REPORT TO COUNCIL
SUBJECT
Title
Study Session: Review of the Proposed FY 2024/25 & FY 2025/26 Biennial Capital Improvement Program Budget and FY 2024/25 Operating Budget Amendments
Report
COUNCIL PILLAR
Enhance Community Engagement and Transparency
BACKGROUND
City Charter Section 1302 Budget - Submission to City Council requires that at least thirty-five 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.
This budget continues the biennial budget process that alternates between an operating and capital budget. This year’s budget focuses on the capital infrastructure, supporting the facilities that serve our residents and community. Amendments to the FY 2024/25 Adopted Operating Budget are also included. The Proposed Budget is attached to the memorandum and can be found online at: <https://www.santaclaraca.gov/home/showpublisheddocument/83797/638500031070970327>.
The City Council approves 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. The proposed principles for FY 2024/25 are 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 Council policy that would set the BSR at 25% of expenditures. The proposed FY 2024/25 Budget Principles can be found in the Budget and Fiscal Policies section of this document.
On May 7, 2024, 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 in this report. The Public Hearing and the planned budget adoption are scheduled for June 25, 2024.
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. The capital budget guides the City in the planning, scheduling, and budgeting of capital investments within the City.
Total Budget Overview
The FY 2024/25 Proposed Budget totals $1.35 billion and reflects a 22.8% reduction from FY 2023/24 Adopted Budget. The FY 2024/25 Proposed Budget is below the FY 2023/24 Adopted Budget of $1.76 billion primarily because the carryover of funds from FY 2023/24 to FY 2024/25 has not yet been factored into the budget. These carryover adjustments are expected to be brought forward later in the budget process and incorporated into the FY 2024/25 Adopted Budget. The FY 2024/25 Amended Budget is $120.4 million above the FY 2024/25 Adopted Budget approved in June 2023 primarily due to additional planned investments in the capital budget. Table 1 below summarizes the total budgets by fund group.
*Adjusts for transfers, contributions, and reserves to avoid double counting of the same funds (e.g., internal service funds are excluded).
Biennial Capital Budget
The CIP guides the City in the planning, scheduling, and budgeting of capital investments within each of the twelve theme areas. The FY 2024/25 and FY 2025/26 Biennial Capital Budget and planned CIP is a carefully balanced budget that reflects the City Council priorities and continues strategic investments in the City’s infrastructure. The Proposed Biennial Capital Budget totals $642.6 million and the five-year CIP totals $1.04 billion.
Table 2: Proposed CIP by Theme is a breakdown of the capital budget by theme.
Capital Highlights
Of the $1.04 billion CIP, $914.6 million (88%) funds capital projects for the City’s utilities and there is sufficient funding in the associated utility funds to support these projects. The other projects total $127.6 million (12%) and fund improvements to the parks, trails, libraries, transportation system, storm system, convention center, and other City facilities. There are significant funding gaps in these areas and unfunded projects identified in this budget total $626.2 million, with $623.7 million unfunded in the General Fund, over the next five years. This funding gap does not fully represent all the unmet/deferred infrastructure needs throughout the City beyond the five-year CIP period.
Long-term funding strategies are needed to meet the City’s infrastructure needs as the General Fund does not have sufficient funding to cover these capital costs. The projected starting FY 2024/25 General Fund Capital Projects Reserve (CPR) balance is $23.9 million. Of that amount, $15.0 million is recommended to be allocated in this CIP, leaving a remaining CPR balance of $8.9 million.
Following are some of the key investments by theme in this CIP that are detailed in the Capital Improvement Program section of the Proposed Budget:
• Administrative Facilities - Fire Training Tower Renovation ($504,000), City Buildings Upgrade Lighting to LED ($500,000), City Hall Gutter and Waterproofing Repair ($485,000), Repairs - Modifications to City Buildings ($350,000), and Emergency Operations Center Security Upgrades ($294,000);
• Community Facilities - Planning and Construction of Temporary and/or Permanent ISC Replacement Facility ($1.0 million) and Northside Branch Library - Automated Materials Handling System ($332,400);
• Convention Center - Santa Clara Convention Center Condition Assessment Repair ($2,150,000), work will continue on projects funded in FY 2023/24;
• Electric Utility - NRS Upgrades and Expansion ($134.0 million), KRS Rebuild and Replacement ($107.0 million), SRS Rebuild and Replacement ($98.0 million), Transmission Loop 1 ($76.3 million), Homestead Substation Rebuild ($75.1 million), and New Business Estimate Work ($54.6 million);
• Other Community Projects - Related Santa Clara ($4.0 million) and Tasman East Specific Plan ($2.8 million);
• Parks and Trails - Park Improvements ($949,400);
• Sewer Utility - San José-Santa Clara Regional Wastewater Facility ($86.1 million), Sanitary Sewer Capacity Improvements ($30.0 million), Sanitary Sewer System Improvements ($10.2 million), Sanitary Sewer System Condition Assessment ($5.0 million), and Sanitary Sewer Hydraulic Modeling As Needed Support ($1.4 million);
• Solid Waste - Sanitary Landfill Development - Post Closure ($4.2 million);
• Storm Drain - Storm Drain Pump Station RTU Upgrade ($2.5 million), Green Stormwater Infrastructure Design & Construction ($747,500), and Storm Drain Pump Station Motor and Control Maintenance, Repair and Replacement ($645,750);
• Technology and Equipment - Utility Management Information System Enhancements ($1.5 million), Geospatial Information System (GIS) Enterprise System ($1.5 million), Financial and Human Resources Management System (FHRMS) Update Project ($1.2 million), and Fire Protective Equipment Replacement ($592,019);
• Transportation - Annual Street Maintenance and Pavement Rehabilitation ($46.2 million), Tasman Complete Streets Plan 2021 Improvements Phase I - North San Jose Settlement ($6.3 million), Traffic Signal Enhancements ($3.3 million), Uncontrolled Crosswalks Improvements ($2.8 million), Sidewalk, Curb and Gutter Repair ($2.6 million), and Street Tree Services ($1.4 million); and
• Water and Recycled Water Utilities - Distribution System Replacement/ Restoration ($15.3 million), New and Replacement Wells ($5.7 million), Buildings and Grounds ($3.5 million), and Supervisory Control and Data Acquisition (SCADA) Improvements ($1.3 million).
Unfunded Projects
While there is funding available to support the capital projects for the City’s utilities, there is insufficient funding to meet the infrastructure needs in many other areas. Table 3: Unfunded CIP Projects by Theme identifies unfunded projects of $626.2 million that were itemized as part of this CIP process. Of this amount, $623.7 million would rely on funding from the General Fund Capital Projects Reserve.
Descriptions of the unfunded projects are provided in the Capital Improvement Program section of the Proposed Budget by theme.
The unfunded projects identified in the Proposed Budget represent only a portion of the unmet/deferred infrastructure needs in the City, with many significant needs spread across the capital theme areas, including:
• Storm Drain Master Plan - $290 million (in 2018 dollars) and the Storm Drain Pump Station Evaluation identified $3 million (2018 dollars) annually for pump station repair, maintenance, and upgrades
• Santa Clara Bicycle Plan Update 2018 - $39.3 million (in 2018 dollars)
• Santa Clara Pedestrian Master Plan - $194.0 million (in 2019 dollars)
• Americans with Disabilities Act Self-Evaluation and Transition Plan (Draft) - $758.5 million (in 2024 dollars)
• Public buildings (e.g., new City Hall, existing City Hall, historic buildings, corporation yard)
Additionally, there are other City Council priorities that have not been funded. On March 25, 2024 and April 3, 2024, the City Council held two City Council Priority Setting Sessions where needs and priorities were identified. Staff is developing the prioritized list that will be presented separately. There is existing funding of $250,000 to support these efforts.
Potential Funding Sources
The City has historically relied on annual General Fund savings allocated to the Capital Projects Reserve to support various capital improvements not supported by dedicated funding sources (e.g., utility infrastructure funds, dedicated transportation and parks funds). The Capital Projects Reserve does not provide consistent funding nor is it sufficient to address the significant unfunded/unmet capital infrastructure needs.
Additional capital revenue sources are needed to start meeting these needs. As directed by the City Council, staff has been researching a potential bond measure to address critical capital project needs. Because General Obligation Bonds require voter approval, efforts to inform residents about these unmet capital needs and obtain their feedback are critical to gauge community priorities. These efforts are ongoing and designed to allow a robust community engagement process.
In addition to the infusion of one-time funds to address the backlog of needs, an ongoing funding mechanism is necessary to ensure the capital infrastructure remains in good condition.
FY 2024/25 Operating Budget
FY 2024/25 Budget Balancing
The Adopted FY 2023/24 and FY 2024/25 Biennial Operating Budget included a General Fund budget-balancing strategy that relied on a combination of expenditure reductions, revenue solutions, and the use of reserves. The use of ongoing and one-time solutions balanced the competing goals of aligning ongoing revenues and expenditures and minimizing the service delivery impacts to the community. This also allowed for time to evaluate the post COVID-19 recovery.
While the General Fund position has improved, budget shortfalls are projected in upcoming years as described in the Ten-Year General Fund Financial Forecast section of the document. Budget actions will be brought forward in those years as necessary to balance the budget based on updated projections in the General Fund Forecast. In FY 2024/25, a small General Fund shortfall of $0.9 million is projected and is proposed to be addressed by the use of $0.4 million from the General Fund Budget Balancing Reserve established for this purpose and $0.5 million from the Budget Stabilization Reserve.
FY 2024/25 Operating Budget Amendments
The City Council approved the FY 2023/24 and FY 2024/25 Biennial Operating Budget in June 2023. While this year’s budget is focused on the capital budget, budget amendments to the FY 2024/25 Adopted Operating Budget are necessary to reflect updated revenue estimates and to account for updated labor and non-personnel costs and position changes in the General Fund and other funds.
The detailed amendments to the FY 2024/25 Operating Budget by fund can be found in the Appendices section of the Proposed Budget.
May 7, 2024 -- Study Session
At the May 7, 2024 Study Session, staff provided an overview of the budget and there were a couple of questions from the Council that are responded to below. A comment from the public focused on the request for a partial reopening of the International Swim Center.
Responses to Questions
1. What is the difference between the $45 million of unfunded Strom Drain projects listed in the CIP and the unfunded projects in the Storm Drain Master Plan of $290 million?
Response: The $45 million included on the unfunded projects list is a subset of the $290 million identified in the Storm Drain Master Plan and reflects the most urgent needs over the five-year CIP cycle, as identified by the Department of Public Works. Given the size of the needs, they are phased in with only a portion reflected in the five-year CIP.
2. Will the potential bond get the City through the $626 million of unfunded needs? Please reconcile the timing of the bond (30-year bond vs. five-years of unfunded needs).
Response: The sizing of a potential bond measure has not yet been finalized; however, the City has been evaluating a $598 million bond. While that would not address the complete list of unfunded projects, it would make a sizable dent in addressing those needs. This would be a substantial investment in the City and provide dedicated one-time funding that currently does not exist to address the City’s capital needs.
If voters approve a bond measure, the dollar amount would be issued in phases to align with the capital project delivery schedules. It is anticipated that the projects would be delivered over three to eight years depending on the timing of all project stages (e.g. design, engineering, construction). Typically, the bond issuances have a term of 30 years, allowing the projects to be paid off over time.
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 potentially significant impact on the environment.
FISCAL IMPACT
The Proposed Biennial Capital Budget totals $285.1 million in FY 2024/25 and $357.5 million in FY 2025/26, and the five-year Capital Improvement Program totals $1.04 billion. The Proposed Operating Budget for FY 2024/25 is $1.07 billion. The combined proposed capital and operating budgets for FY 2024/25 totals $1.35 billion.
Under the City Council approved budget policies, the Budget Stabilization Reserve is to be set at a minimum of 25% of General Fund expenditures. Given the City’s fiscal challenges, the City Council approved an exception to this policy in FY 2023/24, allowing the reserve to be set at a minimum of 15% of expenditures; this level is also recommended for FY 2024/25. In the FY 2024/25 Amended Budget, the Budget Stabilization Reserve is projected at $53.8 million, or 17.6% of General Fund expenditures.
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
Review and provide input on the Proposed FY 2024/25 & FY 2025/26 Biennial Capital Improvement Program Budget and FY 2024/25 Operating Budget Amendments.
Staff
Reviewed by: Kenn Lee, Director of Finance
Approved by: Jovan D. Grogan, City Manager
ATTACHMENT
1. FY 2024/25 & FY 2025/26 Biennial Capital Improvement Program Budget and FY 2024/25 Operating Budget Changes