REPORT TO COUNCIL
SUBJECT
Title
Study Session to Review Proposed FY 2023/24 and FY 2024/25 Biennial Operating Budget and FY 2023/24 Capital Improvement Program Budget Changes
Report
COUNCIL PILLAR
Enhance Community Engagement and Transparency
BACKGROUND
City Charter Section 1302 (Budget - Submission to City Council) requires that at least 35 days prior to the beginning of each fiscal year, or at such prior date thereto determined by the City Council, the City Manager shall submit to the City Council the proposed budget. The Proposed Budget is attached to this Report to Council (Attachment 1) and can be found online at: <https://www.santaclaraca.gov/home/showpublisheddocument/80482/638182746058823294>.
On May 9, 2023, the first Study Session was held to allow the City Council and public to review and provide input on the Proposed Budget. Responses to questions from that Study Session are included as Attachment 2 to this report. The Public Hearing and the planned budget adoption are scheduled for June 27, 2023.
The City Council has adopted the following Council Strategic Pillars:
1. Promote and Enhance Economic, Housing and Transportation Development
2. Deliver and Enhance High Quality Efficient Services and Infrastructure
3. Enhance Community Sports and Recreational and Arts Assets
4. Enhance Community Engagement and Transparency
5. Ensure Compliance with Measure J and Manage Levi’s Stadium
6. Manage Strategically Our Workforce Capacity and Resources
7. Promote Sustainability and Environmental Protection
The City Council adopts a set of Budget Principles each year. These Budget Principles provide a general framework and approach for developing the City’s budget, ensuring fiscal stability by considering both the short and long-term impacts of any funding decisions. These principles are generally consistent with those approved last year with the Budget Stabilization Reserve (BSR) continuing to be set at a minimum of 15% of expenditures; this is an exception to the Budget and Fiscal Policies that set the BSR target at 25% of expenditures. These principles are incorporated as part of the actions considered in this Proposed Budget. The FY 2023/24 Budget Principles can be found in the Budget and Fiscal Policies section of the Proposed Budget.
DISCUSSION
The annual budget serves as a financial plan and operational guide that reflects the policies, goals, and priorities of the City Council and community while also maintaining fiscal stability.
The City’ s financial position has significantly improved since the adoption of the FY 2022/23 budget. The latest Ten-Year General Fund Forecast shows smaller deficits of $8.0 million - $9 million in FY 2023/24 and FY 2024/25. This is well below the $27 million deficit projected in June 2022 and reflects stronger revenue growth in several areas as described in further detail in the Ten-Year Financial Forecast section of the Proposed Budget document. While the financial picture is much better, it is important to note that significant economic uncertainty and the risk of a recession persists.
The Proposed Budget continues the multi-pronged approach to solve the General Fund deficit with new revenues, one-time and ongoing expenditure savings, and use of reserves. Based on the improved financial position, this budget preserves services with fewer reductions necessary. The expenditure reductions limit direct service impacts, with the goal of stabilizing the services residents access on a regular basis as the organization continues to recover from the COVID-19 service disruptions. As part of this recovery, the City continues to fill vacant positions, which will result in an overall improvement to the services the City provides with the funding included in this budget.
Proposed FY 2023/24 and FY 2024/25 Biennial Budget
The expenditures in the FY 2023/24 Proposed Budget total $1.5 billion and reflect an increase of 12% from the FY 2022/23 Adopted Budget. In FY 2024/25, the budget decreases to $1.2 billion as a result of one-time Electric Utility and Sewer Utility debt issuances anticipated in FY 2023/24 for capital projects. The issuance of debt financing is also the primary reason the FY 2023/24 Proposed Budget is above the FY 2022/23 Adopted Budget of $1.33 billion. The Proposed Budget funds 1,149.25 positions in FY 2023/24 and 1,153.25 positions in FY 2024/25. The table below summarizes the proposed budgets by fund group.
The FY 2023/24 and FY 2024/25 Proposed Budget incorporates actions to bring the budget into balance, particularly the General Fund that represents approximately one-fifth of the total budget. Staff has carefully analyzed all department budget proposals, considering the fiscal year projected resources, anticipated service impacts to Santa Clara residents and businesses, and City Council goals, principles and priorities. The Proposed Budget also factors in recommended changes to FY 2023/24 capital projects.
With the projected General Fund shortfall of $8.0 million in FY 2023/24, the budget balancing strategy for the FY 2023/24 and FY 2024/25 Biennial Operating Budget incorporates a combination of increased revenues, one-time and ongoing expenditure reductions, and use of reserves as shown in the table below. This strategy is intended to preserve services while also maintaining the City’s fiscal stability.
Following is a summary of the budget balancing components that are also discussed in more detail in the individual department sections of the budget document:
• Revenue Solutions: Part of the balancing strategy is to factor in increases to specific revenue sources. In November 2020, Santa Clara voters approved to increase the Transient Occupancy Tax rate by up to 4%, and the first two percentage point increase went into effect on January 1, 2022. The Proposed Budget assumes that the City Council will phase in the remaining increase in FY 2023/24 (1 percent in January 2024) and in FY 2024/25 (1 percent in January 2025), which would increase the rate from 11.5% to 13.5%. The rate increases would generate additional revenue of approximately $0.9 million in FY 2023/24 and increasing to $3.4 million ongoing. Fee adjustments have also been factored into this proposed budget. The fee increases incorporated into the FY 2023/24 were brought forward and approved by the City Council on April 18, 2023. This includes additional revenue assumed for the Parks & Recreation Sports Field Reservations Program, Public Works engineering fees, and Community Development fees. The anticipated increase to the Storm Drain Environmental Compliance fee is also reflected in the FY 2024/25 fee adjustments above. The funding sources also include a one-time transfer of $149,000 from the Vehicle Replacement Fund for the sale of vehicles that will be retired as a budget proposal.
• Expenditure Reductions: one-time expenditure savings in both the Fire and Police Departments are expected to be realized in this biennial budget with no service delivery impacts. In FY 2022/23, the Fire Department was awarded a three-year SAFER grant, which will generate annual net overtime savings ($1.0 million to $3.1 million) during the grant period. In the Police Department, an increase to the Department’s vacancy factor is recommended to align with historical performance. This results in no position reduction and provides the General Fund with approximately $1.6 million and $1.7 million in savings in FY 2023/24 and FY 2024/25, respectively. The vacancy factor adjustment has no impact in terms of recruitment or hiring efforts on the Department’s side. Other departmental reductions limit direct service impacts, and the 4.0 position reductions are in strategic supports areas (City Attorney’s Office, City Manager’s Office, City Auditor’s Office, Human Resources Department).
• Use of Reserves/Future Unidentified Solutions: In FY 2022/23, the City Council approved the establishment of a Budget Balancing Reserve as part of the FY 2021/22 Budgetary Year-End Close process. This Proposed Budget uses $1.1 million of this reserve in FY 2023/24 and replenishes the amount in FY 2024/25. After the biennial budget period, additional balancing solutions are expected to be necessary and a revised forecast will inform the needed actions at that time.
The proposed budget balancing strategy addresses approximately half of the budget deficit with ongoing solutions. This continues the use of one-time and ongoing actions to bring the budget into balance, allowing time for the City’s finances to recover. This strategy, however, does not provide capacity to restore services or to address the significant backlog of unmet and deferred capital needs.
Future Revenue Opportunities
While not incorporated into the budget figures presented in the Proposed Budget, the City Administration will continue to evaluate future revenue opportunities that can help address a portion of the remaining ongoing General Fund shortfall, better position the City moving forward, address capital infrastructure needs, and align the City’s revenues with other jurisdictions.
Other potential measures include, but are not limited to: 1) implement a General Obligation Bond to fund capital infrastructure needs; 2) establish a library or community services Parcel Tax; 3) increase to the Property Documentary Transfer Tax; 4) establish a district sales tax; and 5) establish a utility users tax. These measures would require voter approval. Staff will seek direction from the City Council on those measures to potentially pursue.
Proposed FY 2023/24 Capital Improvement Program Amendments
The City Council approved the FY 2022/23 and 2023/24 Biennial Capital Budget and five-year capital improvement plan in June 2022. While the focus of this year’s budget is operations, several budget amendments to the FY 2023/24 Adopted Capital Budget are also recommended, including a street trees replacement project funded by the General Fund Capital Projects Reserve as well as those funded by other funds. Further detail can be found in the Appendices section of the Proposed Budget.
May 9, 2023 Budget Study Session
The City Council and public provided feedback and had questions regarding the Proposed Operating Budget. There were questions regarding various aspects of the General Fund Forecast and balancing strategy. Concerns around staffing and recruitment were discussed, with emphasis on potentially increasing library and Senior Center hours. There was also discussion around public safety and the need to continue funding both the Fire and Police Departments, along with the programs and services they offer (e.g., Northside substation and D.A.R.E.). The Councilmembers also expressed interest in exploring new sources of revenue for the City to address the significant unmet infrastructure needs.
Responses to questions from the Study Session are included in Attachment 2 of this report.
Feedback was also given to provide a summarized version of the budget online. This report also includes a Budget-in-Brief as Attachment 3, a concise summary of the FY 2023/24 and FY 2024/25 proposed budget document. This document was posted online on May 23, 2024.
Subsequent Changes to the Proposed Budget
Subsequent to the posting of the FY 2023/24 and FY 2024/25 Proposed Biennial Operating Budget, the City Council approved the Community Development Department’s FY 2023/24 Annual Action Plan (AAP) on May 9, 2023. Actions in the Housing and Urban Development Fund will be recommended as part of the budget adoption on June 27, 2023 to align with the approved AAP.
On May 2, 2023, the City Council approved Community Development Department staff, in partnership with the County of Santa Clara, to move forward with the Homekey Interim Housing Development Project. This project would enable the development of interim housing at the corner of Lawrence Expressway and Benton Street. As part of this approval, City Council provided direction for staff to return with a budget amendment, appropriating up to $5.5 million from various Housing funds for the operations at the Benton/Lawrence interim housing site. As part of the budget adoption on June 27, 2023, actions will be brought forward for Council consideration to budget the necessary funding. A portion of this amount is recommended to be allocated from Santana West Settlement Agreement funding, while the remaining funding is anticipated to be appropriated from unallocated Housing fund balances. Although budgeted, no monies will be expended on this project until City Council approves a final agreement with the County on terms for the release of funds and City requirements for project operations.
While not included as part of this Study Session, additional adjustments including the carryover of capital improvement program funds will be brought forward for Council consideration as part of the budget adoption on June 27, 2023.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environment Quality Act (“CEQA”) pursuant to section 15378(a)(4) of Title 14 of the California Code of Regulations 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.
FISCAL IMPACT
The FY 2023/24 and FY 2024/25 Proposed Biennial Operating Budget totals $1.10 billion and $1.13 billion, respectively. The Capital Budget totals $395.3 million in FY 2023/24.
COORDINATION
This report has been coordinated with the City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
1. Review and Provide Input on the Proposed FY 2023/24 and FY 2024/25 Biennial Operating Budget and FY 2023/24 Capital Improvement Program Amendments.
Staff
Reviewed by: Kenn Lee, Director of Finance
Approved by: Jōvan D. Grogan, City Manager
ATTACHMENTS
1. FY 2023/24 and FY 2024/25 Proposed Biennial Operating Budget and FY 2023/24 Capital Improvement Program Amendments
2. Responses to May 9, 2023 Study Session City Council and Public Comments
3. FY 2023/24 and FY 2024/25 Proposed Biennial Operating Budget Budget-in-Brief