Title
2021-22 Year-End General Fund Budget Results and 2023-24 Budget Calendar
Description
This report provides an overview of the 2021-22 General Fund (GF) budget results. Overall, actual resources of $1,694.7 million exceeded estimates by $31.7 million representing a variance of 1.9 percent. Total actual expenditures of $1,470.3 million were $7.3 million under the estimate representing a variance of only 0.5 percent. As a result, the GF ending balance of $224.4 million was approximately $39 million higher than estimated. This report also requests adoption of the 2023-24 budget calendar.
THIS ITEM IS FOR DISCUSSION AND POSSIBLE ACTION.
Report
Summary
The GF ending balance of $224.4 million exceeded the estimate of $185.4 million by $39.0 million, primarily due to higher than anticipated revenue collections discussed further in this report. The fund balance carries forward to the current fiscal year and will be factored into the development of the 2023-24 GF Budget Status.
Two components make up the GF ending balance: resources and expenditures. GF 2021-22 actual resources were $1,694.7 million and exceeded the estimate of $1,663.0 million by $31.7 million, or a variance of 1.9 percent. Higher than anticipated revenue collections contributed to the GF ending balance. GF revenues were $1,495.7 million, representing a variance to the revised revenue estimate of $45.8 million. The increased revenue collections were partially offset by increased transfers, primarily to City trust funds including the Worker's Compensation Trust and the Self-Insurance Reserve Trust. These trust funds are statutorily and actuarially required to be adequately funded and additional resources are needed due to increases in the cost of insurance and required reserve amounts. It is anticipated increased funding requirements for these trust accounts will continue for the near future. GF expenditures ended the fiscal year at $1,470.3 million, and $7.3 million less than the revised estimate of $1,477.6 million. The GF expenditure variance is primarily due to more than estimated vacancy savings. City departments are having a very difficult time recruiting and retaining employees due to the competitive labor market. Attachment A provides graphical illustrations of the GF budget results and Attachment B provides a department by department comparison of GF expenditure actuals to the revised estimate.
Over the coming months staff will develop revised resource and expenditure forecasts to prepare a 2023-24 GF Budget Status and Five-Year Forecast scheduled to be presented to the City Council on Feb. 21, 2023.
2021-22 General Fund Results
Resources
Total resources include:
- Beginning fund balance;
- Annual revenue;
- Recoveries of prior year encumbrances that were not spent; and
- Interfund transfers to/from other City funds.
As mentioned above, GF resources were $1,694.7 million for the 2021-22 fiscal year and include a beginning balance of $283.0 million, revenues of $1,495.7 million, recoveries of $3.8 million, and net transfers out of $87.8 million. Total GF resources exceeded estimates by $31.7 million representing a variance of only 1.9 percent. The reason for the variance was higher than anticipated revenue collections primarily in city and state sales taxes, offset by lower than anticipated net transfers.
Revenue forecasting over the past two years has been extremely difficult in part due to the COVID-19 pandemic and more recently increased economic uncertainty. Several factors have influenced revenue collections and are uncharacteristic compared to past economic cycles. This includes the infusion of one-time funds from the federal government via the Coronavirus Aid, Relief, and Economic Security (CARES) and the American Rescue Plan (ARPA) acts into state and local economies. This is remarkable, unprecedented and has certainly influenced economic conditions. Additionally, high inflation has positively impacted sales tax collections. However, this positive trend should not be expected to continue as consumer purchasing power is diminished by the higher cost of goods and services which are not taxable. The recent geopolitical crisis in Europe, market volatility and concerns of recession by economic professionals have all contributed to uncertainty about the direction of the economy. Budget and Research staff worked diligently over the past two years since the pandemic started, to analyze revenue data and economic indicators, utilize our econometric model developed in partnership with the University of Arizona's Economic and Business Research Center for sales taxes, and listen to our trusted economic sources to project revenues. It is for these reasons staff has taken a cautious approach to estimating revenue and will continue to do so in order to ensure revenues are not projected too aggressively in an uncertain economy. The 2021-22 Year End GF revenue report is available online at phoenix.gov/budget and provides further details on revenue collections by category.
Expenditures
Total GF expenditures were estimated at $1,477.6 million, and actual expenditures were $1,470.3 million, or $7.3 million (0.5 percent) less than estimated. The variance is due to savings in department operating expenditures of $6.3 million (Attachment B) and GF capital pay-as-you-go savings of $1.0 million. As indicted above, savings in operating expenditures were primarily the result of City departments achieving more salary savings than expected. Staff built into the expenditure forecasts additional salary savings based on recent data trends, however the number of vacancies grew more than anticipated.
Budget and Research staff are underway with the annual salary and benefits projection review process and will soon start on the 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. These processes are critical steps in development of the GF Budget Status.
Looking Ahead
The 2021-22 GF ending fund balance variance of $39.0 million is in "reserve" until the budget status for 2023-24 is developed over the next several months. The higher than anticipated ending fund balance is good news and will be beneficial as we move forward. However, the City faces many fiscal challenges in the years ahead which will require strategic decision making to optimize resources. These challenges include:
- Need to offer competitive and fair compensation packages to City employees;
- Rising employee benefit costs, particularly for Public Safety pension and health care;
- Additional resources to adequately fund City trust accounts;
- 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;
- Potential budgetary impacts from the Department of Justice investigation of the Police Department;
- Challenges estimating revenue collections in the current economic climate;
- Reductions to state shared revenues due to the decrease in Phoenix's relative population; and
- Potential reduction in state and federal funding or new unfunded state or federal mandates, including environmental requirements and attempts by the legislature to reduce taxes.
The items above add significant pressure and uncertainty to the GF operating budget and creates challenges estimating City revenues and expenditures. Staff will be working over the next few months to study data trends, gather updated economic information, and complete our necessary budget development steps in order to construct the GF 2023-24 Budget Status and Five-Year Forecast.
It is important to mention Phoenix's relative population share used to calculate state shared revenues has decreased again this year. Staff has estimated the negative impact to GF revenue could range from $6 million to $7 million per year. Pension costs will also continue for the foreseeable future based on information we received from the Public Safety Personnel Retirement System (PSPRS) actuary. Updated pension rates from the June 30, 2022 actuarial valuation will be provided to the City in December and will be used to develop the GF 2023-24 Budget Status and Five-Year Forecast. Attachment C includes historical and forecasted GF public safety pension costs based on the most recent estimates from the PSPRS actuary.
2023-24 Budget Calendar
The City Charter and Code include 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 2023-24 budget calendar reflected in Attachment D.
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Budget and Research Department.