City Finances Update, including recent mid-year budget actions

As we transition through the economic and social effects of the pandemic, the City’s budget has gone through its most volatile period in many years. In the last year, the City Council and City staff have made significant strides in restoring the services that were cut during 2020 addressing both the immediate needs and medium to long term fiscal sustainability.

This update shares recent budget changes, and mid-year actions by the Council restoring certain service priorities. It also answers questions we’ve heard from the community, including the FY 2022 budget surplus, FY 2023 projections, and addresses misinformation that has been brought to our attention.

Financial Summary, Key Highlights

The City Council approval of its mid-year budget in February reflects the City’s recovery tracking better than the projections used for FY 2023 budget development. While the future remains uncertain, the near-term recovery and recent voter approval of ballot measures give us confidence in being able to restore and enhance community services. These restorations have been achieved using one-time funding to bridge the gap until stable revenues would be in place to sustain these services.

The City recently reported an FY 2022 year-end surplus of $40.8 million (M) above target reserve levels. This consisted of revenues of $238.7M that were higher and expenditures of $197.9M that were lower than budgeted for the year.

Here are a few highlights on these figures:

• Revenues of $238.7M were higher than budgeted $223.8M (by $14.9M) due to excess receipts in property, sales, hotel (transient occupancy), and documentary transfer taxes.
• Expenditures of $197.9M were lower than budgeted $233.2M (by $35.3M) of which over 70% is due to delay of expenditures from 2022 to 2023.
• Some observers described this as unanticipated and hidden from the public. While it’s accurate that final figures were higher than expected, 65% of these funds were anticipated and included in financial plans adopted by the City Council June 2022.
• As with any ongoing business, accounting work continues past the fiscal year end. The City receives key revenue information such as final Sales Tax and Transient Occupancy Tax revenues as late as September following the fiscal year-end on June 30.
• Some significant expenses do not align with year-end. Of the $40.8M difference, $17.1M in activities reflect the net impact of funds carried forward into FY 2023 and required year-end accounting adjustments. Carryover funds include $12.7M set aside for planned payments to gas utility customers under the Green litigation.
• In anticipation of the excess, $9.1M was allocated in May 2022 to restore services as part of the FY 2023 Adopted Budget adopted in June 2022 and additional $0.2M for specific projects during FY 2023.
• Of the remaining approximately $14M, $8.9M was included in the FY 2023 budget adopted in June and the remainder unknown until final accounting closeout in October 2022. This was then allocated by the City Council in winter 2022, in alignment with Council policies.
• Staff estimates that by the end of this fiscal year, or June 30, 2023, there will be at least $6M in surplus funds. The Council will soon consider final action to use $2.5M of these funds for electric and gas utility rebate programs to support resident customers on April 10, 2023. The remainder will be discussed as part of the FY 2024 budget process which begins on May 1.

Below is how the City accounted for these transactions:

KEY COMMUNITY QUESTIONS, ANSWERED

If the City ended FY 2022 with a surplus why did it seek ballot measures for new taxes?

The City Council very clearly stated its intent to program most of the FY 2022 surplus to provide a one-time bridge until ongoing revenues could be established as part of the FY 2023 adopted budget. The gas transfer (measure L) will assist in ensuring services restored using one-time funds (the $9.1M reference previously) can continue sustainably into the future. In addition, financial needs were identified in the key areas of affordable housing, transportation, and public safety. The new Business Tax (measure K), not to be collected until January 2024, will provide funds to increase investment in these areas. The visual below provides examples of services that could be funded through measure k and measure l.

The press quoted a $40.6 million figure in recent articles as well; what is that?

The City’s net position in the Statement of Activities for FY 2022 contained in the Annual Comprehensive Financial Report (year-end close audited statements) was $40.6M and although close to the $40.8M discussed above is not the same.

The Statement of Activities reflects the net total revenue and expense for citywide activity ($40.6M), including funds that may have restricted use (i.e. grants or development impact fees) and utility funds. This is a figure that reflects all funds in accordance with Government Accounting Principles (GAAP) and can be found in the City’s Annual Comprehensive Financial Report (ACFR).

For the City’s Annual Comprehensive Financial Reports, go here.

When did the City know about the FY 2022 surplus and when was that shared?

Timeline of information shared through City Council reports and discussions

• October 2021: Projected surplus of at least $5M to $9.5M.
• February 2022: Projected surplus of at least $7M to $11.5M. Council spent about $3.8M of this as part of Mid-Year Budget for service restorations.
• May/June 2022: Projected surplus of at least $14M and Budget Stabilization Reserve (BSR) of $54.7M ($8.9M above target levels). Council’s FY 2023 budget used $9.1M of this surplus to restore services.
• November 2022: City reported a surplus beyond the Council targeted reserve level as a result of the FY 2022 revenues above expenses $40.8M.
• January 2023: Projected FY 2023 surplus at least $6M. The BSR is projected to reach $51.8M by June 30, 2023, $6.2M above the Council-approved reserve target.

While revenues and expenses can vary significantly over time, by law the City must adopt a balanced budget each year. This requires conservative budgeting to avoid shortfalls, resulting in some level of surplus in most years.

Why are my Utility bills so high and will the City help pay for this?

The City’s utility services are separate and distinct from services such as police, fire, and libraries, that are funded in the City’s General Fund.

This winter, the high gas costs defied historical trends and projections. Details can be found in a message posted by Utilities Director, Dean Batchelor here. In short, it cost Palo Alto Utilities five times more to buy gas in the markets this January when compared to January 2022.

Additional financial support for utilities customers is being finalized. The City is working to mitigate these exceptionally high costs for customers and have also asked state and federal leaders to investigate the causes of the huge spike in gas prices. Mayor Kou sent letters to Governor Gavin Newsom and our State and Federal delegations supporting the Governor’s call for a federal investigation of the historic high prices. The City Council approved a gas rebate program for residential customers and is scheduled to consider an electric rebate program soon. This is in addition to existing rate support programs such as Project Pledge, extended payment plan assistance, Rate Assistance Program, free energy advisor assessments and more.

For these programs, go here. For more on City Utility rate changes, go here.

Stay connected as budget discussions continue

Through the course of each year, the City receives updated revenue and expense estimates.

The City proceeds through several formal steps to assess financial conditions, develop and approve a fiscal year budget, and confirm year-end financial reports to reconcile actual expenditures.

• The City Manager releases a proposed budget in May, and the Council reviews and adopts a new budget for the fiscal year in June.
• In the Fall, an annual comprehensive fiscal report is released in November that review the past year’s fiscal actions in detail along with updated revenue projections.
• In mid-year (February), staff releases a budget update with any mid-year projections and budget changes that are necessary or recommended. This balances available resources with community needs.

The major financial planning milestones are:

While future economic conditions remain uncertain due to a possible recession ahead, the near-term recovery and recent voter approval of ballot measures give us better confidence in being able to meet priority community service needs. We encourage community feedback through these engagement opportunities as these discussions evolve.

More Online Resources

Learn more about the City’s fiscal sustainability at www.cityofpaloalto.org/fiscalsustainability

Learn about the City’s budget at www.cityofpaloalto.org/budget

Access the City’s OpenGov Open Budget dashboard at paloalto.opengov.com