REPORT TO COUNCIL AND SUNNYVALE FINANCING AUTHORITY
SUBJECT
Title
Receive and File the FY 2016/17 City and Sunnyvale Financing Authority Budgetary Year-End Financial Report and Approve Budget Modification No. 32
Report
REPORT IN BRIEF
This report is intended to provide the year-end financial condition of the City of Sunnyvale on a budgetary basis for the fiscal year ended June 30, 2017 and recommends approval of Budget Modification No. 32.
Overall, the General Fund ended the year above the final budget, however, slightly below planned estimates assumed in the development of the FY 2017/18 Adopted Budget in Spring 2017. General Fund revenues finished the year approximately $0.6 million above budgeted amounts. Higher than budgeted Transient Occupancy Tax, Construction Tax, Real Property Transfer Tax, Community Development Fees and Public Safety Fees represented the largest positive variances. Property and Sales Tax performed below levels estimated in the FY 2017/18 Adopted Budget. General Fund expenditures ended the year approximately $0.4 million below budgeted levels primarily due to vacancy savings in the Department of Public Safety and the Department of Library and Community Services.
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 2016/17.
Adjustments to General Fund revenue, Capital Improvement Projects Reserve and the Budget Stabilization Fund are recommended through Budget Modification No. 32. In addition, the carryover of Special Projects and corresponding revenues as detailed in Attachment 1 is recommended in this report.
BACKGROUND
Each year, staff provides a report to the Council detailing the year-end financial condition of the City on a budgetary basis. The results are compared with the most recent projection. As part of development of the FY 2017/18 Recommended Budget, the revenue projection for FY 2016/17 is updated in the February to March timeframe. Staff also reviews General Fund operating expenditures to date and estimates expenditure savings for FY 2016/17 in the General Fund twenty-year financial plan, if applicable, to provide the best estimate for the financial position of the fund. The Budget Modification included in the year-end budgetary report reconciles the Budget Stabilization Fund and Capital Improvement Projects Reserve positions based on actual FY 2016/17 performance, compared to the level estimated in the development of the FY 2017/18 Budget.
The Sunnyvale Financing Authority approves an annual budget each year. The results are also summarized in this report.
EXISTING POLICY
Council Policy 7.1.1 Fiscal -Long Range Goals and Financial Policies, Statement
A.4.6: Any unexpended appropriations shall expire at fiscal year-end unless specifically reappropriated by the City Council for expenditure during the new fiscal year. (* per City Charter Article XIII Fiscal Administration Section 1305, amended November 28, 2007, 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)
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 7.1.4 Budget Appropriation and Control:
1. The City’s budget appropriation control is at the program and department level, within the same fund. Expenditures of the City of Sunnyvale for each fiscal year, appropriations to reserves and inter-fund transfers/loans are governed and controlled according to the amounts adopted by the City Council through a resolution for each of the classifications of the General Fund and Special Revenue Funds.
A. For re-appropriations between programs within the same department and fund, where the annual program budget is equal to or greater than $500,000, Council approval is required for re-appropriations between programs that exceed $100,000 or 5% of the annual program budget, whichever is greater, up to a maximum of $250,000 (annual cumulative total).
B. For re-appropriations between programs within the same department and fund, where the annual program budget is less than $500,000, the maximum reappropriation threshold is limited to $50,000 or 50% of the annual program budget, whichever is less (annual cumulative total).
2. If the expenditures for the Proprietary Funds and Internal Services Funds for the fiscal year exceed actual revenues plus the planned appropriation from the Rate Stabilization Reserve Account or the Resource Allocation Plan Reserve Account, as the case may be, on an annualized basis, Council approval shall be required.
3. The City Manager may authorize reappropriations that are within the thresholds stated in 1 (A), (B), and 2 above, so long as the Council-set services and service levels will be met.
Council Policy 7.1.5 Grants, Donations, Contributions, and Sponsorships:
1. The City Manager may accept or reject donations, contributions and sponsorships, both solicited and unsolicited, of money, equipment and in-kind contributions to City Departments or the City in general up to $100,000, so long as they do not require a local match or obligate the City to ongoing expenses not already planned in the City’s Resource Allocation Plan.
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 2016/17 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
General Fund revenues results for FY 2016/17 are shown in Table 1.
* Final Budget includes budget modifications that occurred after adoption of the FY 2017/18 Budget.
Total General Fund revenue, including grant revenue carryover, ended below estimates from the FY 2017/18 Adopted Budget by $37.0 million. Excluding one-time revenue planned from the sale of city property, revenue exceeded the plan by $594,314.
Comparison with Prior Year
Overall, General Fund revenue was down $9.5 million (5.3%) from actual FY 2015/16 revenue of $179.8 million. This decline is due to one-time revenue from the Sale of Property that was received in FY 2015/16. Excluding the sale of property revenue, the total year-over-year growth in General Fund revenue was $4.4 million for a 2.6% growth. The revenue sources with the largest year-over-year increases were the General Funds largest revenue sources: Property Tax increased $4.2 million, Transient Occupancy Tax improved $0.3 million, and Total Other Taxes, which includes Construction Tax, Business License Tax and Real Property Transfer Tax grew $1.2 million. Sales Tax continued to decline, down $1.9 million compared to FY 2015/16.
Comparison with Final Budget
Total revenue of $170.3 million was collected in the General Fund in FY 2016/17, which is $37.0 million below the Final Budget. The FY 2017/18 Adopted Budget included $37.6 million in estimated revenue for the sale of two properties which did not occur by the close of the fiscal year. Given that revenue from the sale of property is one-time and, by policy, does not impact the Budget Stabilization Fund reserve, a better comparison is to review Total Revenue (Excluding Sale of Property) against the Revised Budget. With one-time revenue from the sale of property excluded, actual revenue exceeded the revised budget by $594,314. This positive revenue variance is attributable to several factors, notably, higher than anticipated construction tax revenue. Other revenues that performed favorably against the revised budget include Utility Users Tax, and Community Development and Public Safety Fees. These positive performing revenue sources were offset by shortfalls against revised budgets for Sales Tax, Property Tax and Transient Occupancy Tax.
Property Tax revenue in FY 2016/17 came in approximately $0.7 million lower than projected in the FY 2017/18 Adopted Budget. Total Property Taxes increased $4.2 million, or 6.7%, from FY 2015/16. Growth in Secured Property Tax revenue, the largest component of total property taxes, was $3.9 million, equivalent to 9.7%. The revenue growth came from increases to the assessed valuation in both the residential and commercial / industrial sectors. Residential assessed value increased 8.6%, while commercial and industrial assessed value increased 12.6%. Residential property accounts for approximately 60.2% of secured assessed value on the Sunnyvale property tax roll, which has decreased from 64% in FY 2014/15, which was a peak period for residential property in Sunnyvale, due to dramatic growth in the commercial/industrial category. The FY 2017/18 Budget projects that Property Tax revenue will increase further in FY 2017/18 by 4.6%. However, based on reports received from the County Assessor’s office, it is likely that returns will exceed the original estimate. A revised projection will be included in the FY 2018/19 Recommended Budget.
Sales and Use Tax revenue for FY 2016/17 ended the year $2.0 million below estimates. The original projection for sales tax revenue in the FY 2016/17 General Fund Long-Term Financial Plan assumed modest growth of 3%, reflecting numerous positive economic indicators. Based on data collected through the first quarter of FY 2016/17, the estimate for FY 2016/17 was lowered slightly in the FY 2017/18 Adopted Budget from $31.7 million to $31.5 million. However, sales tax returns declined significantly in the second half of the fiscal year, particularly returns from the Business and Industry (B&I) category. The B&I category is the largest component of the Sunnyvale sales tax “base”, and it is a highly volatile source of revenue that is challenging to forecast. Despite the anticipated modest decrease, the result for the full fiscal year was significantly lower than estimated. Revenue in Q3 and Q4 was negatively impacted by re-locations as well as a shift of revenue from a major sales tax payer from Sunnyvale to the County Pools. While the City continues to monitor ongoing Sales Tax data, a revised downward projection will likely be included in the FY 2018/19 Recommended Budget.
Transient Occupancy Tax (TOT) revenue reached its highest level in FY 2016/17, totaling $16.6 million. Despite falling slightly short of the estimate by $0.2 million, the TOT revenue collected in FY 2016/17 increased $0.3 million from the prior year, which was the previous record. The large majority of TOT generated in Sunnyvale is business-related travel, and this sector remained very strong through the fiscal year. Room rates averaged $158, approximately 3.9% higher than in FY 2015/16. Occupancy levels also sustained record-highs at 76%. The City averaged $1.4 million in monthly TOT revenue in FY 2016/17, and has averaged over $1.2 million since voters increased the tax rate to 10.5%, effective January 1, 2014. The General Fund long-term financial plan projected further increases in future years to reflect City-approved construction and renovation developments, further strengthening the TOT base. However, we do take caution with our projections because, historically, TOT revenue has shown high volatility with substantial declines in periods of economic recession.
Other Taxes finished the year $1.2 million higher than FY 2015/16 and $2.0 million above the revised projection. The Other Taxes category is comprised of Construction Tax, Business License Tax, and Real Property Transfer Tax. Construction Tax experienced its highest year on record in FY 2016/17, exceeding the estimate by $1.3 million, which was established based on last year’s actual revenue. Development activity in Sunnyvale sustained an elevated level in FY 2016/17, resulting in corresponding high building valuations and strong revenue growth of Construction Tax. Construction Tax is a valuation-based tax imposed on all construction work for which a permit is required. While all other development-related revenues go to the Development Enterprise Fund, Construction Tax is a General Fund revenue because it is a general tax. Real Property Transfer Tax revenue exceeded projections by $657,000. As a tax on the transfer of interests in real estate, it is driven by the rate of property turnover and changes in valuation. The increase reflects the sustained strength in the Sunnyvale real estate market. For residential properties, median home prices (single and multi-family) increased 14.1% in FY 2016/17, from $1.11 million to $1.27 million. Full value sales decreased 6% to 1,090 from 1,159 in FY 2015/16. Business License Tax revenue was higher than projections by over $50,000.
Utility Users Tax (UUT) revenue for FY 2016/17 exceeded the projection by $430,542. This reflects a $433,000 increase from the prior years. Sunnyvale voters approved an ordinance to modernize UUT in November 2016. The approach used to estimate UUT revenue in the FY 2017/18 Budget was to set the budget at the prior year actual as actual data is collected and a better understanding of the impact of the ordinance change can be projected. Approximately 65% of UUT revenue is from major electricity service providers. The next largest category is 17% from large telecommunication service providers. Despite the growth in revenue in FY 2016/17, long-term projections for UUT revenue remain cautious given the evolving nature of energy-efficient and telecommunications technologies.
Federal and Intergovernmental revenues fund specific projects and revenue is typically received on a reimbursement basis. Therefore, current year budget may be carried over to the following fiscal year in conjunction with the unspent budgeted project expenditures. The assumption of the receipt of these revenues is assumed as part of the figures in Table 1. Federal and Intergovernmental revenue reflects grant funding exceeding projections by $198,500. Grant revenue in this category includes revenue from the Focus Grant Program of the Metropolitan Transportation Commission (MTC) for Phase II of the Lawrence Station Area Plan. State Shared revenue includes funds from Senate Bill 90 which reimburses local agencies for mandated costs, as well as numerous public safety grants. Interest income ended the year higher than projection by over $370,000 due to expenditure timing (outflows occurring late in the fiscal year) and slightly higher interest rates than anticipated. Finally, Table 1 also includes Revenue Carryover, which includes grant revenue and deferred transfer in that will be made from other City funds for specific General Fund projects that are reflected on the expenditure-side as project carryover.
Expenditures
General Fund expenditures for the fiscal year ending June 30, 2017 are shown in Table 2.
* Final Budget includes budget modifications that occurred after adoption of the FY 2017/18 Budget
The details of FY 2016/17 expenditures as compared to the budget are contained in Attachment 1 of this report, by fund. It is important to note that the budget values in Attachment 1 represent the Council-appropriated budget amounts for each fund and may not match the estimated amounts for FY 2016/17 assumed in the production of the FY 2017/18 Adopted Budget. In order to capture the most accurate financial position of each fund heading into the next fiscal year, updated expenditure estimates, such as projected salary or vacancy savings, were included in the General Fund 20-year long-term financial plan. However, Council-appropriated budgets are not modified and individual programs are still held to those budgets as they were approved by Council.
Operating expenditures finished the fiscal year below planned by $869,117. This was primarily the result of savings in the Department of Public Safety and the Department of Library and Community Services. Over recent years, the Department of Public Safety has had an increased level of turnover which has impacted staffing of the Police Services program where the Department runs the majority of the vacancies and covers with overtime. In FY 2016/17, City Council voted to commit additional funding to increase recruitment efforts. Vacancies fluctuated throughout the fiscal year, however, currently,189 of the 201 approved Sworn positions are filled with twenty-two in training. The Finance Department will continue to work closely with the Department of Public Safety to anticipate future attrition and include appropriate funding in the upcoming budget process. The Library and Community Services Department achieved savings of approximately 3% in both the Library Program and the Arts and Recreation program from vacancies.
The Department of Public Works expenditures exceeded the budget by $392,339. This overage is primarily due to activity in the Neighborhood Parks and Open Space Management program which absorbed a significant increase to the cost of water. FY 2016/17 was the first year of a re-structured water rate; the details of which were not available as staff developed the FY 2016/17 Operating Budget. The revised rate structure resulted in an 86% increase for water costs in the Parks program, versus a budgeted 8% projected decline, causing water costs alone to exceed budget.
The General Fund also provides funding for numerous capital and infrastructure projects. Due to the long-term nature of capital projects, unspent budget amounts are committed to the next fiscal year for those projects that are still in progress. Approximately $26.8 million is being carried forward to FY 2017/18 to cover expenditures related to projects. This amount consists of $10.1 million for projects directly-charged in the General Fund, and $16.4 million for projects budgeted in other funds (Transfers Out of the General Fund). The large project carryovers in the General Fund include $3.4 million for the Public Safety recruitment projects, and $2 million for the ERP System Acquisition project. Of the $16.4 million being carried forward in order to transfer to other funds for project expenses, $11.3 million is budgeted to transfer to the Infrastructure Fund (primarily to fund the Pavement Rehabilitation and Sidewalk, Curb and Gutters projects), and $3.8 million is budgeted to transfer to the Capital Projects Fund for the Lakewood Branch Library project and several downtown projects which are funded by the Reserve for Capital Improvement Projects.
Balance sheet transactions recorded in the Comprehensive Annual Financial Report (CAFR) are adjusted for on a budgetary basis, if appropriate. These transactions can include items that are committed cash on a budgetary basis, however, reported in the CAFR as balance sheet transactions with no impact to the financial statements. This adjustment totaled $1.3 million primarily due to balance sheet transactions in the Executive Management Mortgage Assistance Program and elections costs.
Overall, expenditures in the General Fund ended $432,878 under budget due to savings in the operating programs. It is not anticipated that the savings will be ongoing over the long run, as the main cause for the savings was staff vacancies.
Final Fund Results
The final position of the General Fund, when normalized for the Sale of Surplus Property that did not occur, is $1.1 million favorable. It is important to note that the Final Budget figures include all approved Council adjustments through June 30,2017. Due to the timing of the production of the FY 2017/18 Adopted Budget, these figures differ from the estimates for FY 2016/17 assumed during the development of the budget.
* Final Budget includes budget modifications that occurred after adoption of the FY 2017/18 Budget.
The details in the Table 4 summarize the impact on the Budget Stabilization Fund.
The negative variance of $502,332 reflects a very narrow margin (0.13% of combined revenue and expenditure budgets). The negative variance resulted primarily from the omission of a budget modification related to the Public Safety Recruitment Projects in the FY 2017/18 Recommended Budget. This will be factored into the development of the FY 2018/19 Recommended Budget. Combined with the fiscal strategies included in the out-years of the FY 2017/18 Adopted 20-Year Financial Plan, the volatility of the City’s major revenue sources, increasing demands on services and infrastructure (e.g. calls for service in DPS, parks, library, and community services, transportation infrastructure), and continued growth in personnel costs, will require a balance of service delivery evaluation, use of reserves, additional revenue and a disciplined approach in the allocation of resources over the short and long-term.
Other Funds
In addition to the General Fund, other funds that warrant further discussion are highlighted below:
Park Dedication, 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. As a result, every year many of these projects have unspent appropriations that will be used in the following fiscal year. Revenues for these funds are either transfers into the fund from other special revenue funds or grants and contributions from developers. 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.
Ongoing projects in the Capital Projects Fund had unspent funds of approximately $48.8 million, of which most is being carried forward to be spent in FY 2017/18. The major ongoing projects utilizing this carryover funding include the Fair Oaks Avenue Overhead Bridge project, the Calabazas Creek Bridge at Old Mt. View-Alviso Rd project, and the Mathilda/237/101 Interchange Improvements Study. Net requirements exceeded budget by $3.3 million, however, this amount reflects a $3.4 million intra-fund transfer from the Transportation Impact Fees Sub-fund to the newly established Community Benefits Sub-fund to properly account for developer contribution revenue.
In the Infrastructure Fund, there was $30.1 million in unspent project funds, primarily associated with the Fair Oaks Park Renovation project ($5.8 million carryover) and Community Center Comprehensive Infrastructure Renovation project ($5.8 million carryover). Both these projects are underway and expected to spend down significantly in the FY 2017/18. Funding is also being carried over for Pavement Rehabilitation ($3.4 million), the LED Streetlights Conversion Program project ($2.3 million), Park Buildings Rehabilitation ($1.8 million), and the Civic Center Modernization project ($1.3 million).
Ongoing projects funded by Park Dedication Fee revenues had unspent funds of approximately $20.9 million, $20.4 million of which is being carried forward to be spent in FY 2017/18. The carryover funding is for the transfer of funds to the Infrastructure Fund primarily for rehabilitation of the Community Center, funding for the Fair Oaks Park Renovation project, funding for park buildings rehabilitation, and playground equipment replacement. Revenues in the Park Dedication Fund came in approximately $2.2 million higher than planned at $20.99 million, exceeding the FY 2015/16 as the highest year in the City’s history. The unplanned revenue that was collected in FY 2016/17 is accounted for in fund balance as part of the two reserve accounts: Capital Projects Reserve and Land Acquisition Reserve accounts. Council policy sets aside 20 percent of the Park Dedication Fee revenue into a reserve specifically designated for land acquisition. These funds will be used to acquire land for the purpose of constructing parks, open space, trails and other recreational facilities.
Development Enterprise Fund
The Development Enterprise Fund was established in FY 2014/15 to account for the revenues and expenditures associated with supporting 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. FY 2016/17 was another record-breaking year for development activity in Sunnyvale, causing the Community Development Department operating programs to exceed budget, given the high demand for service. Nevertheless, total operating expenses in the Development Enterprise Fund finished approximately $2.7 million better than the revised estimate. Actual revenue exceeded the planned amount by $3.7 million. The net fiscal impact to the fund was an increase in the Development Enterprise Reserve of $3.6 million.
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 rate payers, with the remainder coming from connection fees. The combination of the water rate re-structure and changes in demand after experiencing five consecutive drought years, resulted in consumption-based water sales revenues increasing by 23% from the prior fiscal year, consistent with the 25% overall rate increase adopted for the year. Total water revenues exceeded the revised projection by $1.6 million, mostly contributed by higher than expected development related connection fees.
After accounting for unspent project funds, total expenses were over budget by approximately $1.9 million. This came primarily from the higher than planned water purchase costs, which exceeded projections. The total fund ended the year approximately $155,300 better than planned. Staff continues to watch the activity of this fund carefully as the City’s cost to purchase water remains heightened as both wholesale water providers will enforce minimum quantity contracts in FY 2017/18.
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, yard trimmings, and recyclable materials. Revenues in this fund are driven primarily by the volume of garbage 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 2016/17 approximately $1.3 million better than planned, an increase of 3.4% year-on-year. Expenses came in under budget by $819,600, attributable to lower than planned contractor payment to Bay Counties Waste Services for collection of garbage and various smaller operational savings. After accounting for unspent project expenses, reserve balance for this fund remains stable and $1.3 million better than planned.
The SMaRT Station fund accounts for revenues and expenses related to operation of the SMaRT Station by the three partner cities, Sunnyvale, Mountain View and Palo Alto. 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 Fund net position for the year ended approximately $209,000 less than planned resulting from lower partner contributions for capital replacement projects, due to slower project deployment. As the costs for the SMaRT Station are based on the allocation of tons across the three cities, approximately half is attributable to Sunnyvale, which is paid for by the Solid Waste Management Fund. It is important to note that as increases in tons are driven by increased activity in the economy, revenue to the Solid Waste Management Fund (discussed above) is available to offset the increase in expense. FY 2016/17 ended with higher revenues (and corresponding expenses), resulting from better recyclables market and increase in public haul tonnage of materials to the facility.
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, excluding project related transfers, were $1.7 million better than projections. This is all attributable to connection fees due to continuing high levels of development activities. FY 2016/17 Wastewater Management Fund total expenses, after accounting for unspent project funds, ended approximately $1.4 million lower than expected. Cost savings resulted from position vacancies and lower than anticipated purchases in all three operating programs. Overall fund position remains in good fiscal condition ending $9.3 million higher than the revised plan, not accounting for bond proceeds. However, there are significant capital needs in this fund coming up, including the replacement of the existing Water Pollution Control Plant (WPCP). Cost estimates for the WPCP project have been included in the long-term financial plan.
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. FY 2016/17 was the fifth year of this Fund’s operation, starting July 1, 2012, recreation operations were moved into the General Fund and the golf and tennis operations formed a new enterprise fund. While operating golf revenues ended approximately $145,000 better than projections, they still declined 4% year-over-year, from FY 2015/16. Operational expenditures were approximately $166,300 over budget due to increases in water fees, one-time tenant related costs, and higher than projected staffing costs. The fund ended in a positive fiscal position, mainly as a result of the planned $850,000 transfer from the General Fund required to keep the fund solvent; however, the fund balance ended the year $92,300 lower than the level estimated in the FY 2017/18 Adopted Budget. It is important to note that this fund continues to run a very tight fund balance. Another transfer of $1.4 million from the General Fund is budgeted for FY 2017/18 to keep the fund in a positive cash position while conducting further analysis and study of long-term strategies for the golf courses.
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, the General Services Fund finished in-line with what was projected in the FY 2017/18 Adopted Budget.
Employee Benefits and Liability and Property Insurance Funds
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.
Revenues to the Employee Benefits Fund to cover the cost of employee benefits come from the operating departments in the form of an “additive rate” that is charged to every hour an employee works. The Employee Benefits Fund ended FY 2016/17 with reserves of $20.3 million, approximately $2.5 million better than $17.8 million planned. 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. Further, reserves in this fund are set to accommodate these year-over-year fluctuations.
Due to the numerous number of claims paid out and related legal fee increases in FY 2016/17, the Liability and Property Insurance Fund came in over budget by approximately $242,000. Because there can be significant variances in claims expenses year-over-year, staff has budgeted the average with a sufficient reserve level to be drawn down and replenished on a year-to-year basis. The reserve was drawn down in FY 2016/17; it ended the year at $873,000, as compared to $1.1 million planned.
Current Fiscal and Economic Environment
The narrow year end results for FY 2016/17 compared to planned estimates means the continued approach of exploring fiscal strategies presented in the current budget will be necessary for the upcoming FY 2018/19 Recommended Budget process. The Finance Department continues to evaluate revenue options for potential ballot measures in 2018. Staff continues to monitor increased costs related to personnel, including projected retirement contributions with the City’s actuary. The strong economy has continued to be reflected in our elevated revenue performance. With these factors, caution will be required as staff begins development of the FY 2018/19 Recommended Budget. The City is faced with balancing strong revenue growth in some stable categories (e.g. Property Tax) against revenues like development-related revenues, Sales Tax, Transient Occupancy Tax, and Real Property Transfer Tax, that can be highly volatile with significant fluctuations through economic cycles. As such, a thoughtful and disciplined approach to budgeting and spending against these elevated levels is necessary in order to ensure the City can continue to address many of its growing expenses and long term liabilities.
Providing stability to the City’s fiscal position, Property Tax revenues continue to be steady through economic cycles and have shown healthy gains in the taxable base. The FY 2017/18 secured tax roll grew 8.3% over the prior year, the result of significant new construction activity in the commercial/industrial sector and the continuation of a robust residential market. Staff included strong growth projections for the next several years in the adopted budget. However, the FY 2017/18 roll growth is 4 percentage points higher than the original estimate of 4.6% growth included in the budget. This is the fifth consecutive year in which the property tax roll growth (Secured and Unsecured) has exceeded 7%. The Sales Tax revenue category continues to underperform budgeted forecasts Current projections indicate that actual performance will fall short in FY 2017/18. Staff will continue to monitor and analyze FY 2017/18 results and will be adjusting the revenue projections for the FY 2018/19 Recommended Budget.
Just as important as the City’s revenue base, expenditure pressures continue to provide challenges to the General Fund. As the largest expense category, addressing personnel expenditure growth remains a priority. For the Public Safety units, where salary adjustments are based on a regional survey, the August 2017 survey resulted in a salary increase of just over three percent.
In addition to salary, a significant area of rising personnel costs continues to be the cost of benefits. The largest expenditure in this area is for pension benefits. The City, working together with bargaining units, has taken several actions to control the growth of pension costs. However, even with the implementation of reduced benefit second and third tier pension plans for new employees and the additional pick up of employee contribution rates by employees, pension costs continue to rise sharply. Currently, the City is projected to pay $36.5 million for pensions to CalPERS. That is anticipated to increase to $67.7 million within 10 years, almost double in cost. Approximately half of the City’s pension cost is payment on the unfunded liability. The City’s two plans (Safety and Miscellaneous) are both approximately 68 percent funded. In addition, due to CalPERS’ changes in its amortization and rate smoothing policies has increased short term volatility in the City’s employer payment for pensions, presenting further challenges. Initial CalPERS performance ending June 30, 2017 was reported at 11.2% compared to a 7.0% rate of return assumption. Even with this good news, negative pressure to de-risk the CalPERS plan is expected to continue. CalPERS has recently approved a plan to lower its assumed rate of return over an extended period of time, which will result in an increase to employer contribution rates.
With these many pressures, it is critical that the City continue manage its costs for total compensation in order to maintain a sustainable fiscal position.
The City is also experiencing pressures from increasing demand for services including:
- Development Related Demands - the current high level of development also brings with it a demand for services including safety, parks and open space, traffic management, utilities and more. The City has begun to address these demands with funding for additional staff. However, the additional resources are modest and only begin to address the gap between workload and staff capacity. As demands continue to pressure our existing assets, staff will continue to look to strategically address demand through a mix of solutions.
- Environmental and Regulatory Demands - increasing regulations in storm water management, pressure from the drought, and efforts to accelerate climate action and reduce greenhouse gas emissions impact costs and resources in many ways across both the General Fund and the Utility Funds.
- Demands from aging infrastructure - the City’s aging administrative, parks, and utility infrastructure require resources to renovate and modernize to current standards. In the present bidding climate, costs for repairs of infrastructure are rising due to competition for work.
To the extent possible, all of these pressures, while manageable, should be taken in context together through the City’s budget process. Balancing priorities will be a critical function of the budget going forward to ensure continued balance and fiscal sustainability.
All revenue sources will be evaluated over the next several months to update current year estimates and develop projections for each year of the twenty-year plan. Setting the right revenue baseline will be a significant factor in determining the City’s capacity to meet the increasing demands on our services.
A mid-year financial update and more detail on the factors affecting the City’s fiscal environment and development of the recommended budget will be presented at the Study and Budget Issues Workshop at the end of January 2018.
In summary, the City enters Fiscal Year 2018/19 in a sound position financially based on past efforts made to restructure itself to operate more efficiently and better contain costs. It has also benefitted from an ongoing economic recovery that drove revenues higher than expected. While vulnerabilities exist, some within the City’s control and some not, the City believes it has taken, and will continue to take, the actions necessary to maintain its solid financial foundation. The City is in a positive and stable position and is well situated to meet the future head on.
Sunnyvale Financing Authority Summary
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 Sunnyvale Finance Authority Board review and approve the annual budget. The Sunnyvale Financing Authority receives lease payments from the City and makes debt service payments to the fiscal agent when due. The fiscal agent (trustee of the bond reserve funds) handles the transactions for the Sunnyvale Financing Authority. The 2009 Government Center Certificates of Participation is the only outstanding debt of the Sunnyvale Financing Authority. During FY 2016/17, all debt service payments were made as planned. At the end of FY 2016/17, an ending fund balance of $1.1 million remained in the debt service fund. These funds are restricted for the purposes of meeting future debt service requirements. The outstanding debt of the Sunnyvale Financing Authority totals $11,615,000.
Pension Trust Fund Update
As part of the workshop to present information regarding the City’s pension obligations on June 20, 2017, Council asked how much the City would have to deposit on day one into an irrevocable pension trust that would cause a one-decade acceleration in the actuary’s model on each of the two plans where assets equal liabilities. Bartel Associates, LLC performed this analysis and determined that the City would need to set aside $82.4 million for Miscellaneous and $110.2 million for Safety retirement plans. These contributions assume 5% investment returns and contributions are set aside on January 1, 2018. The date where assets would equal liabilities would accelerate to June 30, 2030.
The City has initiated efforts to implement an irrevocable pension trust. The City must establish a trust agreement for the Pension Trust Fund and an IRS Private Letter Ruling application may be required to establish an irrevocable pension trust. The City has contracted with Pillsbury Winthrop Shaw Pittman LLP to develop a trust agreement and or to? explore the IRS Private Letter Ruling requirement, and if necessary, assist with that application. Future updates on the progress to establish and provide initial funding will be brought forward, as appropriate.
Administrative Budget Modifications
Administrative budget modifications, which are listed below, 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. The following table summarizes the Administrative Budget Modifications approved by the City Manager in FY 2016/17.
|
Admin Budget # |
Title |
Fund Name |
Fund # |
$ Amount |
|
1 |
Approve Administrative Budget Modification No. 1 to Appropriate $60,000 of State of California 9-1-1 Office Residual Grant Funds for a purchase of a Fire Priority Dispatch System and Call Center Equipment, a new project. |
General Fund - Grant |
35/100 |
$ 60,000 |
|
3 |
Approve Administrative Budget Modification No. 3 to Appropriate $28,358 as a Sub-grant through Health Trust from Sourcewise Older Americans Act Grant Funds for Disease Prevention and Health Promotion |
General Fund - Grant |
35/100 |
$ 28,358 |
|
4 |
Approve Administrative Budget Modification No. 4 to Appropriate $63,445 of Office of Traffic Safety (OTS) Grant Funds for a New Project, FY 2016/17 OTS Selective Traffic Enforcement Program (PT17128). |
General Fund - Grant |
35/100 |
$ 63,445 |
|
5 |
Approve Administrative Budget Modification No. 5 to Appropriate $67,102.90 of Board of State and Community Corrections City Law Enforcement Grant Funds for Law Enforcement Activities. |
General Fund - Grant |
35/100 |
$ 67,103 |
|
6 |
Approve Administrative Budget Modification No. 6 to Appropriate $5,650 in grant funds from the Public Library Partnership and $17,558.07 from the Friends of the Sunnyvale Public Library to establish a Library Bike-Mobile Program at the Sunnyvale Public Library. |
General Fund - Grant |
35/100 |
$ 23,208 |
|
7 |
Approve Administrative Budget Modification No. 7 to Recognize $90,000 of Energy Innovation Grant Funds for a Residential Energy Efficiency Program and Find that the Action is Exempt from CEQA |
General Fund - Grant |
35/100 |
$ 90,000 |
|
8 |
Approve Administrative Budget Modification No. 8 to Appropriate $3,000 of Advanced Micro Devices (AMD) Grant Funds for Pathways to College Program at Columbia Neighborhood Center in FY 2016/17 |
General Fund - Grant |
35/100 |
$ 3,000 |
* Administrative Budget Modification No. 2 was not used.
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 2016/17 less favorable than expected. As the General Fund faces many pressures on both the revenue and expenditure side in the next several years, a rebalancing of the 20-Year Financial Plan, including FY 2016/17 actual performance, will be required and included in the upcoming FY 2018/19 Recommended Budget.
Budget Modification No. 32 has been prepared to restate the FY 2017/18 Budget Stabilization Fund balance based on FY 2016/17 actual results. Adjustments to the Capital Improvement Projects Reserve and corresponding Sale of Surplus Property revenue are also recommended to reflect the sale of property that did not occur as planned in FY 2016/17 and expected to close in FY 2017/18.
Budget Modification No. 32
FY 2017/18
|
|
Current |
Increase/ (Decrease) |
Revised |
|
General Fund |
|
|
|
|
Revenues |
|
|
|
|
Sale of Surplus Property |
$21,000,000 |
$17,600,000 |
$38,600,000 |
|
|
|
|
|
|
Reserves |
|
|
|
|
Budget Stabilization Fund |
$33,734,663 |
$ (502,332) |
$33,232,331 |
|
Capital Improvement Projects |
$41,929,649 |
$ (1,391,269) |
$40,538,380 |
In addition to the General Fund transactions listed above, the reappropriation of Special Projects and associated revenue listed in Attachment 1 is recommended as part of Budget Modification No. 32. These appropriations lapse at the end of the year and reappropriation of unexpended funds are required to ensure completion of these projects. In many cases, these include one-time non-capital improvement projects and/or grant funded projects.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City's official-notice bulletin board outside City Hall, at the Sunnyvale Senior Center, Community Center and Department of Public Safety; and by making the agenda and report available at the Sunnyvale Public Library, the Office of the City Clerk and on the City's website.
ALTERNATIVES
City Council:
1. Receive and file the FY 2016/17 City Budgetary Year-End Financial Report and Approve Budget Modification No. 32 adjusting General Fund Revenue, Capital Improvement Projects Reserve and the Budget Stabilization Fund.
2. Other action as determined by Council.
Sunnyvale Financing Authority:
1. Receive and file the FY 2016/17 Sunnyvale Financing Authority Budgetary Year-End Financial Report
2. Other action as determined by Council.
STAFF RECOMMENDATION
Recommendation
City Council:
Alternative 1: Receive and file the FY 2016/17 City Budgetary Year-End Financial Report and Approve Budget Modification No. 32 adjusting General Fund Revenue, Capital Improvement Projects Reserve and the Budget Stabilization Fund
Sunnyvale Financing Authority:
Alternative 1: Receive and file the FY 2016/17 Sunnyvale Financing Authority Budgetary Year-End Financial Report
Staff
Prepared by: Kenn Lee, Assistant Director of Finance
Reviewed by: Timothy J. Kirby, Director of Finance
Reviewed by: Teri Silva, Interim Assistant City Manager
Approved by: Kent Steffens, Interim City Manager
ATTACHMENTS
1. Schedule of Appropriations by Fund