Finance and Budget Committee Special Meeting

Roll call, please. Thank you, Ms. Palmeri.

Yes good afternoon everybody. I did receive a letter with some questions from one of the members of the committee. I don't really know how to share this screen so you can all see it. I'll give it a try. It's only, what, the fifth year since we've been doing this?

Has he been granted permission to share? Okay. If he sends you the presentation, OK.

Yeah, can she do it

if you sent it to her?

Yeah. Why am I on here twice?

Mr. Shea, if you want to email the presentation to Brenda or Leah we could share it for you.

Yeah I did it already but I'll send it to Brenda real quick again.

We have the original one so I can pull that one up Terry.

Oh thanks.

It's just one of those slides repeats but we can just skip over it. No thanks

thank you. I think somebody's talking on your end. Okay, we see the slide now so if you want to talk us through it.

Can you hear us okay? You may have muted yourself Mr. Chair. All right can you

hear me? All right, so if you could go to slide two. So basically just giving a little bit information on the Gann limit for those that are watching from the audience or on television. So basically appropriation limit applies to all taxes levied by and for a government entity The appropriation limit is the calculated dollar amount which restricts the ability to appropriate the proceeds of taxes.

The appropriations subject to limitation may not exceed the appropriations limit in its simplest form, the appropriation limit for any years, the appropriations limit from their previous fiscal year increased for inflation and population growth. The appropriations limit may be altered for a limited period of time in the event of a declared emergency or if the voters override Approve an override temporarily increasing the appropriations limit.

Any override cannot exceed four years. Next slide. So this one I'll get to the back, this is one that's duplicated if you go to the next one so So proceeds of taxes include all taxes levied by or for a public agency, any revenue from regulatory licenses, user charges, user fees to the extent that those proceeds exceed the cost for providing the regulation product or service.

And as part of the appropriation calculation You take in those types of revenues, user fees and you offset the cost. And if you're below it then you don't have any to add so if your user fees don't exceed your costs then you're alright. Any state subventions? Not a lot of state subventions these days. And then any interest earned, so part of your investing your money is... So there's also a calculation you do to allocate a portion to interest or to taxes and non-tax revenues.

So the important part is the exclusions. Certain types of debt service costs, qualified capital outlay, the cost of complying with court orders and federal mandates which without discretion require an expenditure for additional services or which unavoidably make the providing existing services more costly. And if you have to refund taxes to individuals, I've only seen that twice in 44 years and then local agency loan funds are indebtedness funds or investment funds in bank accounts. So the next one?

So what the city is using on their current calculations, they're using a little over $3 million from the, I guess it's Measure C for capital. Qualified capital outlay is an appropriation for a fixed asset, including land and construction with a useful life of 10 or more years and a value which equals or exceeds $100,000. This may include annual debt services and other financing costs, certificates of participation Lease purchases, purchases or rehabilitation which enhance the value of or extend the life of existing property provided that the equipment land facility and our construction costs meet the dollar and life expectancy criteria ten years in a hundred thousand. An example would be the addition of 100 000 sprinkler improvements to enhance an existing park sprinkler system Or another example would be the reconstruction of a deteriorated roadway and the lease of a qualified capital asset.

Next slide. So items which are not considered qualified capital include the collection of lower-priced assets, which when aggregated total more than $100,000 and regular maintenance. And the only portion that you count of the purchases which are purchased with tax proceeds an asset with multiple funding sources, which does happen should be prorated to determine how much is exempt. So the city's just using three million just from Measure C funds And there's also a reserve fund, which is one of the questions I received. Whenever tax proceeds are appropriated into a reserve fund, contingency emergency unemployment reserve retirement sinking fund trust or similar fund they're counted as appropriations subject to the limit in the year of the appropriation however such funds are not included in the computation when they are withdrawn or authorized to be withdrawn And then transfers among eligible reserves also don't count.

And then there are two exceptions to the rule, funds for future qualified capital outlay or the damage of an eligible emergency may be created and financed outside of the appropriations limit. Next slide. So then you can also change it if you have to. We've helped a couple of cities change theirs, and there are some cities in California that went back and changed some of the They used assessed valuation for non-residential development and significantly increased that. That's something the city can always look to do as well, but basically you go back to year one and you start over and then you use different approaches as opposed to inflation or other types of items. Next slide.

So this is the city's current one. So you can see estimated tax revenues just a little over $20 million, estimated capital outlay of $3 million from those funds which then leaves revenue subject to the appropriations limit of $17 million which is about $896,000 below So I guess there is some questions as to what happens with the reserves, so if somebody wants to ask those questions.

So Mr. Shea are you taking questions at this point? Is that your...

Yes, I got an email from Brenda that shows some of the questions regarding how using of the reserves works.

Okay very good. I think Ms. Roth had some questions

Yeah, I did have a couple of questions and I did outline it in the email. Did you see a copy of that email?

Yeah Okay what happens is Is when the

I might just jump in really quick because we have viewing public and people in the audience They don't know what your question was so you should probably reread it or he should reread

Like her to reread

I don't want to read the whole thing because it turned out to be a lot longer. Well, otherwise people

aren't going to know what we're discussing. Summarize?

Yeah. Okay, I'll just summarize. The GAN portion of it has to do with two basic questions—actually three basic questions So I don't have any problems with the calculation. The calculations look good, 17,984,338. So is that on your document there? Yeah. OK. So the appropriation subject to the limit is $17 million And so that leaves what is typically called this headroom of 895,880. And so I started looking at that number and And then I understand that you are allowed to estimate what your capital outlays are, which you did of the $3,003,000. And those are capital outlay items that you would expect to be exempt under the exemption clause for fixed assets qualified capital outlay greater than 100,000 useful life of 10 years, right?

I'm following you so far. So then I go to look at our, well first of all while we're on this sheet here the speed humps document there for $100,000 my understanding is that those are temporary Those are not permanent kinds of things. But- No,

that's not those once installed or intended to exist for a useful lifespan there are you have seen the deployment of temporary speed house but that's not what this is

Okay, so those speed humps and that's why I didn't know So there are speed humps that are temporary but these are not the temporary ones. Okay The

council is embarked as you know from the discussions where you've been present You know that it's a policy and they're looking for to implement this in a systematic way citywide

Okay, great. That's fun. That's wonderful. I'm glad for to have that clarification and then So then the other item is if we go and look at the Measure C fund, which is on page 49 of our document. It shows that we have Measure C fund is the 5% TOT that was voter approved. And it shows that we have salaries and benefits that are part of the measure C fund And those expenditures are operations. They're not capital outlay items, so the payroll and personnel as well as the code enforcement Those are operating funds rather than capital improvement funds. So I'm wondering how those would be treated as far as how they would be added back into the amount that's subject to the appropriation limit?

Well, I think they're in there. If you look at that 17 million 088 458 the last column

Yes

There's over a million dollars and measure CTOT in there And so those would come out of that million dollars million forty nine zero forty

Okay, so what you're saying is because that number only excludes the three million it's in the 1 million amount

yes

OK, all right. So that adds that clarification. And then the last item has to do with in our budget document on page 22. Under Measure C funds, the change in fund balance. So basically the transfers out of Measure C that are going to the capital outlay fund are $9,551,000. And they're using portions of fund balance, $5.8 million. And my understanding is that those were all tax revenues and those taxable revenues become part of your appropriations in the year that those are appropriated Is that what you just said?

Are you asking me?

Yes.

Okay, my understanding is that Whenever you have money in reserves, it says whenever tax proceeds are appropriated into a reserve, contingency, emergency and unemployment reserve or any kind of reserves they're to be counted as appropriation subject to the limit in the year of appropriation which is the year that the council decided to put those away in the reserve so that that year when When those monies were placed in the reserve, that's the year that they were counted against the appropriation limit.

But they were never actually appropriated in that year?

They were part of the appropriations limit council just chose not to spend them and save them for future years, which is a reserve But

I would disagree with that. I don't believe that those reserves were actually appropriated to a reserve They were part of

the appropriations limit, right?

I just I guess I'm wanting to ask what what are the stakes here for you right now?

No, I'm just trying to get clarification on how those Appropriations so appropriations are in the year that the money is to be spent Not when there's no side into a reserve. That's my understanding. Yeah

know When whenever council passes a budget and if measure C has more revenues than expenditures that money then is included And in the reserve it just happens to fall into the reserve of that fund Those revenues collected that year were part of the appropriations limit calculation

and I have never seen that to be true in the actually When you go look at the actual Gann limit calculations, there's never any reserve monies that are in a

It's just the balance that's left over. They chose not to spend that money, right? So there is a thing that says subject to limitation of the year appropriation however such funds are not included in the computation when they are withdrawn. It says contribution any such fund to the extent that contributions are derived from the proceeds of taxes I

guess if I could step in. So, when I'm looking at the chart that's on the screen right now and I see as you pointed out this kind of headroom of 895-880, I'm reading that to be our buffer so to speak that we would want to pay attention to that number and obviously not get much closer to that number, but I'm hearing you say you're not comfortable. You said the calculation was right, but you're concerned that the Measure C even with the $3 million being taken out for these capital outlays, you're worried that the calculation isn't correct or you're okay that it is correct?

What you do not see in any of these Appropriations subject to limit is any reserve funds. There's no line item for any reserves It's current revenues, it's only the current revenues that are subject

That's what I'm trying to ask you though. So we're going to

Basically the appropriations on it is Thank you. It says in the law, it says contributions to any such fund to the extent that such contributions are derived from the proceeds of taxes shall for the purposes article constitute appropriations subject to the limitation in the year of contribution. Neither withdrawals from any such fund nor expenditures or authorization to expend such withdrawals nor transfers among such reserves shall for the purpose of this article constitute appropriations subject to the limit. So when they were collected, they were subject to the appropriations limit. They just weren't spent.

So now we're choosing to spend those. Like a lot of cities like where I work, Canyon Lake or Small City, we accumulate our HUMD money for five years and then buy a couple vehicles so this isn't saying you have to spend up to that appropriations on it. I mean you can plan out these things and say we're going to build up this reserve to redo something maybe a major street project which obviously you're doing if you're transferring it over Revenues are counted in the year and the appropriations limit that they were received. They just weren't spent

And I understand what you're saying so I'd be happy to sit down and go over this with you in a little bit more detail because What I'm seeing is the revenues from measure C are consistently underestimated So they build up and accumulate reserves that were never part of the original appropriation in this calculation. That's the only way I can describe it, so I'd be happy to sit down and talk with you about that in more detail though.

But I would just jump in, you know that you're right. So the time the budget is adopted there is an estimate of what the amounts will be but that doesn't make it incorrect if as the year goes through and that number proves to be less than what isn't actual.

I thought the second or third slide of the presentation Explicitly said when you pull something out of reserve and spend it You would not it would not fall into the Gann limit if I saw that bullet point. Yes Qualifies

mayor. Yeah, could I jump in with potentially a simple explanation? That might get clarity The Gann limit really doesn't say anything about spending. It just says what you are allowed to collect in taxes, and the limit with regard to how much you can collect in taxes is actually a function of a historical spending level going back into the 80s I believe. And it rolls forward as a function of inflation and population so every year that what it's simply saying here is On the left-hand side of this chart, the most you can collect in taxes is the $17.9 million.

And if you collect more, you either have to get permission from the voters or give it back somehow. But as long as you haven't collected up to the limit, then you're safe. So if you choose not to spend a certain amount of money that you collect in a year and put it in reserve, the points that is being made is, in a future year taking that out of reserve does not constitute a tax in that future year. So spending money out of reserves In any specific year is not going to affect this calculation one iota the more important issue here.

But again, GAN has resolutions for all the problems. So it's not like we're up against a rock and a hard place The more important issue here is that our limit Headroom to use that word has declined quite a bit in the last year

Yes

And will almost certainly decline in the next year and The limit is affected by the budget for revenues, for taxes. And to the extent that we have a budget that understates expected tax revenues in the next year, in essence fooling ourselves by saying that we have headroom, but in fact we might not.

This is you simplifying?

It sounds like it's complicating.

My

apologies, Mr. Mayor.

I follow everything you're saying. And so

do I. Well, I'm worried just to hear that. No. Well, I'll cut off then if I've reached the limit of my clarification. In any event, I don't think the reserve issue is a big issue.

Well, and I do believe that we do have headroom. And I know that there are definitely qualified capital outlay items for which those reserve funds should be spent. I'm not disputing any of that. OK. I am bringing to your attention the idea if you estimated Measure C funds of $4 million and you collect $5 million Are the five millions that you collected subject to your appropriations and can be spent anytime you want in that capital outlay kind of mechanism?

In the future, it can be.

Yes, yes. And what you're saying is if you collect $8 million, it's OK. You can go ahead and spend it. And I don't see that based on those numbers. So that's what I'm trying to get clarification on because we're getting closer to the limit. That's all.

Do you feel satisfied at the moment with the explanation so far? Yeah.

But I'd be happy to sit down and clarify when those revenues come in much higher than what are in this worksheet, how you go about calculating and accounting for those excess reserves.

OK. Thank you.

And uses of fund balance.

Yeah, I have not seen any city I don't think you would ever go back and calculate with actual numbers. It's usually just based on the budget, which for the most time are fairly accurate. The Measure C, you know, you guys went through COVID so I'm sure your TOTs dropped that year but it just...I don't think I've ever seen that where they've gone back and actually calculated based on actual numbers after the year But I think the reserve, the first part of his explanation was very easy to follow.

And so it doesn't... The big issue is that you're getting close to your thing and you could go over it or you're going to have to spend a lot more on capital outlay stuff I'm not sure. I'm sure there's plenty of deferred maintenance in every city, you know to cover that but eventually you're going to have to come up with a solution like

I suspect we're going to do that. There's going to be a lot of things that are already on kind of the wish list around capital improvements, but I appreciate you highlighting that. We're getting close.

Well and the other thing that happens is in this last year we had a couple million dollars worth of mid-year budget adjustments that were operating—most of them were operating in nature. Some of them were capital outlay items. Once you start getting into those kinds of numbers with mid-year budget adjustments and you're this close on your headroom, you don't have a lot of... You've got to look at your GAN calculation again is what I'm trying to suggest.

Okay. Any more questions for Mr. Shea? Okay. Do you have anything more sir?

No, I just appreciate your time and her concern it's a valid concern and if she's willing to sit down Welcome that and talk with her anytime, so.

Thank you. Appreciate that. Thank you Mr. Chair. Mr. Miley did you want to speak on this issue?

While I was listening, I looked it up and I kind of answered my question. But the issue is having read the GAN report, I have the understanding that revenues ordinanced for capital spending only are exempt and I found that out. Okay? So that means Measure C funds as I understand it are exempt from the GAN limit. Am I—I hope I'm right. Also, any future add-on sales tax which I've lobbied for in the past.

Assuming our population is the same and our budget's the same we'd have to give the money back.

Possibly.

So we just need to spend more or something like that.

Wow! I love that. Thanks Mr. Miley. Okay. Anymore comments out there? Anybody online? Okay, great. Thank you. We can move on. We're onto the consent item number two, the Finance and Budget Committee meeting minutes from May 19th. Did anybody have any changes to those minutes they would like to address? If not, I'm happy to move the approval of those minutes. Okay? Any objections?

Could I ask a question about when public comments are made who are those to be sent to and would those be filed or available for future reference

They're on the video only so we take just action minutes So we only record basically motions and what's derived not what everybody said,

but I think mayor if I could I think We attach public comments. I know that we do it at the council meeting if they're written if they're written Is that what you're speaking about?

Yes

Okay, so I think I think we do the same for our commissions. I'm fairly certain so if you go into the The entry you should you should see it If you're not seeing it tell me and we'll make sure that they get included

Well, and for example, Mr. Hsu's PowerPoint presentation? It would be nice if that was added.

So what we always do – and that is not considered a public comment. That is considered a presentation obviously. And what we do customarily, and if we have forgotten one tell us, once the meeting ends we attach it to the meeting.

I just want to make sure that they are showing up there. Yep, thank you.

Yeah like the agenda like on the City Council meetings You'll see the day before the public comments are listed when you go to the public Meetings worksheet that you can download all of them.

I just know that mr. Miley made public comments He didn't know where to send him and then it's you can't find them on the agenda at this time so I was just hoping there's a Permanent way that people can get them updated and part of the agenda Thank You

Okay, we have a motion and a second. Any objections to the minutes? Okay, wonderful. All right moving on to the discussion fiscal year 26-27 GAN appropriation limit calculation.

Thank you, Mayor. I'll be brief just because we had heard a presentation from Terry Shea on the GAN appropriation limit. The GAN appropriation limit is to be established annually. The city's appropriation limit for fiscal year 26-27 as we just discussed was $17,984,338 and this is calculated using prior years limit and adjusted for population change for the county and the change in the state's per capita income growth And as seen in the presentation and in the attachment is a detail showing that the city's under the limit by approximately 900,000.

So I know that was a very brief presentation but if there are any questions, I'm happy to answer.

So if we make mid-year adjustments, I suppose just going off of what Ms. Roth just

said...

If we make mid-year adjustments, we would want to pay attention to that number as we approach that headway

And I believe Mr. Shea also mentioned that typically the calculation is done based on the appropriation when the budget's adopted, it's not revisited and recalculated based on actuals or adjustments.

Got it.

Yes please? Go ahead. I was just going to clarify that point slightly. The appropriateness of the budget is important for financial control purposes because you want to know what to expect in the way of revenues and obviously expenses as well. The slightly ironic thing about the Gann limit calculation, as well as some of our other calculations with regard to balanced budget and reserve policy is they are largely driven by calculations based on budget time, not actual. And you heard Mr. Shea say that he hasn't seen anybody go back and redo their calculation based on actual.

So it's slightly ironic. You can put together a budget that is a complete fairy tale but if it still meets the GAN limits you've met the letter of the law. But of course, the fairytale budget is going to make it pretty hard to manage the city. So there's this balance between reality in budgeting and playing the game of GAN limits. And so I think it's a balancing act. I do think there is a lot of evidence that says that our revenues are understated in this budget.

And if you were to go back to the GAN limit calculation Calculated based on what I think is a closer to reality Revenue number you would see that headroom shrink and there's a scenario which is not unlikely that if you did an absolute Unbiased estimate of what your revenues are you'd have a zero headroom limit, but again the Gann rule The GAN limit is not like a hatchet waiting to slice your head off.

It is manageable if that's an issue, either by allocating more capital or by getting voter approval or by managing some of the marginal tax rates. We get a little bit for cannabis tax. We get a little bit for business license tax which are fairly, you know—not the world's best way to tax. And so you can manage your tax revenue that way. So it's not the end of the world but it's worth paying attention to. Thank you.

Any

comments?

Thank you, Brenda. I just want to say Brenda and I did have a meeting to go over this and this list of qualified capital outlay items is a new item and I appreciate you putting those details in because that does help everybody have a better sense that this is where those exemptions are, and it's based on some qualified items that we know are forthcoming in the budget and should be there.

But it's great to not just have a WYSIWYG number but to have some items identified that you expect to spend the money on. Thank you.

I appreciate that. ** Okay. And we're just receiving that, correct? **

And then I just want to say one more thing because if you go back and look at the – and I'm sorry but I really am a stickler for details about having the right column and the right data in there – and I know if you look at the allowed growth rates for personal income and the Department of Finance population increases those numbers got switched at some point.

And I know because it's a multiplication, and it doesn't make any difference which column it's in. But in my mind, it does make a difference. So if you could go back and just check that those are the right numbers in those columns, it would be more accurate to know that we're following these numbers more closely. Thank you.

Of course. Thank you.

Thanks. OK. On to Mr. Miley, did you have a comment about that? Yes Okay, that's coming okay here we go We're on we're on to number three and we will now go to I mean number four rather the 26 27 budget review Thank you

So, okay, thank you The initial review of the proposed fiscal year 26-27 budget was held at the last Finance and Budget Committee meeting on May 19th. Following the preliminary review, finance staff met with two members of the committee for further review and questions. And I will note that the changes made to this budget document reflect the feedback and comments from the prior meeting and from this committee.

Some of the comments that we incorporated that are reflected in this document is adding a percentage change from the fiscal year 25-26 budget to 26-27 budget, adding notes to large fluctuations in the workbook provided. We also did remove the fee study as a nonrecurring cost and we did remove the $2 million in the ERF grant budget which was originally for the operation subsidies but will be Moving that to a future year.

And then the next slide, please So this slide highlights some of the key factors of the budget, which of course will be presented for council's consideration in the first meeting in June. The biggest change that we made from the prior iteration of the document is related to personnel. This version includes a placeholder of a 3.7% COLA, which is a fiscal impact of approximately $200,000.

So for the major revenue sources, as I mentioned in the last meeting are projected in conjunction or consultation with HDL who specializes in revenue analysis and economic insights. And I'll start with sales tax. For the prior fiscal year their city received 2.3 million in sales tax and we also looked at the prior meeting where We saw the actual receipts through April and saw that in the current fiscal year.

It's slightly ahead when comparing that to the receipts received in April, in the prior year. For the current year, expect the trend to slightly exceed the budgeted revenues. And for next fiscal year we're projecting $2.5 million in sales tax and per HDL's latest sales tax update which was for quarter four of 2025, the city saw a growth of 9.6% in comparison to the same quarter in 2024. In comparison County saw a growth of 1.7% in that same measurement period and the state of 1.1%.

And for property tax, the current fiscal year budget for secured and unsecured is approximately 2.4 million though we do anticipate coming slightly over that amount. The 26-27 projection is 2.6 million and that projection takes into account consideration of a two percent CPI. The projection also takes into consideration the sales in 2025, since there would be a difference on the value of the tax roll and the actual cost in the sale because the property would be reassessed at the time of a change in ownership. So we would see a bump based on the number of sales in the prior year.

And then for transient occupancy tax, you can see that the trend continues to rise with the next year's forecast to be approximately $8.1 million in the general fund and a total of $12.16 million including Measure C. This slide is just showing the allocation of the general fund expenditures by department. Just notably, police public safety accounts for roughly 23% of the general fund budget.

Next slide. It's just another review of the balanced budget policy and the minimum fund balance policy, just to highlight that operating revenues must fully cover operating expenditures. Though it is allowable for the expenditures to exceed revenues in the case that the fund balance is used toward capital improvement projects or one-time nonrecurring costs. Additionally, the minimum fund balance states that the minimum balance is to be 100% of the prior year's general fund operating expenditures as the minimum reserve.

And then this slide is just showing the general funds summary. It shows a structurally balanced budget where recurring revenues are greater than recurring expenditures. One time cost includes the USD grant match and the historic inventory survey, and as I mentioned at the beginning of this presentation we did remove the fee study from the non-recurring total.

The estimated general fund balance This table shows that the balance at the end of this fiscal year is estimated to be approximately 21.7 million, which leaves 5.6 million of the balance unallocated, which is also the amount that would be beyond the 100% reserve amount. And so you can see that this balance is estimated to be reduced to 4.3 million by the end of next year given when accounting for the two non-recurring expenses.

Could you explain that, could you go back to that last slide? I'm sorry.

Not at all, go

ahead. That unallocated amount so what that looks like is just a subtraction this is the amount of the ending balance you subtract out the reserve and this is the unallocated balance So that doesn't have anything to do with any of those committed numbers and those different categories of Expenditures that are part of the audit. Could you explain how I

would

say

the unallocated there would be Some amounts that are not available for example at the end of a year as of June 30 2026 we would have prepaid That would be one of the items that are not available because they're booked as a prepaid. So it's not available liquid cash, but they are paid in advance for the next fiscal year, for example. So that would be an example of an amount that would affect that unallocated balance.

Other than that, items that are committed specifically by City Council would play into account. But as of right now, that $5 million would be essentially unassigned.

If I might respond, so for example, I look at that dollar amount there. That 4282 and that amount if we as the council goes forward and we look at projects like do we want to keep the road paving on track? Have you heard Lindy Palmer before say It may have to delay unless we were to put some more resources in that. I look at that dollar amount and say, that's where it's coming from? That amount?

So if there are projects that are not allocated at the moment, for example like what came up the other day was something like might we buy in bulk screens for fire hardening. I look at that dollar amount and say, that's what we have to play with if we keep the 100% reserve. If that makes sense.

Yeah, so I guess and my question has to do with other things having to do with like commitments that the city has made to do the general plan update and they signed a contract to do the general plan update for one point $2 million and it got increased by 300,000. So we've got 1.5 million dollars that needs to be spent for the general plan update and I'm not sure where we're at on any of those expenditures but I'm just wondering if that would also be included or if that is part of the reserve?