TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Javier Carcamo, Finance Director
PREPARED BY: Geovanny Calvopina, Financial Analyst
SUBJECT: Fiscal Year 2022/23 Year End Report and Approve Appropriations
for Carryover of Unspent Amounts from FY 2022/23 to FY 2023/24
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RECOMMENDATION
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Accept this report;
Amend the Fiscal Year 2023/24 Operating Budget to include the Fiscal Year 2022/23 Rollovers; and
Appropriate the Unassigned Fund Balance.
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PRIOR ACTION/VOTE
On June 1, 2021, the City Council, the Board of Directors of the Murrieta Fire District (MFD), the Community Services District (CSD), the Murrieta Library District (MLD), the Housing Authority (HA), and the City Council acting as Successor to the Redevelopment Agency (SRDA) adopted a series of Resolutions (21-4405, 21-4406, MFD 21-210, CSD 21-258, HA 21-33, and 21-4407) approving the Operating Budgets for Fiscal Years (FY 2021/22 and 2022/23) (Vote: 5-0).
On December 6, 2022, the City Council, the Board of Directors of the MFD, CSD, MLD, SRDA, and the HA approved various amendments to the Fiscal Year 2022/23 Operating Budget on
(Vote: 5-0).
On February 21, 2023, the City Council, the Boards of Directors of the MFD, CSD MLD, SA, and the HA approved amendments to the Fiscal Year 2022/23 Operating Budget (Vote: 5-0).
On May 16, 2023, the City Council, the Boards of Directors of the MFD, CSD MLD, SA, and the HA approved amendments to the Fiscal Year 2022/23 Operating Budget (Vote: 5-0).
CITY COUNCIL GOAL
Maintain a high performing organization that values fiscal sustainability, transparency, accountability and organizational efficiency.
BACKGROUND
Budgets are projections based on known and anticipated future revenues and expenditure obligations. Staff monitors and analyzes actual revenues and expenditures against projections throughout the Fiscal Year (FY) and provides quarterly reports to the City Council, City Manager, and Department Directors. They also recommend budget amendments, if necessary. This report aims to provide consistent financial updates by summarizing the Citywide estimated financial operating results for the FY that ended June 30, 2023. While this report is presented at a Citywide summary level, the estimated final results for each major fund, which includes the General Fund, Measure T, Fire District, Community Services District, and Murrieta Library, can be found in Attachment 1.
The totals presented herein for FY 2022/23 summarize the actual revenues and expenditures compared to the corresponding adopted and amended budget amounts for the year. However, please note that as of the date of this report, the independent external audit for FY 2022/23 has yet to be concluded. As a result, the actual amounts are subject to change should accounting adjustments be necessary before finalizing the audit. This report also includes carryover budget requests for the appropriation of encumbrances from FY 2022/23 to the FY 2023/24 budget.
The financial operating balances for the year exceeded expectations due to a combination of increased revenues and budgetary savings. Multiple factors contributed to ending the year on a positive note, including higher-than-anticipated Sales Tax and Property Tax, along with other revenue sources. Additionally, savings were achieved through vacant positions and budgetary savings under general Operations & Maintenance.
The City generated $204.5 million in revenue and $168.6 million in expenditures for all funds. The actual revenue exceeded the amended budget by $23,452,706, while expenditures were under budget by approximately $1 million, mainly because of approved budget amendments throughout the year. This resulted in an operating surplus of roughly $36 million. The City of Murrieta (City) achieved positive operating results due to budgetary savings and revenues exceeding actual expenditures.
It is essential to note that the figures listed in this report are subject to change until the annual audit of the City's financial records and the Annual Comprehensive Financial Report (ACFR) are completed.
The following table summarizes all City funds' unaudited revenue and expenditures through June 30, 2023. A complete Budget to Actual Report of all accounts is included in Attachment 2.
Revenues
The three revenue categories that experienced the most significant increases in FY 2022/23 were Sales Tax, Property Tax, and Other Miscellaneous Revenues.
• The City has seen steady revenue growth in the FY in Sales Tax and Property Tax. Sales Tax comprises two sources: Bradley Burns (local Sales & Use Tax) and Measure T (a voter-approved 1% District Tax). These two sources are the primary revenue generators for the City. Sales Tax revenue experienced significant increases before FY 2022/23, but it is now leveling out to regular levels of growth. The Sales Tax budget was conservatively established due to the uncertainty of the economy; however, collections exceeded the Amended Budget by $3,601,037 (or 7%), with a total collection of $55,317,537. Bradley Burns (Sales Tax) has seen a 3% increase from the prior year, whereas Measure T's growth was less than 1%. The chart below shows the Sales Taxes collected from FY 2019/20, the first full year Measure T was collected, to the present.
• Property taxes for FY 2022/23 were 14% higher than anticipated or $3.8 million above the projection. The City experienced strong home sales through most of the fiscal year until interest rates started to rise to offset rising inflation. As interest rates are nearly double what they were last year, Property Taxes are anticipated to reduce back to an average 2-3% annual increase.
• In FY 2022/23, the City received approximately $38.7 million in Other Miscellaneous Revenues, which exceeded the anticipated revenue by 9%. These revenues comprise Developer Impact Fees, Federal & State reimbursements, and Other Revenues.
The City received $9.5 million in Special Taxes in FY 2022/23. These taxes are collected from properties within Community Facilities Districts (CFDs), also known as Mello-Roos Districts, to fund the annual debt service on the bonds. The CFDs were formed to fund the acquisition of public facilities in connection with new construction.
In accordance with Governmental Accounting Standards Board (GASB) Statement No. 91, the City must recognize Revenues and Expenditures related to the CFDs. Previously, the activities related to these districts were only recognized on the balance sheet. A budget will be established for all Revenues and Expenditures associated with the CFDs going forward.
Expenditures
Citywide expenditures ended the year being under budget by $938,787. The most significant budgetary savings came from Personnel Costs and Operations & Maintenance (O&M).
• Personnel Costs were under budget by $790,479 or 1% under the Amended Budget. Most savings derive from unanticipated vacant positions and the delay in hiring newly budgeted positions.
• The O&M costs were $3.3 million or 6% less than the Amended Budget. The savings were mainly due to Contract Services.
• Internal service fund allocations ended the FY $537,981 under budget. This was intentional due to the year-end true-up of the Information Technology (IT) Fund. Any budgetary savings within this fund were credited back to each contributing fund.
The Transfers Out Expenditure category was over budget by $2.8 million, which is a result of negative and positive variances. Operating Transfers to funds that do not have sufficient revenues to cover their expenses are "trued-up" at the end of the FY. The "true-up" resulted in budgetary savings of $4.1 million for certain funds; however, there was $6.9 million in unbudgeted transfers related to the CFDs associated with Debt Service payments. These transfers will be budgeted going forward.
Estimated Components of Fund Balance
In accordance with GASB Statement Number 54, each fund balance is categorized primarily based on the extent of its resource usage constraint. The table below displays the anticipated variations in each fund balance category within the General Fund and Measure T Fund from June 30, 2022, to June 30, 2023.
The balances are not only reliant on the operation outcomes (i.e., the difference between Revenues and Expenditures), but also on the changes in other fund balance categories such as long-term note receivables, inventory, annual debt service payments, capital projects, and unspent appropriations carried over to the succeeding FY. As mentioned earlier, the amounts are subject to change until the external audit and the City's FY 2022/23 financial statements have been completed. Below is a classification of the General Fund and Measure T fund balances. The fund balance classifications for the remaining major funds (Fire, CSD, and Library) can be found in Attachment 4. The estimated fund balances for all funds are also listed in Attachment 5.
For the General Fund, the most significant changes in the fund balance classifications come from Committed and Unassigned.
• The Committed Fund Balance of the General Fund has increased by approximately 2%. The primary reason for this increase is the requested carryovers from FY 2022/23 to FY 2023/24, which will be discussed in detail in the following sections. Furthermore, the Unassigned Fund Balance has increased by 41.6%, which brings the estimated Unassigned Fund Balance to $36,591,368. This growth can be attributed to higher-than-anticipated revenues and planned and unplanned expenditure savings as well as fund balance changes in the other fund balance categories.
For the Measure T Fund, the most significant changes in the fund balance classifications come from Committed and Unassigned.
• The Committed Fund Balance decreased by 26.9% due to decreases in funding needed for capital projects. However, the Unassigned Fund Balance increased by 126.2%, equivalent to $31,212,803. This increase was due to higher-than-anticipated revenues and savings from planned and unplanned expenses.
It is important to note that while the Unassigned Fund Balances for the General Fund and Measure T appear to be high, most of those balances were designated as part of the Biennial Budget Adoption.
Appropriation of Unassigned Fund Balance
To ensure that the City functions optimally and remains financially stable, it is crucial to focus on maintaining reserves for both operations and sustainability. Staff recommends allocating a portion of the projected Unassigned Fund Balance for Measure T to these Reserves as part of this budget update.
For FY 2022/23, the delta between actual Revenues and Expenditures for the General Fund was approximately $10.6 million. A portion of the excess will fund the proposed carryover requests discussed in the following section. Staff will propose an allocation of the balance of the excess during the upcoming FY 2023/24 Mid-Year Budget Update.
For FY 2022/23, the delta between actual Revenues and Expenditures for Measure T Fund was approximately $9.4 million; this was approximately $4.69 million more than what was anticipated. Staff recommends appropriating this excess to Economic Contingency and Continuing Operations Reserves.
The funds appropriated to the Economic Contingency Reserve will be set aside to address financial impacts resulting from changes in the economic environment. Funds appropriated in the Continuing Operations Reserve will be used to fund the recently approved public safety employee group memorandums of understanding (MOUs), if needed; unanticipated one-time expenditures; equipment; and capital improvements. Per the Fund Balance and Reserve Policy 100-11, the City Council will need to authorize funds from any Reserve category before its use.
Requested Carryover FY 2022/23 Budget Appropriations to FY 2023/24
Purchase Orders (POs) are used to encumber funds for procurement of goods and services required for operating activities and/or specific projects. If the projects remain unfinished by the end of the fiscal year the PO was established, the remaining budget and PO can be carried over to the following year with City Council authorization. Staff identified projects that were not completed during FY 2022/23 due to various reasons such as timing, staffing, reprioritization of workload, or projects spanning multiple years. Most of the PO carryover requests, accounting for 70%, are related to Capital Improvement Projects, while the remaining 30% are from Operations.
In addition to the PO carryovers, there are some requests for budget-only carryovers that are not associated with a PO. The total amount of these carryover requests for revenues is $3,934,425 and $4,248,978 in expenditures. These budgets were reserved for grant-funded projects not completed in the previous FY 2022/23, but City staff expects them to be finished in the current FY 2023/24. Examples of budget-only carryovers include one-time replacement or purchase of computer equipment and software, fire vehicle equipment, and unspent grant funds.
The requested budget amounts for carryover are currently unspent and available. If not requested for carryover, these amounts would have been considered budgetary savings and would have contributed to the fund balance. A brief summary by Fund number is presented below to provide an overview of the carryover requests. For detailed information, please refer to Attachment 3.
FISCAL IMPACT
No net fiscal impact is associated with the action related to the carryover of unspent appropriations. The previously authorized expenditures will simply be spent in a later period, which only affects the timing of cash flow.
Appropriate excess Measure T Unassigned Fund Balance in the amount of $5,282,884 as reference in this report.
ATTACHMENTS
1. FY 2022/23 Budget to Actual Report - Major Funds
2. FY 2022/23 Budget to Actual Report - All Funds
3. FY 2022/23 Carryover Requests by General Ledger Account and Purchase Order
4. Components of Fund Balance (Estimated)
5. Fund Balances for All Funds (Estimated)