY 2023/24 to cover expenditures related to projects and equipment.
The General Fund project carryover is mostly associated with Public Safety Recruitment ($5.7M), Pavement Rehabilitation and Sidewalk, Gutter, and Curb Replacement ($6.8M), replacement of the emergency generator at the Department of Public Safety ($2.3M), as well as $2.5M for transportation and other sustainability-related grant matching. When specific project savings are identified or projects are completed under budget, the City can return funds to the BSF Reserve. For FY 2022/23, there is $4.5M associated with projects that were completed under budget or need to realign their project schedule with a more realistic timeframe across the twenty-year financial plan, the most significant of which is $1.9M to be reprogrammed for Public Safety Officer Recruitment.
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 2022/23 were $35.0M and occurred as planned.
Overall, expenditures in the General Fund ended $9.3M under budget. Savings were mostly due to staff vacancies in operating programs as well as projects that were completed with savings that were returned to fund balance. Thus, it is not anticipated that the savings will be ongoing.
Final Fund Results
The final position of the General Fund is a positive variance of $23.4M with $19.6M allocated to the Budget Stabilization Fund Reserve. It is important to note that the Final Budget figures include all approved Council adjustments through June 30, 2023. Due to the timing of the production of the FY 2023/24 Adopted Budget, these figures may differ slightly from the estimates for FY 2022/23 assumed during the development of the budget.
Table 3 summarizes 2022/23 General Fund revenue expenditure results:
The details in Table 4 summarize the impact on 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.
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Table 4A - Summary of Impact on FY 2022/23 Available BSF Reserve Balance  |
$19.6M 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. While the City has budgeted this source at approximately 70% of the County of Santa Clara’s estimate to mitigate risk, this is not a reliable revenue source. Therefore, ERAF is only included in the FY 2023/24 General Fund long-term financial plan for one more year.
Other Funds
In addition to the General Fund, other funds that warrant further discussion are highlighted below:
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 $53.1M, of which most is being carried forward to be spent in FY 2023/24. The major ongoing projects utilizing this carryover funding include the Lakewood Branch Library Facility ($23.0M), SNAIL Neighborhood Traffic Improvements ($5.3M), Evelyn Avenue Multi-use Trail ($4.1M), 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 are $18.9M in unspent project funds being carried over, primarily associated with Civic Center Modernization ($9.2M), Fire Station 2 - New Construction ($4.2M), and Renovate Median Landscaping to Low Maintenance ($2.9M). 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 Capital Project 2020 Civic Center Fund 3300. With the project nearing completion, $2.4M in unspent funds remain to carry forward and have already been drawn down.
Ongoing projects funded by Park Dedication Fee revenues account for approximately $46.7M that will be carried forward to be spent in future years. Revenues in the Park Dedication Fund came in approximately $10.8M higher than the planned $38.9M at $49.7M. This is partly due to projects that were delayed from the previous fiscal year were finally being realized in FY 2022/23. Revenue in the Park Dedication Fund that was collected in FY 2022/23 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 moderated in FY 2022/23 after rebounding in FY 2021/22 from slower activity in FY 2020/21 due to the COVID-19 pandemic. Revenue ended the year at $22.7M ($2.1M under revised estimates), and expenses amounted to $20.0M, which is $1.3M under budget. The net fiscal impact is less growth in the Development Enterprise Reserve by approximately $1.4M (after accounting for project carryover of $0.6M) than anticipated in the FY 2022/23 revised budget. However, reserves remain robust and revenues continue to equal or exceed expenditures maintaining a continued positive fund position.
Water Supply and Distribution Fund
The Water Supply and Distribution Fund accounts for the operations of 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 connection fees. Total water revenues were $59.7M, $2.1M lower than the revised projection. Revenues were lower than anticipated due to connection fee revenue finishing the year $1.6M lower than projected.
Based on current year revenues and expenditures (and including ongoing project costs), the net position of the fund decreased by $1.0M to $81.2M. 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 2022/23 at $57.7M, approximately $0.2M more than projected. Accounting for ongoing project requirements, the reserve balance for this fund finished the year as expected when compared to the Final Budget. Increased costs related to the implementation of new recycling services offset higher solid waste revenues for FY 2022/23.
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 carryover debt issuance to FY 2023/24) were $240.1M, which was $1.8M higher than anticipated. This is attributable to higher than projected revenue from connection fees.
The fund remains in good fiscal condition and ended $5.7M 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 the newly popular sport of pickleball. Golf and Tennis revenues ended at approximately $6.7M (including the $1.8M transfer from the General Fund), which is $261.5K over the revised projection. Expenditures totaled $5.5M, at $124.1K higher than planned. The revised budget reflected the fund operating at a $1.1M surplus (without the General Fund transfer, the Golf Fund would have run a deficit of $0.7M). With the year end results, the fund ending position is approximately $137.3K better than planned, providing a much-needed additional reserves for future years expenditures as FY 2023/24 is the last planned General Fund transfer.
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-yr 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 FY2022/23 with reserves of $36.5M, approximately $3.0 million more than the $33.7M projected.
In FY 2021/22, the Liability and Property Insurance Fund exceeded its budget by approximately $0.2M 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 $446.3 million as of June 30, 2023, which increased by $189.5 million from the prior fiscal year. The increase was mainly due to depreciation of fair value of the Pension Plan assets measured as of June 30 2022, which is factored in calculating the net pension liability reported as of June 30, 2023. 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 $2.5 million during FY 2022/23, including an annual payment $1 million and an additional $1.5 million from the General fund budget savings resulting from higher tax revenue collections. The current twenty-year plan includes a contribution of $1 million annually to the Trust through FY 2027/28 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, 2022. The Report had the OPEB Trust fund balance of $132.8 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 $45.2 million, which increased by $8.8 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 towards the end of the 20-year planning period.
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 2022/23. Accordingly, Maze issued three AUP reports (Attachments 4,5,6). Three programs: 1) Active Employee Medical Contributions; 2) Facilities Rental - Policies and Procedures; and 3) Development 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 major exceptions were noted for the surprise cash counts. However, Maze recommends for the Sunnyvale Community Center that City staff ensure cash is collected on a reasonably regular basis although the cash bags were properly placed in the locked safe at the Community Center. Subsequently after the auditor’s visit, Finance staff followed up, picked up the bags, and transported them to the bank for deposit. Staff worked with the armored car service contractor to resume the pickup services on 9/7/2023. For the same location, Maze also recommends that the City should update the location cash balance to account for the missing $50. The City staff agreed with the recommendation and will work with the Community Center staff to revisit their practices and procedures to ensure the security of City funds.
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 2022/23, which total $0.6M ($567,642) 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. As discussed, the General Fund finished FY 2022/23 more favorably than expected. 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 2022/23 performance as part of FY 2024/25 budget development.
Budget Modification No. 8 provides for General Fund clean-up items related to stormwater emergency repairs and opioid settlement funds in addition to reallocation of General fund savings, and funding for several other priority initiatives.
General Fund Clean-Up Items
836140 - Stormwater Outfall Emergency Repair
A series of severe winter storms occurring between December 2022 and March 2023 resulted in a significant erosion incident at the intersection of Stevens Creek and Mockingbird Lane on March 18, 2023. The erosion led to the loss of a stormwater outfall and a substantial section of the connected storm pipe. It also created a steep cliff beneath the dead-end roadway and damaged the asphalt above it. The City Manager declared a local emergency on March 30, 2023. The declaration was subsequently ratified by the City Council (Resolution RTC 23-0501) on April 4, 2023. The severe winter storms that occurred in early 2023 were also designated a federal disaster by the Federal Emergency Management Agency (FEMA) under FEMA-4699-DR-CA: California Severe Winter Storms, Straight-line Winds, Flooding, Landslides, and Mudslides. The City submitted a Request for Public Assistance (RPA) to the FEMA seeking cost-sharing for eligible expenses related to this project and it has been approved. Staff is currently working with FEMA to prepare and submit the required supporting documentation for reimbursement.
Cost sharing for eligible expenses is expected to be 75% FEMA and 25% local funds. The City’s cost estimate is $411,376. Approval of this budget modification will appropriate $411,376 in expenditures and $308,532 in anticipated FEMA reimbursement revenue to 836140 - Stormwater Outfall Emergency Repair to the General Fund.
Opioid Settlement Funds
On July 21, 2021, settlements were announced to resolve several lawsuits involving the three largest pharmaceutical distributors (McKesson, Cardinal Health and Amerisource Bergen) and the opioid manufacturer Janssen (owned by Johnson & Johnson). The litigation alleged that the distributors and Janssen contributed to the national opioid crisis by ignoring signs of opioid addiction and overselling opioids. It is estimated that California will receive approximately $2.05 billion from the Janssen and Distributors Settlement Agreements through 2038. Additional background about the Opioid Settlement Funds can be found in RTC No. 21-1125.
Based on the terms of the Agreements, the actual amount an entity will receive depends on the number of non-litigating cities that opt in. Allocations from the California Abatement Accounts Fund must be expended on opioid remediation activities focused on prevention, intervention, harm reduction, treatment, and recovery services in California communities. Pursuant to the California State-Subdivision Agreements, no less than fifty percent (50%) of the funds received by a Participating Subdivision in each calendar year will be used for one or more of the High Impact Abatement Activities (HIAA) listed below:
1. Provision of matching funds or operation costs for substance use disorder facilities with an approved project within the Behavioral Health Continuum Infrastructure Program (BHCIP)
2. Creating new or expanded substance use disorder (SUD) treatment infrastructure
3. Addressing the needs of communities of color and vulnerable populations (including sheltered and unsheltered homeless populations) that are disproportionately impacted by SUD
4. Divers of people with SUD from the justice system into treatment, including by providing training and resources to first and early responders (sworn and non-sworn) and implementing best practices for outreach, diversion and deflection, employability, restorative justice, and harm reduction
5. Interventions to prevent drug addiction in vulnerable youth
6. The purchase of naloxone for distribution and efforts to expand access to naloxone for opioid overdose reversals
The City began receiving funds in Spring 2022. To date, Sunnyvale has received $137,760. It is estimated that the City will receive $99K through 2031 from the Janssen settlement and approximately $521K through 2038 from the Distributor settlement. If all or nearly all cities and counties in California elect to participate, Sunnyvale may be entitled to receive a maximum of $835,294 over 18 years. Based on the limitations of uses of the settlement funds (i.e., opioid abatement, treatment, education, recovery), the City may later elect to send its share to Santa Clara County for use on the City’s behalf or to expend the funds on its own behalf.
The City recommends appropriating $137,760 for funds already received to a new project in the General Fund for the activities outlined below. Additional appropriations will be updated annually as part of the budget development process.
• Working in partnership with the Sunnyvale School District and other community partners, provide intervention resources for youth that are currently drug addicted and prevention programs/services to educate youth and their families of the dangers of drugs and its short and long-term impacts.
• Train Library staff on the administration and distribution of Naloxone and provide community education on dangers of drugs and strategies to prevent overdoses while serving all customers at the library, including vulnerable and unhoused populations.
• Purchase of Naloxone for use in Public Safety operations and resources for additional officer training.
General Fund Reallocation of BSF Reserve Savings
Staff makes the following recommendations for reallocation of General Fund savings:
A. Reallocate $1,851,977 in savings from completed DPS Project FY 2020/21 Recruitment and Training for Sworn Officers to 834150 - FY 2023/24 Recruitment and Training of Sworn Officers to fund three additional recruits to keep pace with the Department’s hiring needs. Fewer recruits than planned completed training as part of the cohort associated with Project FY 2020/21 Recruitment and Training for Sworn Officers.
B. Appropriate $23,400 to Project 835260 - Tasman Drive Temporary Lane Closure. At the February 7, 2023 City Council meeting (RTC 23-0001), Council directed staff to include $23,400 as part of the FY 2023/24 budget to extend the lane closure through December 2024. Staff is including this as a budget modification item at this time as it was a missed budget item during FY 2023/24 budget development.
C. Transfer $15,000 for Wordly translation software to Program 15200 - Information Technology Services and Support in Fund 7027 - Technology and Communication Services. Wordly will provide cost-effective translation services for Board and Commission as well as City Council meetings to provide greater language access for Committee members and the public as a one-year pilot program.
D. Transfer of $3,472,187 to Fund 7027 - Technology and Communication Services Fund for a new project supporting Enterprise Resource Planning (ERP) stabilization and “after go-live” support which is critical to long-term success and adoption of the second phase, Human Capital Management (HCM) that replaces the City’s legacy human resources (HR), and payroll software. The funding will cover one quarter of the current fiscal year, and two subsequent years of costs associated with the project. Costs include $540,000 to provide consultant support (after a formal Request for Proposals solicitation) for ongoing configuration optimization and automated testing of quarterly updates delivered by the software vendor, $122,000 to provide mid-term support by the current implementation vendor, and $275,000 to implement the Performance Management Module for Human Resources. Staffing includes five term-limited positions. During this period, the need for permanent staffing will be evaluated and brought forward with the regular budget process if required. The positions and their associated costs over the 27-month period are as follows:
|
Department |
Position |
Total Cost |
|
Office of the City Manager |
Information Technology Manager |
$651,520 |
|
Department of Human Resources |
Principal Human Resources Analyst |
$515,665 |
|
Department of Information Technology |
Senior Applications Analyst |
$484,650 |
|
Department of Information Technology |
Senior Applications Analyst |
$484,650 |
|
Department of Finance |
Business Systems Analyst |
$398,704 |
E. Transfer $686,000 to Fund 7027 - Technology and Communications Services to equipment fund P21600 - Information Processing Hardware - $362,000 for two storage servers (Civic Center and Emergency Operations Center) required to maintain camera surveillance footage and consultant support/equipment to stabilize performance of the Council Chambers broadcasting system, and $324,000 for the additional IT equipment needed to outfit all conference rooms and director offices for hybrid meeting video conferencing at the Civic Center.
F. Funding of $175,419 for a Human Resources Analyst position in the Recruitment and Selection division in the Human Resources Department. This position will address the increased turnover in the labor market and help to shorten recruitment timelines by adding staffing resources. With the increase in competition in labor, the number of recruitments and applicants has increased in the last several years, slowing the cycle times for completing recruitments. This position will reduce the amount of time approved requisitions wait on the queue, cross train on public safety sworn recruitments, assist the Human Resources Technician with the casual summer hiring process, and serve as proctor for all oral exams. This frees up time for Analysts and Technicians in the other HR Divisions. The ongoing cost will be included in the FY 2024/25 Recommended Budget with a twenty-year total of approximately $5.1 million.
G. In line with Council Policy, staff is recommending that an additional $5,325,889 payment to CalPERS to pay down the City’s ongoing pension liabilities and the transfer of the additional $3,791,109 in ERAF revenue to the Pension Trust. This strategy is consistent with prior years where staff recommends diversification of funding for long-term pension costs. The transfer to the Pension Trust allows 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 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.
$2,661,368 will be applied to the Miscellaneous Plan and $2,664,521 to the City’s Safety Plan. While the payment to the Safety Plan will come 100% from the General Fund, the payment to the Miscellaneous Plan will be approximately 52% funded by the General Fund with the remainder coming from other major funds with personnel costs.
H. The remaining balance of $8.1M would fall to the General Fund BSF Reserve to be considered with development of the FY 2024/25 budget.
Other Funds
Fund 2021- Housing Mitigation Fund
With RTC 23-0770 (8/8/2023), Council authorized the City Manager to execute the Agreement of Assignment of Purchase and Sale and Exclusive Negotiating Agreement between the City of Sunnyvale and MidPen Housing Corporation for the purchase of real property located at 295 S. Mathilda Avenue for $7,350,000 to be used for future affordable housing. While Council approved the purchase of the property, staff inadvertently excluded budget modification language to appropriate the funds in the RTC. Budget Modification No. 8 proposes to appropriate $7,350,000 from Fund 2021 - Housing Mitigation to a new project to account for this capital activity. There is no new fiscal impact associated with approval of this item and the Housing Mitigation Reserve balance is $57,345,116 after the purchase.
Fund 6085 Wastewater
Reappropriate savings of $430,000 from Project 833100 - Sunnyvale Cleanwater Program Capital Replacement to Project 835500 - Cleanwater Program Reserve. Funds were not needed for any urgent and unplanned rehabilitation work in FY 2022/23. Reappropriating to Project 835500 - Cleanwater Program Reserve maintains the funds for the Cleanwater program that can be appropriated toward reinstating deferred rehabilitation or other deferred Cleanwater elements in future fiscal years. As this appropriation is funded by FY 2022/23 project savings, there is no fiscal impact. Adding $430,000 will bring the available budget in Project 835500 - Cleanwater Program Reserve to $687,232.
Budget Modification No. 8 has been prepared to appropriate $15,581,585 from the General Fund and $8,951,626 to Other Funds as discussed above.
Budget Modification No. 8
FY 2023/24
|
|
Current |
Increase/ (Decrease) |
Revised |
|
General Fund |
|
|
|
|
Revenues |
|
|
|
|
FEMA-4699-DR-CA: California Severe Winter Storms, Straight-line Winds Reimbursement |
$0 |
$308,532 |
$308,532 |
|
Opioid Settlement Funds |
$0 |
$137,760 |
$137,760 |
|
Expenditures |
|
|
|
|
836140 - Stormwater Outfall Emergency Repair |
$ 0 |
$411,376 |
$411,376 |
|
New Project - Opioid Settlement Fund Programs |
$0 |
$137,760 |
$137,760 |
|
834150 - DPS FY 2023/24 Recruitment and Training of Sworn Officers |
$3,342,927 |
$1,851,977 |
$5,194,904 |
|
Project 835260 - Tasman Drive Temporary Lane Closure |
$0 |
$23,400 |
$23,400 |
|
Transfer to Fund 7027 - Program 15200 - Information Technology Services and Support for Wordly Software |
$0 |
$15,000 |
$15,000 |
|
|
|
|
|
|
Transfer to Fund 7027 - New Project - ERP Stabilization and Support |
$0 |
$3,472,187 |
$3,472,187 |
|
|
|
|
|
|
Transfer to Fund 7027/ Project P21600 - Information Processing Hardware |
$915,746 |
$686,000 |
$1,601,746 |
|
|
|
|
|
|
Human Resources Department Operating Program |
$5,957,260 |
$175,419 |
$6,132,679 |
|
|
|
|
|
|
Additional CalPERS Contribution |
$0 |
$9,116,998 |
$9,116,998 |
|
|
|
|
|
|
General Fund Budget Stabilization Reserve |
$ 78,701,238 |
$7,983,306 |
$86,684,544 |
|
|
|
|
|
|
Other Funds |
|
|
|
|
|
|
|
|
|
Water Fund |
|
|
|
|
Additional CalPERS Contribution |
$0 |
$119,498 |
$119,498 |
|
|
|
|
|
|
Wastewater Fund |
|
|
|
|
Additional CalPERS Contribution |
$0 |
$280,848 |
$280,848 |
|
|
|
|
|
|
835500 - Cleanwater Program Reserve |
$0 |
$430,000 |
$430,000 |
|
|
|
|
|
|
Solid Waste Fund |
|
|
|
|
Additional CalPERS Contribution |
$0 |
$57,868 |
$57,868 |
|
|
|
|
|
|
SMaRT Station Fund |
|
|
|
|
Additional CalPERS Contribution |
$0 |
$14,821 |
$14,821 |
|
|
|
|
|
|
Development Enterprise Fund |
|
|
|
|
Additional CalPERS Contribution |
$0 |
$274,892 |
$274,892 |
|
|
|
|
|
|
Golf and Tennis Operations Fund |
|
|
|
|
Additional CalPERS Contribution |
$0 |
$45,944 |
$45,944 |
|
|
|
|
|
|
General Services Fund |
|
|
|
|
Additional CalPERS Contribution |
$0 |
$326,290 |
$326,290 |
|
|
|
|
|
|
Employment Development Fund |
|
|
|
|
Additional CalPERS Contribution |
$0 |
$132,428 |
$132,428 |
|
Housing Fund |
|
|
|
|
Additional CalPERS Contribution |
$0 |
$19,037 |
$19,037 |
|
|
|
|
|
|
New Project - Purchase 295 S. Mathilda |
$0 |
$7,350,000 |
$7,350,000 |
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 2022/23 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. 8 in the Amount of $23,853,572
2. Other action as directed by Council.
Sunnyvale Financing Authority:
3. Receive and File the FY 2022/23 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 2022/23 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. 8 in the Amount of $23,853,572
Sunnyvale Financing Authority
3. Receive and File the FY 2022/23 Sunnyvale Financing Authority Financial Report.
Staff
Prepared by: Felicia Silva, Budget Manager
Prepared by: Inderdeep Dhillion, Finance Manager, Accounting
Reviewed by: Dennis Jaw, Assistant Director of Finance
Reviewed by: Tim Kirby, Director of Finance
Reviewed by: Jaqui Guzmán, Deputy City Manager
Approved by: Kent Steffens, City Manager
ATTACHMENTS
1. Year-End Budgetary Report by Fund
2. Administrative Budget Modifications Summary
3. FY 2022/23 Sunnyvale Financing Authority Report
4. FY 2022/23 Sunnyvale - Development Fees and Cash AUP
5. FY 2022 23 Sunnyvale Medical Contributions and Cash AUP
6. FY 2022/23 Sunnyvale Facilities Rental and Cash AUP
7. FY 2022 23 Auditor’s Report to City Council
8. Annual Comprehensive Financial Report