TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Javier Carcamo, Finance Director
PREPARED BY: Geovanny Calvopina, Financial Analyst
SUBJECT:
title
Fiscal Year 2023/24 Third Quarter Financial Status Report and Proposed Budget Adjustments
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RECOMMENDATION
recommendation
Receive and discuss the staff report;
Amend the Fiscal Year 2023/24 Operating Budget as defined in the Fiscal Year 2023/24 Third Quarter Proposed Budget Amendments;
Amend the Fiscal Year 2023/24 Capital Budget as defined in the Fiscal Year 2023/24 Third Quarter Proposed Budget Amendments for project 21034; and
Approve the Updated Schedule of Authorized Positions List.
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PRIOR ACTION/VOTE
On June 6, 2023, the City Council, and the Boards of Directors of the Murrieta Fire District (MFD), Community Services District (CSD), Murrieta Library District (MLD), and Housing Authority (MHA), and the City Council acting as Successor to the Redevelopment Agency (RSA), adopted a series of Resolution Nos. (23-4671, MFD 23-219, CSD 23-276, MLB 23-17, RSA 23-29, and MHA 23-43) approving the Operating Budgets for Fiscal Years (FY 2023/24 and 2024/25
(Vote: 4-0-1).
On November 21, 2023, the City Council, and the Boards of Directors of the MFD, CSD, MLD, MHA, and the RSA approved the Fiscal Year 2023/24 Operating and Capital Budget First Quarter Budget Adjustments (Vote: 5-0).
On December 5, 2023, the City Council, and the Boards of Directors of the MFD, CSD, MLD, MHA, and the RSA approved the Fiscal Year 2022/23 Year End Report and Carryover Appropriations to FY 2023/24 (Vote: 5-0).
On March 5, 2024, the City Council, and the Boards of Directors of the MFD, CSD, MLD, MHA, and the RSA approved the Fiscal Year 2023/24 Second Quarter Financial Status Report
(Vote: 5-0).
CITY COUNCIL GOAL
Maintain a high performing organization that values fiscal sustainability, transparency, accountability and organizational efficiency.
BACKGROUND
The City of Murrieta (City) adopts a biennial budget every two years, starting in odd-numbered years. The budget period runs from July 1 to June 30. The Government Finance Officers Association (GFOA) recommends that all governments implement a formal process to compare the budget to actual results to monitor financial performance. To comply with these best practices, the staff prepares quarterly budget reports for the City Council to review and consider. These reports ensure transparency and provide opportunities for staff to recommend that City Council adjust the operating or capital budget based on analyzed trends.
This Third Quarter Budget Update Report serves three purposes:
1. Provide a Fiscal Year 2023/24 Budget Update through the Third Quarter of the Fiscal Year (July 1 - March 31, 2024);
2. Request appropriations for Fiscal Year 2023/24 Operating Budget for items not included in the original budget adoption and adjust budgets for various revenue and expenditures accounts detailed in Attachment 3;
3. Request appropriation in the Fiscal Year 2023/24 Capital Improvement Plan Budget; and
4. Request approval of the Updated Schedule of Authorized Positions List.
During the Second Quarter Budget Update, it is customary for Finance staff to propose adjustments to the operating or capital budget to ensure that revenues and expenditures are aligned with current trends and necessities. However, during the most recent update, staff elected to postpone these changes to monitor fluctuations in key revenue sources that were trending lower than expected. As a precautionary measure, the City Manager and Finance Director requested that departments find budgetary savings within their departments of 10%, where possible, to help balance the current budget; temporarily defer one-time large purchases; and hold off on hiring new, and in some cases vacant positions through the end of the fiscal year. These measures resulted in adjustments to revenue, personnel, operation and maintenance costs, capital outlay, and allocations (i.e., internal services charges). As a result, this Third Quarter Budget Update Report will include the financial status report and the net appropriation requests to reconcile revenues and expenditures throughout the remainder of this fiscal year, with a focus on the General Fund and Measure T Fund. However, reports for Citywide, Murrieta Fire District, Community Services District and Library are detailed in Attachment 1 and a report for all funds is in Attachment 2.
Historically, the City has maintained a conservative budget approach to ensure fiscal sustainability in the long term. With a strong operating reserve balance of at least 25% of the operating budget, the City’s fiscal position remains very good. While the City’s key revenue sources fluctuate, it has the capacity to address unforeseen economic changes by implementing successful cost-cutting measures and using available fund balance. The proposed precautionary measures will ensure our City is in a good fiscal position while maintaining the current level of services for our residents.
Revenue and Expenditures through March 31, 2024
General Fund-Revenue
The General Fund, the City's most significant fund, consists of various revenue sources and expenditure categories. As of March 31, 2024 (75% through the fiscal year), the City had received $47,843,292, which is 69% of the amended revenue budget of $69,595,759. The City had expended $46,972,593, or 62% of the amended expenditure budget.
During this period, the revenues were driven by the better-than-expected receipts for Other Miscellaneous Revenue from grant reimbursements and investment income. Before discussing the main revenue sources, it is important to note that some revenues, such as property taxes and special assessments, are not received monthly, unlike expenses such as salaries and ongoing maintenance contracts, which can be anticipated monthly. Therefore, the General Fund, as well as other funds with semiannual revenue collections, will not track 75% of the budget through the first nine months of the fiscal year. In addition, due to natural collection delays, some revenue sources are heavily influenced by national and local economic changes, such as Sales Tax, Charges for Services, Transient Occupancy Tax (TOT), and Property Transfer Tax.
The Sales Tax receipts in the General Fund represent Bradley Burns's Sales Tax. The above table reflects:
• Collections through January 2024 were $15,349,928, which is 55% of the amended budget.
• Bradley Burns’s Sales Tax are 2% below the same period last year (table below), which is consistent with other cities in the region.
• The decreases for this reporting period were driven by declines in sales for two major industry groups: auto & transportation, which had a 6.1% decrease in fourth quarter sales, and general consumer goods, which had a 3.3% decrease in fourth quarter sales.
During this period, other General Fund revenue sources are reported as follows:
• Collections for Charges for Services were $2,801,243, which is 59% of the amended budget.
• Charges for Services are 28% below the same period last year, which is driven by a decline in plan check and inspection services.
• Collections of Transient Occupancy Tax (TOT) were $1,120,273, which is 28% of the adopted budget.
• TOT was 8% lower than the same period last year, which is driven by a general “softening” of the local economy and an approximate five (5) month delay of opening Murrieta Hot Springs.
• Collection of Property Tax was $369,754, which is 3% below the same period last year.
• Economic changes did not negatively impact VLF / Property Tax Comp and Franchise Tax revenues; although these revenue sources are collected quarterly.
Based on the reported changes in General Fund revenue collections, staff recommends that City Council approve revenue adjustments to Sales Tax, Property Tax, Other Misc Revenue, Charger for Services, Transient Occupancy Tax, License/ Permit Fees, Property Transfer Tax, and Loan / Bond / Lease Proceeds as part of this budget update, which will be discussed in the General Fund Changes section of this report.
General Fund-Expenditure
As of March 31, 2024, the City has spent 62% of the General Fund's amended budget.
• Personnel expenditures are currently at 63%, which fortunately, is lower than expected through the third quarter of the fiscal year because of vacancies. However, they are still higher than the previous year's expenses due to authorized position changes and previously approved increases in personnel costs.
• O&M expenses are at 59% of the budget, which is expected because some expenses are not consistent every month.
• Allocations and Transfers Out are both at 75%, which is expected.
• Capital Outlay expenditures are usually one-time purchases and may not reflect 75% of the third quarter of the fiscal year. As of March 31, Capital Outlay expenditures are 24% of the amended budget.
Measure T-Revenue
Measure T, the second most significant fund for the City, consists of a single revenue source and several expenditure categories. As of March 31, 2024, the City has received $16,755,808, which is 55% of the $30,524,800 of the adopted revenue budget. The City has expended $20,123,316 or 70% of the amended expenditure budget.
The revenues for this period were driven by lower-than-expected Sales Tax receipts. It is important to note that Sales Tax collections, like those in the General Fund, are on a two-month delay, such that they will not track 75% of the budget through the third quarter of the fiscal year and are similarly influenced by the “softening” of the economy. The above table reflects collections through January 2024.
The Sales Tax receipts collected under Measure T are the voter-approved 1% tax. Through January 2024, the collections for Measure T amounted to $16,755,808 or 55% of the adopted budget. Compared to the same period last year, the collections are approximately 1% lower, which is in line with the general trend of Bradley Burns Sales Tax. However, the decrease wasn't as significant due to the way that Measure T is collected. The tax is collected similarly to traditional sales tax with only minor differences. The same exemptions that apply to sales taxes also apply to Measure T. This tax will be paid by anyone who purchases goods at retail establishments within Murrieta. Additionally, Murrieta residents will pay the tax when they make certain purchases such as a vehicle, boat, or aircraft anywhere in California, and register it to an address in Murrieta, subject to certain statutory use exemptions. The decrease in collections result from the general “softening” in the economy and the delay of anticipated big box retailers and hospitality businesses. Staff recommends the City Councill make revenue adjustments as part of this budget update, which are outlined in the Measure T Changes section of this report.
Measure T-Expenditure
As of March 31, 2024, the City has spent 70% of Measure T’s amended budget:
• Personnel expenditures are currently at 69%, which is lower than expected at the third quarter of the fiscal year due to vacancies.
• Transfers Out and Allocations are both at 75%, which is expected.
• O&M expenses are at 35% of the budget, which is expected because some expenses are not consistent every month.
• Capital Outlay expenditures are usually one-time purchases and may not reflect 75% of the budget through the third quarter of the fiscal year. As of March 31, Capital Outlay expenses are 96% of the amended budget.
Third Quarter Proposed Adjustments
General Fund Changes
The table above and below outline the proposed revenue budget adjustments, which indicate a net decrease of $1,991,954, or 3% of total General Fund revenue. This net decrease is the result of decreases and increases in different revenue accounts.
Overall decreases in budgeted revenues total $4,461,300, which include the following major sources:
• Decrease of Bradley Burns Sales Tax of $1,869,300
• Decrease of Transient Occupancy Tax (TOT) of $1,860,000
• Decrease of Charges for Services of $330,840
• Decrease of Property Tax Transfer of $250,000
There are also increases totaling $2,659,346 which helped to offset the significant decreases, which include the following major sources:
• Increase of Interest Income of $1,550,000
• Increase of Other Misc Revenue of $239,642
• Increase of Property Tax of 385,000
• Increase of License / Permit Fees of $136,000
The tables above also outline adjustments to the expenditure budget, which indicates a net decrease of $1,721,152. The net decrease includes $3,075,259 in reduced expenses, of which $1,261,130 is for personnel costs, primarily due to currently frozen positions which will remain vacant until the next fiscal year.
Reduced General Fund expenses also include the following major categories:
• Decreased Operations and Maintenance and Capital Outlay to a total of $1,224,769 primarily due to reduction of contract services and deferred purchase of police vehicles and public works equipment.
• Decreased in allocation for risk-related expenses of $589,360.
There are also increases to proposed expenses of $1,354,107, which includes:
• Increase for personnel costs of $402,084 due to new position salary and benefits.
• Increase of Operations & Maintenance and Capital Outlay increases of $946,699, primarily for contract legal services, consulting services and electricity costs.
• Increase of Allocations of $5,324 for risk-related expenditures.
In summary, the General Fund's proposed revenue and expenditure budgets are $67,603,805 and $75,809,419, respectively, resulting in the use of an unassigned or available fund balance of $8,205,614.
Measure T Changes
The proposed revenue budget reduction is $2,022,360, or 7%. This is mainly to align our current Sales Tax collection with what is expected to be received for the rest of the year.
Likewise, we are also proposing expenditure budget reductions of $625,722, as outlined in the table above. This includes both decreases and increases in different expenditure accounts. The decreases amount to $802,072, out of which $191,402 is for the vacant positions in the Finance and Library departments. The rest of the decrease is due to delayed equipment purchases, and deferred vehicle purchases, reductions in landscaping services and advertising costs, in the amount of $485,510. Also, Allocations have been reduced by $125,160 after the reconciliation of Risk related expenses. The increases amount to $176,350 and are mainly for the implementation of Energov software for the Code Enforcement department and the cost of a vehicle lease, along with the interest expense.
In summary, the Measure T Fund's proposed revenue and expenditure budgets are $28,502,440 and $29,852,232, respectively, resulting in the use of an unassigned or available fund balance of $1,349,792.
Staffing Changes
Staff regularly bring the Schedule of Authorized Positions to the City Council with recommendations to adjust the Schedule for new positions and to re-title existing positions. This Schedule adjustment proposes adding one half (.5) Full-Time Equivalent (FTE) position to the Schedule for FY 2023/24, bringing the FY 2024/25 total to 477.59 FTE positions (Attachment 5). The list below includes a combination of additions, position title changes, and the reclassification of two positions that are necessary as part of a structural realignment of the organization intended to increase operational efficiency and effectiveness. The budgetary changes for the FY 2023/24 positions that have taken place as part of the Mid-Year Update and this Third Quarter Update are reflected as part of the proposed adjustments and can be found in Attachment 3.
Fund Balance and Reserves
The General Fund is proposed to have an adjusted Unassigned Fund Balance of $22,871,726 at the end of the Fiscal Year. The Unassigned Fund Balance comes from funds that were not expensed during the fiscal year and have not yet been transferred to dedicated reserves or otherwise designated for another purpose. The use of Unassigned Fund Balance includes:
• Use of $8.2 million to cover expenses that exceed incoming revenue.
• An allocation of $1.8 million to future Capital Improvements Plan projects.
• A net contribution of $14.6 million to reserves, which is comprised of $18.6 million in new contributions and $4 million in use of reserves.
Measure T is also expected to have a use of Unassigned Fund Balance of $15,184,497. Use of that unassigned balance includes:
• Use of $1,349,792 to cover expenses that exceed incoming revenue.
• An allocation of $1.7 million to Capital Improvements Plan projects.
• A net contribution of $13.8 million to reserves, which is comprised of $14.3 million in new contributions and $533,000 in use of reserves.
The variances in Unassigned Fund Balance for the Fire, Community Services, and Library Districts will be trued-up and addressed as part of a future budget report update. Below is a summarized version of this information. A complete list of the overall proposed changes by fund is included in Attachment 3.
FISCAL IMPACT
The proposed Citywide amendments for all funds for the Third Quarter of the FY 2023/24 Operating Budget include an increase in revenue of $61,012 and a decrease in expenditures of $1,533,883. Similarly, the proposed amendments for the Third Quarter of the FY 2023/24 Capital Budget total $16,670 in expenditures. The General Fund's proposed revenue and expenditure budget is $67,603,805 and $75,809,419, respectively, resulting in the proposed use of unassigned or available fund balance of $8,205,614. Measure T Fund's proposed revenue and expenditure budget is $28,502,440 and $29,852,232, respectively, resulting in the use of an unassigned or available fund balance of $1,349,792. A complete list of the requested appropriations is included by General Ledger account and is included in Attachment 3.
ENVIRONMENTAL IMPACT
None.
ATTACHMENTS
1. FY 2023/24 Third Quarter Budget to Actual Report - Citywide and Major Funds
2. FY 2023/24 Third Quarter Budget to Actual Report - All Funds
3. FY 2023/24 Third Quarter Proposed Budget Adjustments
4. Fund Balances for All Funds (Estimated)
5. Updated Fiscal Year 2023/24 Authorized Position List