REPORT TO COUNCIL AND SUNNYVALE FINANCING AUTHORITY
SUBJECT
Title
Receive and File the FY 2018/19 Budgetary Year-End Financial Report, Comprehensive Annual Financial Report (CAFR), the Sunnyvale Financing Authority Financial Report, Agreed Upon Procedure Reports, the Report to the City Council Issued by the Independent Auditors, and Approve Budget Modification No. 13
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, 2019 and recommends approval of Budget Modification No. 13. In addition, the City’s audited Comprehensive Annual Financial Report (CAFR), Special Agreed Upon Procedure Reports and Sunnyvale Financing Authority Financial Report for FY 2018/19 are being presented for Council and the Authority Board’s information.
The City’s CAFR and Sunnyvale Financing Authority Financial Report were independently audited by the firm of Macias Gini & O’Connell (MGO) who rendered unmodified opinions and found no material weaknesses during the financial audit of the City. Receiving an unmodified opinion is the optimal result from the independent audit.
In addition, MGO 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 the FY 2018/19 year in a positive fiscal position, with a net impact of $13.1 million better than planned. General Fund revenues finished the year approximately $8.2 million to the good. Higher than planned Property Tax, Sales Tax, and Transient Occupancy Tax represented positive variances. In addition, Construction Tax and Community Development Fees performed well reflecting the City’s robust development activity. Permits and Licenses also collected revenue greater than planned due to permits associated with Hazardous Material, Fire Prevention, and Public Safety. General Fund expenditures ended the year favorably at approximately $6.5 million below budgeted levels primarily due to vacancy savings in Library and Community Services, Finance, Environmental Services, and the Office of the City Manager.
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 2018/19.
Adjustments to General Fund revenue, Capital Improvement Projects Reserve and the Budget Stabilization Fund are recommended through Budget Modification No. 13. Additionally, due to the favorable position, staff is recommending appropriation of $2.0 million from all funds ($1.56 million from the General Fund) to the City’s Pension and OPEB Trust Funds, $5 million to the Capital Improvement Reserve, and the remaining $6.6 million to the Budget Stabilization Fund. This will improve the position of the General Fund as the anticipated draw down from FY 2018/19 to 2019/20 is $10.8 million.
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 2019/20 Recommended Budget, the revenue projections for FY 2018/19 are updated in the February to March timeframe. Staff also reviews General Fund operating expenditures to date and estimates expenditure savings for FY 2018/19 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, the Contingency Reserve, and the Capital Improvement Projects Reserve positions based on actual FY 2018/19 performance compared to the level planned.
Additionally, each year, staff coordinates and facilitates completion of the annual audit with the independent auditor. For the annual audit process, staff prepares a number of audit schedules and responds to audit queries while 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 CAFR and Sunnyvale Financing Authority Financial Report, which includes the auditor’s opinion and audited financial statements. Staff also engaged with the independent auditor MGO 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, 2019 shall carryover into FY 2019/20. The City Council shall be provided a complete listing of Special Project funds carried over in the FY 2018/19 Budgetary Year-End Report for City Council approval no later than December 31,2019.
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.
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 2018/19 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
Final General Fund revenues for FY 2018/19 are shown in Table 1.
Total General Fund revenue, including grant revenue carryover, ended above the revised estimate for the 2018/19 fiscal year by $8.2 million.
Comparison with Prior Year
Overall, General Fund revenue was up by $23.1 million (12.2%) from actual FY 2017/18 revenue of $189.5 million when Sale of Property is excluded. The most significant increases were in Property Tax ($10.5 million) and Transient Occupancy Tax ($3.5 million). Transfers In/In Lieu Fees also contributed to the significant year-over-year increase by $7.2 million mainly due to a $7.0 million community benefit transfer from the Capital Projects - Community Benefits Fund associated with the Moffett Towers Development Agreement. This Agreement contributed $7.0 million for funding three public safety officer positions at Fire Station 5. Construction Tax increased ($1.4 million) and Sales Tax was greater by $1.0 million compared to FY 2017/18. Additionally, Service Fees performed well with an 11.3% increase ($0.8 million) over the prior year. Interest income had strong returns (up $1.4 million) as well when compared with FY 2017/18 due to better than estimated interest rates and healthy reserves.
Comparison with Final Budget
When sale of property is excluded, revenue of $212.7 million was collected in the General Fund in FY 2018/19, which is $8.2 million above the Final Budget. While the City received $21.0 million for the sale of property in FY 2017/18, the FY 2018/19 Final Budget did not include estimated revenue for the sale of property though there were some proceeds ($0.1 million) from the sale of 119 San Lucar Ct. that were received. Given that revenue from the sale of property is one-time and, by policy, does not impact the Budget Stabilization Fund reserve, the revenue comparison excluding sale of property provides a more accurate revenue picture when comparing against the Revised Budget. To that end, the positive FY 2018/19 revenue variance is attributable to several factors, notably, higher than anticipated revenue, such as Transient Occupancy Tax. Other revenues that performed favorably against the revised budget include Property Tax, Sales Tax, and Construction Tax as well as Community Development and Recreation Fees. These positive performing revenue sources were offset by shortfalls against revised budgets for Franchise Fees and Miscellaneous Revenues.
Property Tax revenue in FY 2018/19 came in approximately $1.0 million higher than projected in the FY 2018/19 Revised Budget. Though Property Tax continues to reflect updated assessment information and the high value of property in Sunnyvale, almost $4.2 million of the $9.7 million increase included in the Final Adopted Budget is due to Excess Educational Revenue Funds (ERAF) money and is not expected to continue over the longer term. That said, growth in Secured Property Tax revenue, the largest component of total property taxes, was $5.5 million, equivalent to 10.0% of the total. Overall, Property Tax revenue growth reflects increases in the assessed valuation in both the residential and commercial / industrial sectors across the City as well as change of ownership and new construction. Residential assessed value increased 8.4%, while commercial and industrial assessed value increased 15.1% from the prior year. Residential property accounts for 60.8% of secured assessed value on the Sunnyvale property tax roll, which has decreased from the peak of 64% in FY 2014/15, due to dramatic growth in the commercial/industrial category. The FY 2018/19 Budget projects that Property Tax revenue will increase further in FY 2019/20 by 6%. However, based on reports received from the County Assessor’s office, the increase is reflecting overall growth of 7%. A revised projection will be included in the FY 2020/21 Recommended Budget.
Sales and Use Tax revenue for FY 2018/19 ended the year $0.6 million above the $33.3 million estimate. The original projection for sales tax revenue in the FY 2018/19 General Fund Long-Term Financial Plan assumed modest growth of $0.1 million reflecting economic pressures associated with the trend towards a service-based economy and the increase in e-commerce. Based on data collected through the first quarter of FY 2018/19, however, the estimate for FY 2018/19 was increased by almost $1.4 million in the FY 2019/20 Adopted Budget from $31.9 million to $33.3 million. This was due to flat or small growth across almost all sectors except for General Consumer Goods, which declined due to the recent closing of major retailers. Pooled revenues are expected to increase as a percentage of the City’s overall Sales Tax revenue as e-commerce continues to become a larger part of the economy and AB 147, which was signed into law in April 2019 to expand the collection of out-of-state sales tax, is fully implemented. Additionally, the California Department of Tax and Fee Administration implemented new software, which resulted in a delay or misallocation of some revenue. The resulting adjustments are one-time and reflected in the updated revenue estimate.
Transient Occupancy Tax (TOT) revenue reached its highest level in FY 2018/19, totaling $21.2 million and $0.6 million above the revised projection for the fiscal year. Further, the TOT revenue collected in FY 2018/19 increased $3.5 million (or 20%) from the prior year mainly due to the voter-approved Measure K tax increase, which changed the TOT rate from 10.5% to 12.5%. The tax increase became effective midway through FY 2018/19. Additionally, strong occupancy rates and higher room rates contributed significantly to the increase in revenue. The large majority of TOT generated in Sunnyvale is business-related travel and this sector remained very strong through the fiscal year. In addition, after adoption of a voluntary collection agreement with Airbnb, the City’s short-term rental TOT remittance has improved in FY 2018/19 and $0.7 million was collected in the fiscal year. It should be noted that even with strong TOT returns projected in the near future, we do take caution with our projections as, historically, TOT revenue has shown high volatility with substantial declines in periods of economic recession.
Other Taxes finished the year 20.7% ($1.8 million) better than the FY 2018/19 revised projection. The Other Taxes category is comprised of Construction Tax, Business License Tax, and Real Property Transfer Tax and all categories beat the revised estimates for FY 2018/19. Construction Tax was revised slightly upward during development of the FY 2019/20 Budget from $4.6 million to $4.8 million to reflect elevated development activity and had a positive variance of $1.5 million when compared to the Final Budget. This is almost a 30% rebound from prior year actuals.
Real Property Transfer Tax revenue exceeded revised projections by almost $0.2 million (9.0%). However, it was about 3.5% ($0.1 million) less than actuals from the previous year. As a tax on the transfer of interests in real estate, it is driven by the rate of property turnover and changes in sales prices.
Utility Users Tax (UUT) revenue for FY 2018/19 showed a 5.7% increase of $0.4 million from the prior year. The budget was reduced slightly by $0.1 million during FY 2019/20 budget development, but UUT came in closer to the original budget at $8.3 million. Sunnyvale voters approved an ordinance to modernize UUT in November 2016 and the methodology for estimating revenue for this category is still being refined as actual data is collected and the impact of the ordinance is better understood. Therefore, UUT revenue can be challenging to accurately forecast and long-term projections for UUT revenue remain cautious given the evolving nature of energy-efficiency and telecommunications technologies as well as tax credit incentive programs.
Franchise fees came in at $7.0 million, below the revised budget by $0.4 million (5.8%). Franchise fees collected were also $0.2 million lower than fees collected in the prior year, which was a little less than $7.2 million. Therefore, this revenue source warrants further analysis during the next budget cycle.
Federal and Intergovernmental revenues fund specific projects and revenue is typically received on a reimbursement basis. As such, 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 $0.3 million and over 56%. 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 also ended the year more than projected by almost $2.0 million due to higher than anticipated interest rates and strong reserves. Finally, Table 1 includes Revenue Carryover, which includes grant revenue and deferred transfers that will be made from other City funds for specific General Fund projects.
Expenditures
General Fund expenditures for the fiscal year ending June 30, 2019 are shown in Table 2.
The details of FY 2018/19 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 2018/19 assumed in the production of the FY 2019/20 Adopted Budget. 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 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 favorably at $2.7 million below budget. This was primarily the result of savings in the Department of Library and Community Services and Finance due to staff vacancy savings. The Office of the City Manager also had savings attributed to staff vacancy savings as well as purchased goods and services savings mainly related to election services.
The Department of Public Safety was over budget for the year by $0.8 million primarily due to PSOA salary increases that could not be anticipated during development of the FY 2018/19 budget and overages in two programs - Fire Services and Administrative Services. Retirements and corresponding vacancies as well as mutual aid responses for wildland fires drove overtime use in the Fire Services program that resulted in overspending of $1.8 million. It should be noted, however, that $0.4 million in reimbursements was received from the California Office of Emergency Services to cover the backfill expenditures for officers deployed to mutual aid emergency events.
The Administrative Services program was over budget by $1.1 million for the year mainly due to staff vacancy savings that were not fully realized and salaries and benefits that were not allocated to other programs in the Department as intended. Finance continues to work very closely with DPS to understand these variances to ensure appropriate funding levels for each program.
While the Department of Public Works was under budget as a Department, it exceeded its expenditure appropriation in the Neighborhood Parks and Open Space Management program by $0.7 million. Overage in this program can primarily be attributed to overspending in salaries and benefits mostly related to casual staff and overtime. Overspending in Purchased Goods and Services due to spending related to facilities maintenance and repair and for purchase of computer hardware contributed to the overage as well.
The Regulatory Program in the Environmental Services Department was overbudget by $0.7 million due to a technical error in Finance during development of the FY 2018/19 operating budget. When shifting stormwater expenditures to the General Fund from the Wastewater Fund, Service Delivery Plan (SDP) 366.01 in the Regulatory Program was inadvertently missed as a transfer of expenditures to the General Fund in the final operating budget. As a result, the Environmental Services Department budget appears overspent.
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 $22.6 million is being carried forward to FY 2019/20 to cover expenditures related to projects and equipment - $11.3 million for projects and equipment directly-charged in the General Fund and $11.4 million for projects budgeted in other funds (Transfers Out of the General Fund).
Of the project carryover associated with projects directly charged to the General Fund, most of the carryover is associated with public safety recruitment projects. The City has appropriated significant funds over the last several years to recruit and train public safety officers and the Finance Department continues to work closely with the Department of Public Safety to anticipate attrition for effective budgeting and planning. While sworn vacancies fluctuated throughout the fiscal year,189 of the 201 approved sworn positions were filled with an additional 23 recruits in the training pipeline. To that end, during the project carryover process, we were able to identify over $2.5 million able to return to fund balance as recruitment projects are being completed. $2.1 million in recruitment projects will carryover and future recruitment project funding is included across the 20-yr Financial Plan.
In addition to the public safety recruitment projects, other special project carryover includes, Climate Action Plan project carryover, and carryover associated with a myriad of grants. Infrastructure and capital project carryover includes $0.6 million for Replacement and Repair of Storm Drains, $0.6 million for purchase of a vactor truck, and $0.5 million for the Green Stormwater Infrastructure project local match funding.
In terms of transfer carryover, most of the funding being carried forward for transfers to other funds is to the Infrastructure Fund to fund the Pavement Rehabilitation and Sidewalk, Curb and Gutters projects. $1.0 million is also being carried forward in the Capital Projects fund for the Sunnyvale Median Project. About $1.1 million is being carried over in the Sewer fund for the Storm Pump Station No. 1 Rehabilitation project as well.
Overall, expenditures in the General Fund ended favorably at $6.5 million under budget. Savings were mostly due to staff vacancies in operating programs and 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 $13.1 million. It is important to note that the Final Budget figures include all approved Council adjustments through June 30, 2019. Due to the timing of the production of the FY 2019/20 Adopted Budget, these figures differ from the estimates for FY 2018/19 assumed during the development of the budget.
The details in the Table 4 summarize the impact on the Budget Stabilization Fund.
These positive year end results of $13.1 million to the Budget Stabilization Fund reflect better than expected revenues and unanticipated savings as discussed above. This favorable year end position contributes to the City’s overall resources to cover the volatility of the City’s major revenue sources, increasing demands on services and infrastructure as well as continued growth in personnel costs over the next twenty years. Consequently, the City will continue to approach budget development with 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. Therefore, 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 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 $83.3 million, of which most is being carried forward to be spent in FY 2019/20. The major ongoing projects utilizing this carryover funding include the Lakewood Branch Library and Learning Center, Washington Community Swim Center, Fair Oaks Avenue Overhead Bridge project, the Mathilda/237/101 Interchange Improvements, and other various transportation projects.
In the Infrastructure Fund, there was $86.8 million in unspent project funds being carried over, primarily associated with Civic Center Modernization ($43.8 million) Fair Oaks Park Renovation project ($6.7 million), $13.2 million for the Lakewood Park Renovation, and $2.2 for the Park Buildings - Rehabilitation project. $7.3 million in funding is also being carried over for the Pavement Rehabilitation project.
Ongoing projects funded by Park Dedication Fee revenues had unspent funds of approximately $48.1 million that will be carried forward to be spent in future years. Most of the carryover funding is for the transfer of funds to the Capital and Infrastructure Funds for park projects such as those park projects listed above. The Park Dedication Fund will also fund the acquisition of open space for a future park. Total budget for the land acquisition of 1142 Dhalia Court is approximately $8 million and $7.8 million will carryover. Revenues in the Park Dedication Fund came in approximately $1.4 million higher than the planned $9.4 million at $10.8 million The unplanned revenue that was collected in FY 2018/19 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% of the Park Dedication Fee revenue into a reserve specifically designated for land acquisition and these funds will be used to acquire land to construct 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 2018/19 continued with elevated development activity in Sunnyvale. Revenue reached $25.3 million and expenses amounted to $15 million, which was close to planned. The net fiscal impact to the fund was an increase in the Development Enterprise Reserve of $0.4 million when compared with the revised budget in the FY 2019/20 Long Term Financial Plan.
Water Supply and Distribution Fund
The Water Supply and Distribution Fund accounts for the operations of the City's water system. This fund receives most of its revenue from user fees collected from the City's water customers, with the remainder coming from connection fees. Total water revenues were $65.6 million and exceeded the revised projection by $7.6 million, primarily driven by $6.6 million more than projected in water connection fees. The City’s water connection fees were revised in FY 2017/18 to better reflect the cost of buying into the City’s water system by developers.
Based on current year revenues and expenditures (and excluding ongoing project costs), the net position of the fund increased by $8.0 million. As compared to budget, after accounting for unspent project funds to be carried forward, total expenses ended less than forecast by $0.4 million.
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 2018/19 at $54.7 million, approximately $2.9 million more than projected. Much of the revenue increase is due to construction activity in Sunnyvale, which increased the demand for large debris boxes. Performance has been hindered by poor markets for recyclable materials, with the City having to expend money to recycle materials where previously the materials could be sold. Excluding ongoing project funds, the reserve balance for this fund increased by $3.6 million when compared to the Final Budget.
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 Operating Fund net position for the year ended as planned.
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 $58.2 million, which was $10.4 million more than anticipated. This is largely attributable to connection fees due to continuing high levels of development activity. In addition, FY 2018/19 Wastewater Management Fund operating expenses ended $0.8 million less than budgeted with cost savings in the Regulatory and Wastewater Collection Systems programs. Overall fund position remains in good fiscal condition; ending with a positive position for the year before accounting for ongoing project costs and any bond proceeds. However, there are significant capital projects that have started in this fund, including the replacement of the existing Water Pollution Control Plant (WPCP). Cost estimates for the WPCP project as well as anticipated draws on the State Revolving Fund Loan 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. During FY 2018/19, City Council approved Budget Modification No. 19 appropriating the revenue and operating expenses associated with Barrel 19 Bistro & Bar at the Sunnyvale Golf Course. This same action appropriated an additional $0.4 million transfer from the City’s General Fund to the Golf and Tennis Operations Fund to subsidize the deficit in concession revenue and golf operations to maintain a positive fiscal position in the fund. The decline in rounds played has been attributed to the poor air quality due to wildfires and excess rain impacting foot traffic to the restaurant and golf play.
Golf operating revenues ended approximately $3.6 million ($0.07) over projections when transfers are excluded and a little more than $0.2 million from FY 2017/18. Operational expenditures of $5 million were approximately $0.1 million under budget. However, the fund ended in a positive fiscal position mainly because of the planned transfer from the General Fund required to keep the fund solvent. Therefore, it is important to note that this fund continues to run a very tight fund balance and another transfer of $1.5 million from the General Fund is budgeted for FY 2019/20 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 2018/19 Adopted Budget.
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. 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 Payroll & Benefits Fund ended FY 2018/19 with reserves of $25.3 million, approximately $4.3 million more than the $20.9 projected. 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.
In FY 2018/19, the Liability and Property Insurance Fund came in under budget by approximately $0.2 million. 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 increased in FY 2018/19 and it ended the year with $0.8 million versus the $0.6 million reserve forecast.
Current Fiscal and Economic Environment
The positive year end results for FY 2018/19 compared to planned estimates leaves the City positioned to weather economic uncertainty. The Finance Department continues to evaluate maximizing current revenues. Additionally, 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. As over the past several years, the City is faced with balancing strong revenue growth in some stable categories (e.g. Property Tax) against Sales Tax, Transient Occupancy Tax, Real Property Transfer Tax, and other development-related revenues that can be highly volatile and fluctuate significantly through economic cycles. As such, a thoughtful and disciplined approach to budgeting and spending against these elevated levels is necessary 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 2019/20 secured tax roll grew 8% over the prior year, the result of elevated new construction activity in the commercial/industrial sector and the continuation of a robust residential market. The FY 2019/20 roll growth (Secured and Unsecured) is a little over 1% percentage point higher than the original estimate of 6% growth included in the budget. This is the seventh consecutive year in which the property tax roll has exceeded 6.0%. Staff, however, included tempered growth projections for the next several years in the adopted budget as the growth rate has showed signs of slowing. The Sales Tax revenue category continues to show minimal to no growth. Current projections indicate that this trend will continue. Staff will continue to monitor the additional impact of major retailers closing, implementation of sales tax remittance as AB 147 is implemented, and the phased completion of the CityLine project. Accordingly, we will adjust the revenue projections for the FY 2020/21 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. Most significantly, the cost of benefits is increasing; pension and healthcare benefits contributing to the most substantial increases. For managing growth of pension costs on a long-term basis, the City has taken several actions, including implementing reduced benefit second and third tier pension plans for new employees, negotiating labor agreements with sustainable salary increases, and maintaining reserves to fund long-term pension and healthcare liabilities. For fiscal year 2019/20, the City is projected to pay $44.4 million for pensions to CalPERS. That is anticipated to increase to $77.4 million in about 10 years, around a 74 percent increase in cost. The City’s two plans (Safety and Miscellaneous) are respectively 67 percent and 69 percent funded. For the fiscal year 2019/20 budget, employer contribution rates are set at 66 percent for the Safety Plan and 37 percent for Miscellaneous Plan. For the last decade, CalPERS has implemented significant changes in its amortization and rate smoothing policies to de-risk the system, which has caused short-term volatility in the City’s payment for pensions. Several years of hard work in strategic planning and taking appropriate actions for funding the significant increases in pension payments has shown positive results even after including CalPERS’s recent amortization policy changes, which shortens the amortization period for gains and losses from 30 to 20 years. Further, starting with fiscal year 2018/19, the City has established a pension trust to be used as a budget stabilization tool in future years when the CalPERS contributions are at the peak. The City contributed $2 million to the trust in FY 2018/19 and is budgeted to contribute $9 million to the trust in the next nine years.
With these many pressures, it is critical that the City continue to manage its costs for total compensation to maintain a sustainable fiscal position.
Some of the other service demands that the City is facing are:
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, wastewater treatment, 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. The City anticipates issuing long-term debt, including low cost loans, to fund some of these planned capital improvements, such as the Clean Water program projects.
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 rapidly due to high demand for qualified contractors.
To the extent possible, these pressures, while manageable, should be taken in context together through the City’s budget process. Balancing priorities will be critical to ensuring a balanced and fiscally sustainable budget over the long term.
Thus, as discussed, 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 for our services. Additionally, a mid-year financial update and more detail on the factors affecting the City’s fiscal environment and development of the FY 2020/21 Recommended budget will be presented at the Study and Budget Issues Workshop at the end of February 2020.
In summary, the City enters Fiscal Year 2019/20 in a sound position financially benefiting 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 well situated to meet the future head on.
Sunnyvale Financing Authority Budget 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 2018/19, all debt service payments were made as planned. At the end of FY 2018/19, 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 $10.3 million.
Comprehensive Annual 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 Comprehensive Annual Financial Report (CAFR) is prepared annually to meet this requirement and is submitted to Council as Attachment 7 to this report.
The CAFR, 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 Macias Gini & O’Connell (MGO) who rendered an unmodified opinion on the City’s CAFR. Receiving an unmodified opinion is the optimal result from the independent audit.
Effective with the FY 2014/15, with the implementation of the GASB Statement No. 68, the City’s net pension liability, representing unfunded pension obligations, is now presented as a liability on the statement of net position, previously the information was provided as part of the Notes to the Basic Financial Statements section of the CAFR. The Net Pension Liability line totaled $359.5 million as of June 30, 2019, which decreased by $5.9 million from the prior fiscal year. 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 changes to the City’s plans to fund its pension liability. Through the City’s long-term financial planning process, Sunnyvale began to address the liability several 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 $2.0 million during FY 2018/19, including an annual payment $1 million and additional $1 million from the General fund budget savings resulted from higher tax revenue collections. The current twenty-year plan includes an annual commitment of $10.0 million to the Trust to accumulate monies to fund future pension liabilities.
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 since 2011. An audited stand-alone report of the Sunnyvale Retiree Healthcare Trust Plan was issued at the end of June 30, 2018. The Report had the OPEB Trust fund balance of $93.8 million that was used in the calculation of the net OPEB liability. As of June 30, 2019, the outstanding balance of net OPEB liability was $81.9 million, which decreased by $2 million from last 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 at the end of the 20-year planning period.
Auditor’s Report to the City Council
As part of the City’s annual external audit, MGO 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 control. In addition, the report provides assistance to City staff for improving its records and operations and communicates other advisory information, such as future accounting and reporting requirements that may have an effect on the City.
No material weaknesses were noted by MGO in the City’s internal control. A material weakness is a significant deficiency, or combination of deficiencies in internal control 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 6.
Agreed Upon Procedure Reports
City Finance Staff engaged MGO 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. Seven cash collection sites and three programs were selected for review in FY 2018/19. Accordingly, MGO issued three AUP reports (Attachments 3, 4 & 5). Surprise cash counts were conducted on seven sites. One minor difference of $0.14 was noted during the review at the Library cash register. Staff determined the difference was likely attributed to making the incorrect change. Additional cash handling procedures are in place to improve accuracy. No exceptions were noted in other cash collection sites.
Three programs: 1) Sunnyvale Public Safety Parking Citations; 2) Sunnyvale Workers’ Compensation claims; and 3) Sunnyvale Real Estate Property Rental Cash Receipts were selected for review. MGO selected 15 samples for each program and reviewed the collection procedures and verified they were handled based on the City’s policies and procedures. No exceptions were noted for these three programs.
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 8 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, 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. Attachment 2 summarizes the Administrative Budget Modifications approved by the City Manager in FY 2018/19, which totals $274,618.
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 2018/19 more favorably 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 2018/19 actual performance, will be required and included in the upcoming FY 2020/21 Recommended Budget.
Budget Modification No. 13 has been prepared to restate the FY 2019/20 Budget Stabilization Fund and the Capital Improvement Projects balance based on FY 2018/19 actual results. With the positive year end position, staff is recommending appropriation of $2 million from all funds ($1.56 million from the General Fund) to the City’s Pension and OPEB Trust Funds, $5 million to the Capital Improvement Reserve, and the remaining $6.6 million to the Budget Stabilization Fund. Contributions to the City’s Pension and OPEB Trust Funds will be made by the major operating funds based on a percentage of Full Time Equivalent Employees in each fund. The total OPEB Trust contribution will be $500,000 and the total Pension Trust contribution will be $1.5 million, with $750,000 going to each plan (miscellaneous and safety). The contribution to the Budget Stabilization Fund will improve the position the General Fund going forward as the anticipated draw down from FY 2018/19 to 2019/20 in the FY 2019/20 Budget is $10.8 million.
Budget Modification No. 13
FY 2019/20
|
|
Current |
Increase/ (Decrease) |
Revised |
|
General Fund |
|
|
|
|
|
|
|
|
|
Expenditures |
|
|
|
|
Transfer to Employee Benefits Fund (OPEB and Pension Trusts) |
$0 |
$1,560,477 |
$1,560,477 |
|
|
|
|
|
|
Reserves |
|
|
|
|
Capital Improvement Projects Reserve |
$5,893,023 |
$5,000,000 |
$10,893,023 |
|
Budget Stabilization Fund |
$46,381,733 |
$6,578,148 |
$52,959,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
Increase/ (Decrease) |
Revised |
|
|
|
|
|
|
Other Funds |
|
|
|
|
|
|
|
|
|
Expenditures |
|
|
|
|
Housing Fund |
|
|
|
|
|
|
|
|
|
Transfer to Employee Benefits Fund |
$0 |
$5,910 |
$5,910 |
|
|
|
|
|
|
Employment Development Fund |
|
|
|
|
|
|
|
|
|
Transfer to Employee Benefits Fund |
$0 |
$51,884 |
$51,884 |
|
|
|
|
|
|
Water Supply and Distribution Fund |
|
|
|
|
|
|
|
|
|
Transfer to Employee Benefits Fund |
$0 |
$44,641 |
$44,641 |
|
|
|
|
|
|
Wastewater Management Fund |
|
|
|
|
|
|
|
|
|
Transfer to Employee Benefits Fund |
$0 |
$103,988 |
$103,988 |
|
|
|
|
|
|
Solid Waste Management Fund |
|
|
|
|
|
|
|
|
|
Transfer to Employee Benefits Fund |
$0 |
$11,998 |
$11,998 |
|
|
|
|
|
|
Development Enterprise Fund |
|
|
|
|
|
|
|
|
|
Transfer to Employee Benefits Fund |
$0 |
$80,032 |
$80,032 |
|
|
|
|
|
|
Golf and Tennis Operations Fund |
|
|
|
|
|
|
|
|
|
Transfer to Employee Benefits Fund |
$0 |
$24,850 |
$24,850 |
|
|
|
|
|
|
General Services Fund |
|
|
|
|
|
|
|
|
|
Transfer to Employee Benefits Fund |
$0 |
$116,220 |
$116,220 |
|
|
|
|
|
|
Total Transfers |
|
|
$2,000,000 |
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 budgetary Year-End Financial Report, the audited Comprehensive Annual Financial Report, Agreed Upon Procedure Reports and the Report to the City Council issued by the independent auditors, and Approve Budget Modification No. 13 and the list of Proposed Closed Projects.
2. Other action as determined by Council.
Sunnyvale Financing Authority:
1. Receive and file the Sunnyvale Financing Authority Financial Report
2. Other action as determined by the Authority Board
STAFF RECOMMENDATION
Recommendation
Recommendation:
City Council:
1. Receive and file the budgetary Year-End Financial Report, the audited Comprehensive Annual Financial Report, Agreed Upon Procedure Reports, and the Report to the City Council issued by the independent auditors, and Approve Budget Modification No. 13
Sunnyvale Financing Authority:
1. Receive and file the Sunnyvale Financing Authority Financial Report
Staff
Prepared by: Felicia Silva, Budget Manager
Prepared by: Inderdeep Dhillon, Finance Manager
Reviewed by: Grace Zheng, Assistant Director of Finance
Reviewed by: Timothy J. Kirby, Director of Finance
Approved by: Kent Steffens, City Manager
ATTACHMENTS
1. Year-End Budgetary Report by Fund
2. Administrative Budget Modifications Summary
3. FY 2018/19 Sunnyvale Parking Citations & Cash AUP
4. FY 2018/19 Sunnyvale Property Rental & Cash AUP
5. FY 2018/19 Sunnyvale Workers Comp & Cash AUP
6. Auditor’s Report to the City Council
7. Comprehensive Annual Financial Report
8. Sunnyvale Financing Authority Financial Report
Attachments 7 and 8 are posted on the City website at <https://sunnyvale.ca.gov/government/budget.htm>