Unexpectedly reliable levels of property and sales tax revenue, voters’ approval of tax measures, and the city’s strategic renegotiation of cell tower leases combined during the past year not only to eliminate city staff’s worst Covid-related revenue fears, but to create a one-time opportunity to allocate $4.34 million in undesignated revenue.
The news comes as the city prepares to adopt a $28.4 million budget for 2020-2021 — 6.5 percent higher than fiscal 2020. But that’s just the General Fund expenditures for the city’s departments. Including fund transfers such as water bond payments, street and sewer funds, the total budget comes to $59.6 million. There is no new capital spending being proposed.
The budget includes $330,000 in federal reimbursements for Covid-related spending from the 2020 CARES act. It is not yet known how much the city will get under the new Covid Rescue bill President Biden signed March 11, but those funds will be applied to fiscal 2022 revenue.
With little more than three months to go before the June 30 end of fiscal 2021, the draft was presented to and unanimously approved by the Finance Commission March 4. It is set to go before City Council March 17. The severely late budget is expected to result in a very harsh audit finding, but no financial penalties.
The early days of the pandemic brought considerable uncertainty to fiscal 2021 revenue projections, even before public pressure forced the City Council last June to delay adopting a budget until it could complete its 2019 audit and Comprehensive Annual Finance Report (CAFR). But the city’s “operational resources have been far greater than worst feared,” Interim City Manager Sean Joyce wrote in the draft 2021 budget message.
“Simply stated, Measure A revenues were stronger than anticipated, as were regular sales tax revenues; ultimately neither revenue source experienced the deep declines that were initially predicted,” Joyce wrote.
Voters approved Measure A on Nov. 5, 2019 on vote of 67 percent to 33 percent, adopting a 0.75 city-wide sales tax. Revenue started coming in last April. The city originally hoped the tax would bring in an extra $1.5 million, but now expects to take in $2.1 million by the June 30 end of fiscal year.
In addition, total sales tax receipts are projected to finish the year much higher than projected. “It was originally estimated that the city’s total sales tax receipts for FY 20/21 would amount to $3,275,000,” Joyce wrote. They are now expected to finish the year 31 percent higher, at $4,750,720.
During a presentation to the Finance Commission Jan. 28, Interim Assistant City Manager Elaine Aguilar said it was thought sales tax revenue would drop significantly due to the Stay-at-Home order. “Instead, people switched to other ways to spend their money.”
She disclosed that while sales tax revenue from restaurants, gas stations and consumer goods sales took enormous dives during the second quarter of 2020—when the pandemic took hold — receipts from food and drug stores and the building and construction sector shot up, as did sales tax revenue from online purchases.
A year ago, Joyce also wrote, it could not have been predicted that during a pandemic, voters last November would “handily approve” extending the Utility Users’ Tax. It was also notable because UUT revenues have generally been on a downward trend. But with more people at home due to the pandemic, electric and cable use rose, pushing UUT tax revenue up a quarter million dollars to $3.48 million.
“The importance of South Pasadena voters’ continued support of local tax measures simply cannot be overstated,” he wrote.
“Single-handedly, those two things really did save the city from serious financial problems,” Aguilar agreed.
The city also worried property tax payments—by far the largest source of revenue for the General Fund — would suffer as delays or defaults rose due to job losses and the ongoing rent moratorium. “In fact, property tax payments are on schedule and have even increased by 2.3 percent year over year,” Joyce disclosed. The theory is that most of the city’s mortgage holders opted to pay property tax through “monthly impound accounts, resulting in low rates of default.”
However, the city anticipates a “significant wave” of foreclosures is coming, Aguilar told the Finance Commission. That, along with an expected lower adjustment of property taxes under Proposition 13, will impact revenue in 2022.
Revenue for 2021 features a one-time injection of $4.34 million from the city’s new, long-term cell tower master lease with Tower Ventures, pushing overall General Fund revenue up to $35.3 million (though the money will initially be placed in a reserve). The payment replaces the average $250,000 annual payment the city’s gotten for use of the cell towers in the past, but creates an unusual opportunity, as the funds have no designated use. Staff will look to the Council to provide direction for the allocation of these funds.
Finance Commissioner Fred Findley said he hopes the Council will put a good share of the cell tower windfall into reserves, while commissioner Zhen Tao said it should go towards the city’s $36.4 million unfunded pension liability.
The proposed budget includes an allocation for the Police Department of $10.14 million, an increase of 6.9 percent from the $9.48 million budget proposed a year ago. However, the department had a significant amount of overtime expense during the year due to unfilled vacancies, community events, COVID-19 related absences and what the city called “First Amendment assemblies.” It’s actual budget for the year is expected to finish at $9.88 million. The cost for additional training of police officers approved by the Council earlier this year is not included in the Department’s budget.
The city’s legal services budget averaged $294,000 during the three-year period 2017 to 2019. A year ago, the city estimated 2020 legal services costs would be $280,000, but now expects to the end the year at $492,566, an increase of 76 percent. Details on the reasons for the increase were not immediately available. The city is proposing a 2021 legal services budget of $487,000.
As for legal settlement costs, the city is budgeting $1.15 million for 2021, nearly four times as much as for 2020, but expects the 2021 figure to be offset by $370,000 in reimbursements from its insurance carrier. The $1.15 million figure does not include potential costs for the still pending litigation over a sewer leak on Hanscom Dr., Aguilar said.
Over the four years 2017-2020, the city recorded $759 million in legal settlements and $353,000 in reimbursements. In response to a question from Commissioner Tao, Aguilar acknowledged settlement costs, which include workers’ comp and general liability, have been higher than usual. “We’ve had three judgments just since September,” she noted. Insurance only covers judgments over $100,000. The city also maintains a $500,000 legal reserve fund.
Aguilar also said balancing the 2020 budget was achieved in part from about $900,000 in reduced spending in the community services and library departments, including unfilled staff positions—both items that she said will not be sustainable once the pandemic restrictions are lifted.
The 2021 budget, which is expected to end with a $4.4 million surplus mainly due to the cell tower lease money, is based on audited 2019 figures and unaudited 2020 numbers. Aguilar said staff will present a quarterly report on the budget in May or June. The city is on target now to complete its 2020 audit and CAFR, and to prepare a 2022 budget, in time for the scheduled start of 2022 fiscal year July 1.