Title
2019-20 Year-End General Fund Budget Results and 2021-22 Budget Calendar
Description
This report provides an update on the 2019-20 General Fund (GF) budget results. Results reflect the impact of COVID-19 on City resources over the last quarter of the fiscal year and the one-time Coronavirus Relief Funds (CRF) used to offset public safety salaries. This report also requests adoption of the 2021-22 budget calendar.
Overall, GF resources exceeded estimates by $55.7 million or 4.0 percent. Excluding the one-time CRF amount of $48.5 million received by the GF, the variance was only $7.2 million or 0.5 percent. Expenditures came in lower by $17.9 million or 1.4 percent, primarily due to one-time vacancy savings as a result of the hiring freeze implemented earlier in the fiscal year to mitigate revenue shortfalls due to the pandemic. As a result, the GF ending balance was approximately $73.6 million higher than anticipated, or $25.1 million excluding the one-time resources from the CRF.
THIS ITEM IS FOR DISCUSSION AND POSSIBLE ACTION.
Report
Summary
On June 30, 2020 (after legal budget adoption), City Council approved using the $143 million CRF Reserve to offset public safety salaries and thereby preserving City services. To ensure compliance with federal guidance, staff split the $143 million reserve into two transactions, one for fiscal year 2019-20 totaling $57 million and one for fiscal year 2020-21 totaling $86 million. From these transactions, the GF will receive approximately $121 million and the three dedicated public safety funds (Proposition 301, Public Safety Enhancement and Proposition 1) will receive approximately $22 million.
Overall, GF resources exceeded estimates by $55.7 million or 4.0 percent. Excluding the one-time CRF amount of $48.5 million received by the GF, the variance was only $7.2 million or 0.5 percent. Expenditures came in lower by $17.9 million or 1.4 percent, primarily due to one-time vacancy savings as a result of the hiring freeze implemented earlier in the fiscal year to mitigate revenue shortfalls due to the pandemic. As a result, the GF ending balance was approximately $73.6 million higher than anticipated, or $25.1 million excluding the one-time resources from the CRF. Attachment A provides graphical illustrations of the GF budget results and Attachment B provides a comparison of GF actuals to the revised estimate, department by department. While the savings will provide a one-time cushion for the 2020-21 fiscal year, we must continue being cautious and deliberate as we move forward with forecasting city revenues and we must maintain tight spending controls until we have a better grasp on the impact that COVID-19 will have on City resources.
There are two primary building blocks of a balanced budget: sensible revenue and expenditure forecasts and careful spending controls. These building blocks are more important now than ever given the current uncertain economic environment caused by COVID-19. With consultation from a University of Arizona contract approved by the City Council, Budget and Research staff has been honing the sales tax revenue forecasts models for the past several years. This relationship with the UofA and the econometric model used by staff to estimate sales tax has proved to be very beneficial as evidenced by highly accurate revenue projections. GF Revenues for the 2019-20 fiscal year were $4.9 million or only 0.4 percent more than the revised estimate, due to slightly higher than estimated city and state shared sales taxes. With regard to expenditures, actuals were $17.9 million or 1.4 percent under the revised estimate primarily due to vacancy savings as a result of the hiring freeze and less than anticipated pay-as-you-go expenditures. From a best practices standpoint, small variances between actuals and budget figures are normal and expected. Generally speaking, variances of less than 3 percent are considered acceptable.
As a result of the one-time CRF funds and our continued commitment to control expenditures, we begin Fiscal Year (FY) 2020-21 with additional resources. However, the current year comes with several fiscal challenges including how best to estimate revenue trends for the remainder of the current year and for next year in a highly uncertain economic environment, possible negative impacts from the upcoming election, and the continued pressure of pension on the General Fund budget.
2019-20 General Fund Results
Resources
Total resources include:
- Annual revenue;
- Recoveries of prior year encumbrances that were not spent;
- Net transfers from other funds, such as payroll, accounting and other general administrative costs provided to enterprise funded departments; and
- Beginning fund balance.
Total GF resources in FY 2019-20 were estimated to end the fiscal year at $1,396.2 million. Actual total resources, excluding the one-time CRF monies of $48.5 million, was $1,403.4 million for a positive difference of $7.2 million or 0.5 percent. Total 2019-20 GF revenues (collections) ended the fiscal year at $1,258.9 million, compared to the estimate of $1,254.0 million for a variance of $4.9 million or 0.4 percent.
Expenditures
Total GF expenditures were estimated at $1,300.7 million, and actual expenditures were $1,282.8 million, or $17.9 million (1.4 percent) less than estimated. This variance is comprised of savings in department operating expenditures of $10.4 million (Attachment B) and GF capital savings of approximately $7.5 million. Savings in operating expenditures was primarily the result of City departments achieving more salary savings than expected as mentioned above due to the hiring freeze. Additional savings were realized in the fourth quarter of the fiscal year in various contractual and commodity expenditure categories due to the temporary closure of libraries, community centers, art and youth centers, recreation and sports complexes, aquatic facilities and mobile recreation programs due to the public health emergency.
Budget and Research staff are underway with the annual technical expenditure review process, which is a tried and true method of working with all city departments to evaluate spending at the line item level. This deep dive into department budgets will enable us to identify savings and establish realistic estimates necessary to continue existing programs and services. The process runs through November and is followed by the central review process, which involves estimating costs for various commodities such as fuel and electricity and personnel services line items, particularly pension. Both processes are critical steps in development of the GF budget status.
2019-20 General Fund Ending Balance
The FY 2019-20 GF ending fund balance was estimated to be $95.5 million. However, as a result of higher than anticipated resources due to the CRF and lower than estimated expenditures discussed earlier in the report, the actual ending balance was $169.1 million. This means that FY 2020-21 begins the year with $73.6 million more in available resources than was originally budgeted. However, the ending balance reflects the action taken by City Council after legal budget adoption to use the CRF to offset public safety salaries. By strategically using the CRF to offset public safety salaries, GF resources have been freed up to preserve city services and potentially offset revenue lost because of COVID-19.
At this point, the entire $73.6 million should be considered in "reserve" until the budget status for FY 2021-22 is developed and we have a better understanding of how COVID-19 may impact the economy and city revenues going forward.
Looking Ahead
As we move forward with the development of the 2021-22 operating budget, we are focused on several challenges that will need to be accounted for in the budget. These challenges include:
- Annual revenue;
- Economic uncertainty caused by COVID-19;
- Continued increases in pension costs, particularly for PSPRS;
- Deferred maintenance and aging infrastructure such as vehicles, equipment, and City facilities;
- Increases in expenses for replacing and protecting City information technology assets;
- Demand for additional or expanded GF services, such as providing mental and behavioral health services to reduce calls for police services;
- Potential impacts to state shared revenues as a result of the 2020 Census; and
- Potential reduction in state and federal funding or new unfunded state or federal mandates.
The items above add significant pressure to the General Fund operating budget and create challenges for estimating city revenues and expenditures. The uncertainty of how COVID-19 will impact the economy and future revenue streams requires more time and data to formulate responsible estimates. Staff will be working over the next few months to evaluate trends and gather updated economic information in order to construct both the GF 2021-22 Budget Status and the GF Five-Year Forecast.
Additionally, we know pension costs for public safety will continue to increase for the foreseeable future due to actuarial changes made by the Public Safety Personnel Retirement System (PSPRS) Board, and not achieving the assumed rate of return on investments. Preliminary estimates from the PSPRS actuary suggest increases to GF costs for public safety pension could increase from the 2020-21 budgeted amount of $232 million by a range of $12 million to $38 million over the 2022-23 to 2024-25 budget horizon. Attachment C includes historical GF public safety pension costs and forecasted costs based on preliminary estimates from the PSPRS actuary. Updated pension rates will be provided to the City in December and will be used to develop the GF 2021-22 Budget Status and GF Five-Year Forecast.
Although these challenges and uncertainty exist, it is important to remember the City has a proven track record of working smarter, harder and efficiently in an effort to preserve the services our residents use on a daily basis.
Other Funds Outlook
Staff are working on potential revenue shortfall plans for several Non-General Funds including Aviation, Phoenix Convention Center, Sports Facilities, Transit, Arizona Highway User Revenue, and Parks and Preserves in order to identify strategies to mitigate revenue declines as a result of the pandemic. Once finalized, information will be provided to Council for consideration.
2021-22 Community Budget Process Calendar
The City Charter and Code contain legal deadlines and actions that must be followed in adopting the budget. In cases where the deadlines conflict, the City meets the earlier of the two dates or a date designated by the City Council. Adoption of the budget calendar ensures compliance with the City Charter and Code and also allows staff to properly plan the budget development process and all legally required advertising. Staff requests City Council approval of the 2021-22 Community Budget Process Calendar reflected in Attachment D to this report.
Department
Responsible Department
This item is submitted by City Manager Ed Zuercher, Deputy City Manager Jeff Barton and the Budget and Research Department.