REPORT TO COUNCIL
SUBJECT
Title
Joint Study Session to review Proposed FY 2021/22 and FY 2022/23 Biennial Operating Budget and FY 2021/22 Capital improvement Program Budget Adjustments and to review the Proposed FY 2021/22 Municipal Fee Schedule
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.
On February 1, 2021 and February 2, 2021, the City Council held Council Priority Setting Sessions to review the state of the organization, discuss policy priorities, and key data that provide direction on managing the City going forward. As part of those sessions, the City Council confirmed the following Council Strategic Pillars that are incorporated into the budget:
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 also reviewed and adopted a set of Budget Principles during the Council Priority Setting Sessions. These Budget Principles were established to 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. For FY 2021/22, the principles were modified to 1) recognize that the budget will be balanced with ongoing solutions to the extent possible; 2) added a principle to address the budget shortfall with a combination of ongoing and a one-time solutions to balance the competing goals of aligning ongoing revenues and expenditures and minimizing the service delivery impacts to the community; 3) added a principle to continue cost controls measures until General Fund revenues and expenditures are in balance; and 4) modified the principle that would maintain the Budget Stabilization Reserve (BSR) at a minimum of 15% of expenditures if an exception to the Council Policy for the BSR is considered.
The Proposed Budget was developed in accordance with these guiding principles that can be found in the Budget and Fiscal Policies section of the budget document. The Proposed Budget is attached to this memorandum and can be found online at:
<https://www.santaclaraca.gov/home/showpublisheddocument/73855/637560118815870000>
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.
Proposed FY 2021/22 and FY 2022/23 Biennial Operating Budget
The expenditures in the FY 2021/22 Proposed Budget total $1.0 billion and reflect a reduction of 15.5% from the FY 2020/21 Adopted Budget. In FY 2022/23, the budget increases to $1.03 billion as a result of annual adjustments to salaries and benefits and non-personnel costs and the timing of capital projects. The FY 2021/22 Proposed Budget is below the FY 2020/21 Adopted Budget of $1.12 billion primarily because the carryover of capital funds from FY 2020/21 to FY 2021/22 has not yet been factored into the budget. In addition, the FY 2020/21 Adopted Budget did not fully incorporate the impact of COVID-19; Phase 1 rebalancing actions for the budget were approved later in March 2021. The FY 2021/22 Proposed General Fund budget is also lower as this budget includes additional Phase 2 budget reduction proposals necessary to mitigate the economic impacts from the pandemic.
The Proposed Budget is presented at a challenging time as the City continues to face a COVID-19 induced General Fund shortfall of $29 million in FY 2021/22. At the same time, there is cause for cautious optimism as economic conditions are projected to significantly improve later in 2021. With the effective roll-out of the COVID-19 vaccines, businesses and the community are expected to begin resuming a greater degree of normal activities in FY 2021/22. This enables the judicious use of one-time solutions, primarily federal stimulus funds, to solve a portion of the budget shortfall, allowing time for General Fund revenues to recover. While more difficult budget reductions are still necessary to bring the budget into balance, the use of one-time funds avoids more severe service impacts that would otherwise have been required.
The Proposed Budget incorporates actions to close a portion of the $29 million General Fund funding gap with ongoing expenditure reductions of $5.0 million as well as additional revenues of $1.3 million, leaving a remaining balance of $22.7 million that is addressed with one-time funds. When combined with the small forecasted surplus in FY 2022/23 of $3.4 million, the General Fund deficit totals $19.3 million in FY 2022/23. This shortfall is proposed to be solved with General Fund revenues expected to be generated from additional fees and the use of the Budget Stabilization Reserve and the Land Sale Reserve. Based on the latest forecast and the budget-balancing strategy for FY 2021/22 and FY 2022/23, a shortfall of $14.6 million would remain after the two-year budget period.
The combined use of ongoing and one-time funds to address the budget shortfall is intended to balance the competing goals of aligning ongoing revenues and expenditures and minimizing the service delivery impacts to the community, which is one of the budget principles adopted for FY 2021/22
The budget actions brought forward in this Proposed Budget are considered Phase 2 of the budget actions necessary to address the COVID-19 impacts. On March 9, 2021, the City Council approved the Phase 1 budget reductions, which included the freezing of 43.50 positions and ongoing General Fund expenditure reductions of $12.7 million. This second phase of balancing actions relies less on ongoing expenditure reductions, with those totaling $5.0 million, and more on the use of federal stimulus funds, other reserves, and additional revenues. Combined, the Phase 1 and 2 budget reductions eliminate approximately 10% of the discretionary General Fund budget for departments.
To develop proposed General Fund budget proposals for FY 2021/22, departmental staff evaluated departmental operations and services to identify budget actions with the least impact. Revenue strategies include bringing fees closer to cost recovery and a limited number of new fees as well as transfers from the Vehicle Replacement Fund to reflect savings generated from replacing a portion of the City’s vehicle inventory with electric vehicles funded by Silicon Valley Power (SVP). The revenue opportunities that require voter approval are not assumed in the budget but will be an important strategy to help close the ongoing budget shortfall.
In addition to addressing a portion of the General Fund shortfall, budget proposals included in the Proposed Budget address a limited number of General Fund critical needs, to meet development services needs through fee-funded additions, and to support special and enterprise fund activities. The budget proposals are highlighted in the Transmittal Letter and described in more detail in the City Departments section of the Proposed Budget.
Proposed FY 2021/22 Capital Improvement Program Amendments
The City Council approved the FY 2020/21 and 2021/22 Biennial CIP Budget in June 2020. This action approved a two-year capital budget and presented a five-year capital improvement plan. While the focus of this year’s budget is operations, several budget amendments to the FY 2021/22 Adopted Capital Budget are also recommended. Further detail can be found in the Appendices section of the Proposed Budget.
These actions address health and safety issues (such as replacing defibrillators and adding diesel exhaust removal systems in the Fire stations), adjust projects based on the latest cost estimates and schedules, recognize and appropriate grant revenues, and address a limited number of new needs identified.
Priority Matrix
Due to the urgent needs regarding COVID-19, the City Council decided at their 2021 Council Priority Setting Session on February 1st and 2nd that service priorities would focus primarily on COVID-19 Assistance and Relief. This includes programs for food distribution, rental assistance, small business support and more.
The Priority Matrix is included in the Appendices section of the Proposed Budget.
Business Tax Overview
At the Council Priority Setting Session, information was requested on a potential Business Tax measure. Staff will present information and a timeline to potentially pursue a measure for the November 2022 ballot as part of the May 25, 2021 Budget Study Session.
Transient Occupancy Tax Direction
In November 2020, Santa Clara voters approved to increase the Transient Occupancy Tax rate by up to 4% from the current rate of 9.5%. The Proposed Budget assumes that the City Council will implement 2 percent of the 4 percent potential rate increase in FY 2021/22. A separate resolution to bring this forward is expected to be brought forward to the City Council later this calendar year.
Proposed FY 2021/22 Municipal Fee Schedule
The City’s Municipal Fee Schedule is reviewed annually by City staff as part of the normal course of operations. Periodically, a cost of service study is performed to identify the City’s full costs of providing fee-related services. Incremental updates typically occur in the years in between comprehensive studies. This update represents an interim year update with minor, incremental, changes proposed that incorporate feedback received during the prior fee update and feedback received subsequent to adoption of the City’s current schedule of fees. The fee schedule was most recently comprehensively updated in 2020 and was influenced by a comprehensive cost of service study completed in calendar year 2019.
User and regulatory fees are established by the City Council. This item and staff’s recommendations are intended to be considered upon completion of a public hearing that is scheduled for June 22, 2021. The public hearing provides all interested parties with an opportunity to comment or request clarification regarding any of the fees proposed for update. Prior to the public hearing, the City publishes a newspaper notice of the public hearing and notifies all interested parties that have requested to be notified regarding proposed fee updates.
The City’s Municipal Fee Schedule identifies fees for services and activities provided at the request of, or on behalf of, a single party as opposed to the public at large. These fees are commonly referred to as “user and regulatory fees” Examples of user and regulatory fees collected by the City of Santa Clara and municipalities throughout California include, but are not limited to:
• Planning Fees, for services such as entitlement review and review for compliance with the zoning code
• Building Fees, for services such as permitting of new construction or modifications to existing structures
• Engineering Fees, for services such as map review, encroachment permitting, and public improvement review
• Utility Fees, for services such as requests for sewer lateral inspections, and restoration of discontinued service
• Police Fees, for services such as vehicle impound and false alarm response
• Fire Fees, for services such as annual inspections and construction review to ensure compliance with the fire code
• Recreation Fees, for services such as program participation and facility rentals
• Administrative Fees, for services such as requests for public records
User and regulatory fees specifically exclude:
• Taxes
• Assessments
• Franchise Fees
• Development Impact Fees
• Fines or Penalties
• Utility Rates and Services Charges
Since this is an interim year, the vast majority of fees are proposed to increase by the most recent annual change in the regional consumer price index (CPI). The CPI change for the most recent year was 1.72%. This minor recalibration of fees is simply intended to maintain cost recovery levels consistent with the fees previously adopted by the City Council. Other adjustments implement specific inflators for certain fees, align with mandates, and provide further clarification.
In addition to the general changes proposed for fees, several discrete changes are proposed. The changes include:
These changes are intended to offset the costs of providing these services.
A comprehensive review of fees is currently underway. Results of the comprehensive study will be ready for review in Fiscal Year 2021/22. This study is expected to include an evaluation of Parks and Recreation fees and potential adjustments to improve cost recovery and align these fees based on market demand and comparable fees in neighboring jurisdictions.
Parks and Recreation Fee Recovery Policy
The Proposed Budget balancing strategy assumes additional revenues from improving the cost recovery of Parks and Recreation fees. Currently, these fees are 17% cost recovery with a General Fund subsidy of approximately $12 million. While some of these fees were adopted below cost recovery, further discussion of adopting more specific targets of cost recovery based on the primary beneficiary of the service. The chart below is an example of targeted cost recovery levels by user benefit.
This type of model would target parks and recreation fees for those activities that benefit the individual at 100% cost recovery, and target fees below cost recovery for those that provide a wider community benefit. Specific fee recommendations would be brought forward later in FY 2021/22 to amend the municipal fee schedule for parks and recreation fees; however, any current feedback and direction to (1) understand whether the Council would like to engage in improved cost recovery per the budget principles and (2) provide feedback on a framework to evaluate improved parks and recreation cost recovery would help to focus future discussion.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environment Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(a)(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.
FISCAL IMPACT
The FY 2021/22 and FY 2022/23 Proposed Biennial Operating Budget totals $883.1 million and $928.0 million, respectively. The Capital Budget totals $118.2 million in FY 2021/22.
The Budget is scheduled for the City Council’s consideration for adoption on June 22, 2021.
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 <mailto: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 2021/22 and FY 2022/23 Biennial Operating Budget and FY 2021/22 Capital Improvement Program Amendments.
2. Review and provide input on the Proposed FY 2021/22 Municipal Fee Schedule.
3. Provide direction on the implementation of a Transient Occupancy Tax rate increase that received voter approval in November 2020.
4. Provide direction to the City Manager to return to Council with a Parks and Recreation fee cost recovery policy for Council consideration.
Staff
Reviewed by: Kenn Lee, Director of Finance
Approved by: Deanna J. Santana, City Manager
ATTACHMENTS
1. FY 2021/22 and FY 2022/23 Proposed Biennial Operating Budget and FY 2021/22 Capital Improvement Program Amendments
2. FY 2021/22 Proposed Municipal Fee Schedule