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Report on 2023 Unaudited Financial Results
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Submitted by:
John Ruggini
Department:
Finance
A. Issue
The Finance Department has finished closing the 2023 fiscal year and the preliminary and unaudited results are available for discussion.
B. Background/Options
At the close of each fiscal year, the Finance Department presents the preliminary financial results. At this time, those results have not been audited. The final audited financial statements are expected in June.
General Fund
The General Fund, ended the year with a $797,180 surplus which equates to 1.1% of total expenditures. The tables below provide detail by expenditures and revenue categories.
General Fund Revenues
In total, actual general fund revenues were 100.7% of budget, a surplus of $545,000. This is broken down by revenue category below.
The graph below uses a “stop-light” formatting to indicate which revenue categories exceeded the revised budget (green), were within 90% of budget (yellow) or were less than 90% (red).
The largest positive variance from the Revised Budget was “48-Miscellaneous” at 170%. While interest earnings were within 3% of the revised budget, the required mark-to-market adjustment increased the surplus by another $1.9 million. As interest rates decrease, bond prices increase so the City’s portfolio saw a recovery of the $4.4 million-dollar loss of value in 2022.
So long as the City holds its investments to maturity, which it has sufficient cash to do so, the remaining $2.4 million of market value will be recovered. Due to the volatility of the mark-to-market adjustment made annually as of 12/31 and its non-cash nature, the City does not budget for it.
While this is positive news, it should be noted that the increased market value is less than the overall surplus. This will be discussed in more detail below. The chart below shows the historical changes in value due to the mark-to-market.
“44-Licenses and Permits” exceed budget by 13.4% or $218,062. This was nearly entirely due to building permits exceeding the revised budget. However, digging more into the details does raise some concerns. The 2023 revenue was 27% below 2022. As shown below, construction fell 47% over 2022 and was $49 million below the 30 year average - the lowest amount seen since the Great Recession. The only reason building permit revenue posted such a large surplus was because of timing - the Building Department issued the Forensic Science and Protective Medicine Facility (e.g. State Crime Lab) an $80,000 building permit in late December that was not paid until 2024. So the revenue was counted in 2023 but the $110,000,000 construction value will be counted in 2024. We’ll want to monitor building permit revenue in 2024 closely.
“47-Intergovernmental Charges” posted a 6.5% surplus over the revised budget. This was expected as the budget assumed a reduction in the County payment for providing fire services to the medical campus as this contract would be phased out over the next 10 years. However, the negotiations took longer than expected so the first reduction will be seen in 2024, as approved by the Common Council.
While “43-Intergovernmental Revenues” were below budget, it is not shown in yellow because this was entirely due to unspent grant revenues that will be received in 2024 as the projects continued into the current year.
However, “46-Public Charges” was below budget and is marked yellow. This was largely due to a deficit of $239,985 in Ambulance Revenue compared to the Revised Budget of $1,705,000. In 2023 we assumed a budgetary increase due to changes in state legislation that would allow us to collect a higher reimbursement per transport from Medicaid and Medicare. However, there was an error made in the drafting of the legislation that prevented that higher rate of reimbursement. We continue to wait for a legislative fix.
The next largest source of unearned revenue was in “45-Fines and Penalties” which posted 91.3% of budget, a shortfall of $72,338 compared to the revised budget. Parking ticket revenue exceeded the revised budget by 4% and improved year over year by 26% as the police worked dilligently to address turnover. However, this revenue remained below the original budget by $179,628. Municipal citations were $91,784 under the revised budget and 10.3% below the prior year due to police staffing shortages.
Similar to intergovermental revenues, “49-Other Sources” is shown in green despite being 60% of budget due to the way in which we budget for the assumed use of fund balance for carryovers. So long as carryovers are approximately the same year-over-year, this has no impact on the bottom line.
General Fund Expenditures
In total, General Fund expenditures posted a surplus of $760,971, which represents 99% of budget and 7.5% growth over the previous year.
The largest area that exceeded budget on a dollar basis was “52-Benefits” which ran a 4.8% deficit costing $645,602. Of this total, $204,055 is related to health insurance. This will be discussed below as part of the Fund 16 - Health/Life discussion. Pension costs in the Police and Fire Departments were $266,000 over budget. Staff are still examining why this occurred.
The next largest category that ran over budget was “65-Internal Charges” by $357,157, a 9% overage; however, this is shown as “green” due to offsetting related surpluses in other categories. In the case of the Police, we only deployed and billed the medical campus for 13.0 FTE vs. 16.14 budgeted due to patrol division vacancies. In Engineering, we billed nearly 20% less than budget to capital due to vacancies. For these two departments, internal charges are shown as negative expenses to offset expenses incurred and to be billed. So, both deficits were offset by wage and supply surpluses.
“90-Transfers” exceeded budget by $138,073, 0.9%. This was the result of the General Fund not receiving a credit from the General Liability fund as anticipated as a way to increase fund balance in that fund. The transfer to the Debt Service Fund was $53,628 over budget as the 2022 debt issuance which took place after the 2023 Budget was adopted incurred sold with higher interest rates than budgeted.
The final category that ran over budget was “50-Wages”. Despite being only .4% over budget, this represented a $121,664 deficit. The Fire Department exceeded budget by $240,000 (this is partially offset by surplus in other departments). However, this was due to the Finance Department over-estimating their wage savings from vacancies as they ran a six percent vacancy rate and were at 98.3% of their original budget.
A couple of notes when looking at year-over year variances:
• Utilities were down year over year by 12.1% demonstrating continued savings from the City’s sustainability initiatives
• Operating costs and services, while below budget, were both up 14.2% and 31.7% from the prior year. Inflation certainly played a part in these year over year increases.
While not over the revised budget, “51 Overtime” was 54% over the original budget with Police exceeding their original budget by $537,171 and Fire by $297,289. Both are driven mostly by vacancies and are largely offset by wage savings but we continue to monitor this with the departments closely.
In terms of budgetary surplus, the large surplus in “66-Other Expenses” is the offset for the grant revenue surplus discussed above.
General Fund Balance
The total General Fund Balance increased $797,180 to $23,041,710.
In total, the Unassigned Reserve is estimated at $9,558,877 which reflects 47 days of operating expenditures. The City’s policy is to maintain 60 days of operating expenses in reserve so the City is at 78% of its benchmark; a deficit of $2,761,098.
While the surplus is certainly positive, all things being equal, the surplus should have been $1.9 million - the amount of the investment market value recovery. Given this, and that the overall fund balance is short of the City’s desired policy level, I recommend the committee strongly consider using any surplus American Rescue Plan Act funds to replenish fund balance as well as possibly budgeting for a contribution to surplus in 2025.
Other Funds
The ending balance and net change for each fund is included as an attachment as well as a brief explanation of significant changes. A few significant changes are described below.
Health Insurance Fund
The Health Insurance program ran at 103.7% of the premium equivalent as claims exceeded budget by $1.2 million (15% overage). This was offset by prescription rebates and employee and employer contribution surplus so the fund only ran a $112,618 deficit. The increase in claims was caused entirely by a $1.3 million increase over the prior year in high cost claims (claims greater than $50,000) as shown in the tables below. This trend has continued into 2024.
Claim trends are a concern. As shown in the graph below, the plan has run double-digit claims cost increases over the past three years - the first time we’ve experienced three consecutive years of increases since data is available in 2001. This could prove to be challenging for the 2025 budget as we’ve regularly been able to use slower-than-forecasted claims increases to help close the budget gap. That likely will not be an available strategy in 2025 and we already made a significant plan change in 2024 so that savings from plan design are also unlikely.
General Liability
The City had the best year since 2008 in terms of the number claims - only 16 reported. This contributed to the $1,036,075 year-end surplus in the fund increasing the balance by 22%.
Workers Compensation
The number of claims decreased in 2023 from the prior year by 16% to 36 - the second consecutive year drop putting us well below our five-year average of 49 and a nearly 50% reduction in claims costs for that year. However, costs for claims incurred in prior years grew more than anticipated resulting in a claims expense in total exceeding budget by 22% and the fund to deficit by $68,715. The ending funding balance of $97,877 is significantly below our target so we will likely have to budget to replenish the reserve.
Tourism
The Tourism Fund posted a $461,034 increase due largely to better than anticipated hotel/motel revenues which exceeded pre-COVID levels as occupancy increased 2.3% and the average daily rate 6.2% over 2022.
Water Utility
The Water Utility’s fund balance includes the value of physical assets. The adjusted fund balance increased 5% to $5,994,796 which represents 58% of operating expenditures. This is on track to have sufficient cash on hand to pay for upcoming tank paintings and still maintain a 25% balance.
The table below shows a historical comparison of the amount of water pumped, and ultimately sold. We exceeded the 2022 amount pumped by 4% but were below the 3-year average by 2% and below the 10-year average by 5%. The historical decrease has been a result of decreased manufacturing customers and increased residential water efficiency. This has been partially offset by the increase in multi-family customers.
Sanitary Utility
Staffing shortages in the Engineering Division resulted in several postponed projects including the manhole rehab project and the private lateral grouting project. This caused a larger than usual surplus but these funds will be spent in the subsequent year. Adjusted fund balance grew to $17,341,546 representing 184.3% of operating expenditures. This intentionally exceeds our target of 25% due to funds for prior year projects and building a fund balance to help address the pending East Tosa Sewer project.
Stormwater Utility
Similar to Sanitary, the Stormwater Utility adjusted cash fund balance grew to $5,768,334
Representing 108.3% of operating expenditures as the City builds a balance to address the East Tosa sewer project.
C. Strategic Plan (Area of Focus)
For informational purposes only
D. Fiscal Impact
For informational purposes only
E. Recommendation
For informational purposes only