When the Council adopted the fiscal year 2023 (year ending 6.30.23) budget at our 6.21.22 Council meeting, the City did so with a $127K operating budget deficit. This deficit was covered by appropriating reserves from ARPA monies.
At our February Budget/Audit Committee meeting (2.27.23) staff updated its revenue projections for the City and determined that revenues would likely come in higher than anticipated by approximately $82K. This is from a combination of sources, the largest of which is property taxes. We are also seeing greater than anticipated revenues in vehicle license fees, sales tax, franchise fees, and interest earnings. During this meeting staff did not consider savings from vacancies and certain increased returns from investments that are being shifted to higher yield products. The Committee did request that each of these be included when the mid year budget review comes back to the full Council in early April where we will get a better understanding of the anticipated results of FY23.
These fluctuations emphasize the need to conduct robust analysis in order to gather information to base decisions upon. Rather than focus on suggesting a parcel tax as a first resort, we need to dig deeper and understand the basis for any projection, the sensitivity of any projection, any levers available to us in order to impact the overall results, and test the projections against actual results. Because the City was without a full time Finance Director for a period of time, some of this analysis needed to be tabled in order to focus on day to day operations. Now that we have a full time Finance Director, we are beginning to do the analysis necessary to get a better handle on our financial situation.
Given the focus on fiscal sustainability, I wanted to provide a few updates regarding what the City has done recently, and what is still in progress:
Staff Quality of Life
Focus Time for Staff: I've mentioned previously that we have closed City Hall to the public on Wednesdays in order to provide staff dedicated time to focus. This is a no cost action that provides a benefit to city staff and helps our overall efficiency. We will also be considering certain wish list items as requested by staff that they could use in order to make work more efficient and make the work environment better.
Master Fee Schedule and Rate Study
We are currently engaged with a vendor to conduct a rate study that will for the first time include an "all-in" rate for all of the fees charged for specific services and use of facilities. We haven't conducted a rate study in several years and we need to do so in order to ensure the City is being adequately recovering its costs. We expect to adopt a new master fee schedule around the May time frame.
Energy - Street Lights and Infrastructure Investments
We formed an Energy Services and Infrastructure Renewal ad hoc committee consisting of myself and Councilmember Trupiano. As part of this ad hoc committee, we met with our PG&E representatives for the first time in order to identify potential cost savings, infrastructure improvements, and potential rebates. One thing that we were able to identify was the need to switch the rate plan for some of our street lights. The city owns over 1,000 street light poles, and while historically we have replaced some of our older streetlights to LEDs, it turns out that we did not complete the steps necessary to adjust the billing rate for some of those lights and we have not been taking advantage of the cost savings. The work to do this is in flight and we'll have a better idea of the cost savings as we progress.
Also part of the Energy Resiliency ad hoc committee, we have been working with Climatec, a vendor we engaged to assess potential savings across all of our energy uses including gas, water, and electricity. Phase I of their work was the assessment and was done at no cost or obligation to the City. In looking at the draft proposals for Phase II, this work has the potential to have significant benefits in terms of cost and energy use and I'm hopeful it will come to fruition. Ahead of receiving a proposal for Phase II projects, the City is applying for a low interest California Energy Commission loan in order to secure financing for the work, should it make sense to proceed. We will be discussing potential phase II projects at our upcoming meeting on 4.4.23.
Investment Policy and Swaps:
We've spent a significant amount of time looking at our overall investment portfolio. At a little north of $12M, the returns on these funds has the potential to be meaningful to the City. We typically invest in fixed income products as others products carry higher risks and a primary goal of our investments is the preservation of principal. In looking at the detail of our holdings, it turns out that the previous strategy of fixed income five year laddering with CDs was problematic in a couple of ways.
The City's Investment Policy controls the methods and procedures for the investment of public funds. There are three primary objectives of the policy - Safety of Principal, Liquidity, and Return on Investments. Part of the policy states that in order to mitigate certain risks, operating funds should be invested primarily in shorter term securities, and funds should be invested primarily in securities with an active secondary or resale market. This means that if we place an investment and the market turns unfavorably we should be able exit a position relatively easily without taking a significant haircut. Some of these things didn't happen as well as they could have.
By engaging in a 5 year laddering strategy, we locked in rates that were historically low for a long time. Because these were primarily in CDs, there is not a readily available market to exit these positions without realizing a significant loss. We have engaged in a swap analysis to determine if there are positions it makes sense to exit and will do so if prudent.
Our investment policy also calls for a quarterly review, and we've asked our Custodian (UBS Bank) to participate so they can provide more timely updates. To date, the Custodian has not participated in a status update with the Budget Committee so I'm looking forward to starting this process.
Interest and Liquidity:
In addition to the investments held in fixed income securities, the City has held a significant amount of funds in both CAMP and LAIF funds, which are both highly liquid and designed for short term holdings for local governments. The city has used these investment options in order to support operating liquidity. Given the relatively high amounts held at CAMP and LAIF (approximately $2M), we were not taking advantage of higher yield securities for amounts over and above the City's liquidity needs. As such, the City will be taking a portion of these balances that are known to be not necessary for liquidity purposes and immediately placing them in higher yield securities. The City will be continuing analysis on our operating cash needs to determine if a greater portion these funds can be placed in higher yielding securities.
Service Contract Review:
We have a number of on demand contracts with various services providers ranging from filling pot holes to repairing sidewalks to replacing streetlights that are out. We will be doing a review of each to make sure our vendors are performing as expected and for those that are coming due we will be conducting a competitive bidding process.
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While no single effort will solve the fiscal challenges that we face, combined we are making progress. These challenges did not start overnight and they will not be solved overnight either, but through persistent effort we will ensure that we are exploring all available levers we have to put us on track towards fiscal sustainability.
