SAN IPSE. Memorandum. FROM: Jennifer A. Maguire TO: PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE

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1 PSFSS COMMITTEE: 06/16/16 ITEM: (c) 1 CITY OF SAN IPSE CAPITAL OF SILICON VALLEY Memorandum TO: PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE FROM: Jennifer A. Maguire SUBJECT: BI-MONTHLY FINANCIAL REPORT DATE: June 9, 2016 FOR MARCH/APRIL 2016 Approved Date 6/9/16 RECOMMENDATION Accept the bi-monthly status report on actual revenues and expenditures as compared to the Budget and financial results for the ten months ending April OVERVIEW The Bi-Monthly Financial Report for March/April 2016 was jointly prepared by the City Manager's Budget Office and the Finance Department and is presented for the Public Safety, Finance and Strategic Support Committee's review. The City Manager's Budget Office has analyzed actual revenues and expenditures as compared to the Modified Budget as described in this report and the Finance Department has prepared the attached report that reflects the financial results for the ten months ending April Revenues and expenditures continue to generally track within the budgeted estimates in the majority of the City funds. The Administration will continue to closely monitor economic conditions and the performance in all City funds, bringing forward budget adjustments to the City Council as part of the Year-End Clean-up memorandum as necessary. Following are key highlights in this report: Overall, in the General Fund, revenues are tracking to exceed the modified budget and expenditures are tracking to end the year with modest savings. As part of the Proposed Budget that was released on May 1, 2016, it is assumed that excess revenues, expenditure savings, and the liquidation of prior year carry over encumbrances in would generate $42.5 million in the Ending Fund Balance/ Beginning Fund Balance to be available as a funding source in Actual performance in is expected to slightly exceed these estimates, and Manager's Budget Addendum #29, Updated Revenue and Expenditure Estimates in the General Fund and the Transient Occupancy Tax Fund, was brought forward to recognize an additional $2.5 million in Ending Fund Balance from excess revenues and expenditure savings, bringing the total to $45.0 million. As described in this report, approximately half of that amount is expected to be generated from additional Sales Tax ($11.6 million) due to the "Triple Flip"

2 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 2 OVERVIEW (CONT'D.) wind down, Property Tax ($7.6 million) due primarily to Educational Revenue Augmentation Fund (ERAF) excess funds, and Police Department expenditure savings ($5.0 million). Yearend budget adjustments will be brought forward on June 21, 2016, to set aside $25.5 million of excess revenues into a Ending Fund Balance Reserve. The remaining Ending Fund Balance is expected to be generated from additional revenue and expenditure savings to fully meet the estimate assumed in the Budget. Overall, General Fund departmental and non-departmental expenditures are tracking within budgeted levels through April and are expected to generate savings by year-end. A few appropriations are tracking close to or slightly above estimated levels, and necessary adjustments are included in the Year-End Budget Clean-Up memorandum to address any potential overages, primarily through net-zero expenditure shifts or the recognition of additional revenues. Development-related revenues in the General Fund are currently tracking to exceed the budgeted estimates in each of the Development Fee Programs. Construction and Conveyance Tax collections also remain strong and are on track to exceed the budgeted estimate. Development-related taxes (Building and Structures Construction Tax and Construction Excise Tax) are tracking below prior year levels as anticipated, but are tracking to end the year above the budgeted estimate. The Norman Y. Mineta San Jose International Airport (SJC) has enplaned and deplaned 8.3 million passengers, an increase of 6.2% from the figures reported through April of the prior year and compares to an estimated 2.0% growth in passenger activity in In the Silicon Valley, solid economic growth continues with median home prices up 12.4% from the same time last year, and unemployment rates continuing a downward trend, remaining below both State and national levels. The Administration will closely monitor the performance of the City's economically sensitive revenues to identify any changes in collection trends as appropriate. Revenues and expenditures in all other special and capital funds are generally tracking within estimated levels. Budget adjustments are recommended in the Year End Budget Clean-Up memorandum, scheduled for City Council consideration on June 21, 2016, to bring revenues and expenditures in line with the year-end estimates, to recognize any new funding, and to adjust project budgets based on the latest schedules.

3 HONORABLE MAYOR AND CITY COUNCIL June 9,2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 3 OVERVIEW (CONT'D.) Economic Environment The Silicon Valley continues to show solid economic performance with a number of the economic indicators showing improvement from the same period a year ago. The results of the long economic expansion are reflected in several of the economic indicators, particularly among employment and housing. 1,120,000 Monthly Employment Level - San Jose MSA The April 2016 employment level in the San Jose- 1,070,000 Sunnyvale-Santa Clara 1,020,000 Metropolitan Statistical Area (San Jose MSA) of 1.06 million was 1.8% above the April 2015 level of , ,000 million and is close to the historical peak of 1.09 million 870,000 in in in in to (D experienced in December ) ir < ^ r? O ro > < 9* Unemployment Rate (Unadjusted) Apr. Mar San Jose Metropolitan Statistical Area* Apr. 2016** 4.1% 3.9% 3.7% State of California 6.2% 5.6% 5.2% United States 5.1% 5.1% 4.7% * San Benito and Santa Clara Counties Source: California Employment Development Department. ** April 2016 estimates are preliminary and may be updated. The unemployment rates at the local, State, and national levels remain low. In April 2016, the unemployment rate for the San Jose Metropolitan Statistical Area of 3.7% was below the April 2015 rate of 4.1% and the unadjusted unemployment rates for the State (5.2%) and the nation (4.7%). Through April, residential permit activity is tracking below the prior year levels, primarily due to less new construction (1,343 new dwelling units in vs. 3,127 in ). Lower levels of activity are also reflected in construction valuation, with decreases in both new residential construction ($276.1 million in vs. $436.8 million in ) and alterations ($91.3 million in vs. $102.1 million in ). Combined residential valuation of $367.4 million through April is 31.8% below the prior year level of $538.9 million. Although residential activity is significantly lower than the prior year, the drop off is generally in line with budget projections and it is anticipated that the 4 th quarter of will be stronger.

4 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 4 OVERVIEW (CONT'D.) Overall commercial valuation through April is above the level ($344.3 million in vs $321.1 million in ). Industrial construction valuation through April is significantly higher than the level ($515.8 million in vs. $296.0 million in ). Home prices remain strong. The median single-family home price in April 2016 of $950,000 is up 12.4% from the April 2015 price of $845,000. The average days-on-market for single-family and multifamily dwellings in April 2016 was 19 days, which is a 15.9% decrease from the 22 days-on-market in April Finally, the April 2016 number of property transfers of 769 represents a decrease of 8.3% when compared to the 839 sales in April a> o 'SZ Q. _Q) TO <0 c TO ' 0) 1,000, , , , , , ,000 Private Sector Construction Activity (Valuation in $ Millions) YTD Apr 2015 YTD Apr 2016 % Increase Residential $ $ % Commercial $321.1 $ % Industrial $ $ % Median Price - Single Family Homes &,v> if o & ^ On a national level, consumer confidence which had had a modest gain in March, declined slightly in April. Says Lynn Franco, Director of The Conference Board Consumer Research Center: "Consumer confidence continued on its sideways path, posting a slight decline in April, following a modest gain in March. Consumers' assessment of current conditions improved, suggesting no slowing in economic growth. However, their expectations regarding the short-term have moderated, suggesting they do not foresee any pickup in momentum." As suggested by a number of economic indicators, the local economy continues to experience growth, although the rate of growth in some areas has slowed somewhat in comparison to These economic conditions were taken into consideration in the development of the Proposed Budget.

5 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 5 GENERAL FUND REVENUES General Fund revenues through April 2016 totaled $773.1 million, which represents a decrease of $58.6 million (7.0% below) from the April 2015 level of $831.7 million. Both the current and the prior fiscal year include borrowing proceeds from the Tax and Revenue Anticipation Notes (TRANs) issued for cash flow purposes ($100 million annually in both fiscal years). Overall, General Fund revenues are tracking to exceed budgeted estimates. Most categories are currently tracking to exceed budgeted levels, however, Telephone Line Tax, Licenses and Permits, Fines, Forfeitures, and Penalties, Revenue from Local Agencies, and Revenue from Federal Agencies are anticipated to end the year slightly below year-end levels. Year-end adjustments are recommended to align the budget with current projections, increasing revenues by $25.0 million (excluding net-zero adjustments to grants/reimbursements/fees of $4.2 million). This majority of this additional revenue, along with expenditure savings, will be used to meet the Ending Fund Balance estimate of $45.0 million assumed in the development of the Operating Budget. The following discussion highlights General Fund revenue activities through April. KEY GENERAL FUND REVENUES YTD Prior YTD Revenue Estimate Actual Collections Property Tax $255,210,000 $ 185,620,403 $221,573,649 The Property Tax category consists of Secured Property Tax, Unsecured Property Tax, SB 813 Property Tax (retroactive collections back to the point of sale for reassessments of value due to property resale), Airplane In-Lieu Tax, and Homeowners Property Tax Relief. Through April, $185.6 million has been received, reflecting 72.7% of the budget for this category. Based on recent information received from the County in May, revenues are on track to exceed the budgeted estimate by $7.6 million. An increase to this revenue estimate is included in the Year-End Budget Clean-Up memorandum to reflect this higher collection level. Secured Property Taxes represent over 90% of the estimated revenue in the Property Tax category. For , the Adopted Budget estimate of $233.7 million includes $231.7 million from regular Property Tax receipts and $2.0 million from the distribution of excess Education Revenue Augmentation Fund (ERAF) funds. The estimate for Secured Property Tax Receipts was based on the assumption that receipts (excluding ERAF

6 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 6 GENERAL FUND (CONT'D.) funds) would increase approximately 6.0% in compared to the estimate. The current estimate from the County of Santa Clara on the regular Secured Property Taxes is tracking close to this budgeted estimate. Based on information that was received by the County in May 2015, the Adopted Budget also assumed $2.0 million from excess ERAF funds in Beginning in 1992, agencies have been required to reallocate a portion of property tax receipts to the ERAF, which offsets the State's General Fund contributions to school districts under Proposition 98. Flowever, once there are sufficient funds in ERAF to fulfill obligations, the remainder is to be returned to the taxing entities that contributed to it. In May 2016, the County provided information that a one-time payment of $6.6 million is anticipated to be distributed to the City of San Jose, which is approximately $4.6 million higher than what was assumed in the Budget. Overall, Secured Property Tax receipts are estimated to total $239.4 million by year-end, which is $5.7 million above the budgeted estimate. In the Unsecured Property Tax category, collections through April of $ 13.9 million were above prior year collections of $13.2 million. Historically, all of the payments in this category are received by April. Therefore, receipts in this category are expected to end the year above the budgeted estimate of $13.0 million by approximately $878,000. For the SB 813 Property Tax category, collections through April of $3.9 million were below prior year collections of $4.4 million. Based on information received from the County, it is estimated that collections will reach $5.9 million by year-end, which is below the actual receipts of $6.3 million, but above the budgeted estimate of $5.1 million. Airport Property Tax receipts of $2.7 million have been received through April, reflecting an increase of 14.4% from the prior year ($2.3 million) and exceeding the budgeted estimate of $2.4 million. Similar to Unsecured Property Tax, receipts through April typically account for all the annual revenue for this category. Based on the latest estimate from the County, the Homeowners Property Tax Relief revenue is projected to be close to the Adopted Budget estimate of $1.0 million.

7 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 7 GENERAL FUND (CONT'D.) YTD Prior YTD Revenue Estimate Actual Collections Sales Tax $ 190,260,000 $ 105,354,051 $ 130,982,599 The Sales Tax category includes General Sales Tax and Proposition 172 Sales Tax. Overall, revenues are projected to exceed the budgeted estimate of $190.3 million by $11.6 million due to the wind down of the Sales Tax "Triple Flip" described below. An increase to this revenue estimate is included in the Year-End Budget Clean-Up memorandum to reflect this higher collection level. The Adopted Budget estimate for General Sales Tax of $184.1 million requires growth of 5.4% from the year-end figure of $174.7 million. Collections in will be impacted by prior year accrual adjustments, one-time payments, and the Triple Flip Payment from the State. To date, receipts in the first quarter were up 2.9% while receipts in the second quarter, which covers the holiday period, reflected growth of 7.9% from the same quarter in the prior year. However, according to the City's Sales Tax consultant, MuniServices, the receipts in the second quarter are likely over-stated as there was a business that was erroneously reporting to San Jose that is expected to be reversed. Factoring out this error, growth of 5% is estimated for the second quarter. When comparing San Jose's most recent cash receipts to those of other jurisdictions, San Jose's growth was above the growth level of the State as a whole (3.5%), Northern California (4.2%), and San Francisco Bay Area (4.8%). The City's Sales Tax consultant, MuniServices, recently provided the City with economic performance data, which is considered to be a more accurate measure of the actual sales tax activity in San Jose for a particular period. This growth analysis measures sales tax receipts, excluding State and county pools, and adjusts for anomalies, payments to prior periods, and late payments. On a local economic basis, growth of 3.5% was realized in the second quarter. As shown in the chart below, this growth was the result of modest increases in the three largest economic sectors, followed by strong growth in the remaining categories. Sales Tax Revenue Economic Performance (October-December 2014 compared to October-December 2015) Economic Sector % of Total Revenue % Change Oct. - Dec to Oct. - Dec General Retail 25.7% 1.9% Transportation 22.9% 3.2% Business-to-Business 22.9% 2.4% Food Products 16.4% 5.3% Construction 11.3% 6.8% Miscellaneous 0.8% 17.7% Total 100.0% 3.5%

8 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 8 GENERAL FUND (CONT'D.) In , the wind down of the "Triple Flip" 1 sales tax adjustments is anticipated. On August 5, 2015, the Department of Finance notified the California State Board of Equalization and the public that the State's Triple Flip "unwinding" process will be initiated with the defeasance of the Economic Recovery Bonds. It is estimated that the final true-up payment associated with the Triple Flip wind down will be made in August 2016 and will be accrued to Based on information from the City's Sales Tax consultant, MuniServices, anticipated adjustments associated with the Triple Flip payment (including the true-up payment received in January 2016 and the final true-up payment anticipated in August 2016), revenues are currently projected to exceed the budgeted estimate of $184.1 million by approximately $12.0 million. Through April, the Proposition 172 Sales Tax receipts of $4.3 million were down 0.8% from the same period in the prior year. However, the budgeted estimate of $6.2 million requires growth of 7.9% from the collection level of $5.7 million. Based on actual performance and current collection trends, it is anticipated that collections will fall below the budgeted estimate by approximately $455, YTD Prior YTD Revenue Estimate Actual Collections Transient Occupancy Tax $ 17,136,000 $ 11,906,815 $ 10,824,815 Through April 2016, receipts recorded in the General Fund of $11.9 million are 11.8% ($1.3 million) above the prior year's collections for the same period, but are tracking to end the year slightly below ($836,000) the modified budget estimate of $17.1 million, representing a year-overyear increase of 10%. A decrease to this revenue estimate is included in the Year-End Budget Clean-Up memorandum to reflect this lower collection level, offset by a reduction to the Cultural Facilities Capital Maintenance Reserve, whose purpose is described below. The Adopted Budget estimate of $14.7 million was built assuming approximately 4.0% growth in TOT collections over estimated receipts; however, actual collections for reached this level by year's end. As part of the Mid-Year Budget Review in January 2016, the TOT budgeted estimate was increased by $2.4 million (from $14.7 million to $17.1 million), the majority of which ($2.3 million) was attributed to the overall growth in the local hotel industry and a small portion ($136,000) of increased tax receipts were recognized as a result of anticipated activity from Super Bowl 50. Though collection levels through April are up as compared to the prior year level, TOT collections are now tracking to end the year at $16.3 million, which is approximately 5% less than the modified budgeted estimate of $17.1 million. 1 As part of the Proposition 57 State fiscal recovery funding mechanism (passed by the voters in March 2004), onequarter cent of the City's one cent Bradley Burns sales tax has been temporarily suspended and replaced dollar- fordollar with property tax revenue. This action, which went into effect on July 1, 2004, remains in effect until the State's bond obligations have been satisfied.

9 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 9 GENERAL FUND (CONT'D.) The lower revenue estimate is primarily attributed to occupancy rates leveling off, even though room rates are still higher. The average hotel occupancy rate at the 13 surveyed major hotels through April was 75.33%, which reflects no change from the occupancy rate for the same period in of 75.32%. However, the average daily room rate through April was up 12.9%, at $ this year as compared to $ in , and the year-to-date average revenueper-available room (RevPAR) metric of $ is up 13.1% from the prior year amount of $ It is important to note that, as directed by the Mayor's March Budget Message for Fiscal Year , as approved the City Council, the growth in TOT receipts over the collection level of $11.9 million are to be set aside in the Cultural Facilities Capital Maintenance Reserve that will be used to fund future capital improvement projects at City owned cultural facilities. The City-Council approved Mayor's March Budget Message for Fiscal Year broadened the use of this reserve to also include other cultural priorities that TOT dollars would typically fund, but only where those dollars can be leveraged with substantial contributions from private or other public sources. Because the adjusted TOT amount is still well above the collection level, the downward revenue adjustment is appropriate to be offset by a reduction to this reserve YTD Prior YTD Revenue Estimate Actual Collections Utility Tax $93,825,000 $71,850,799 $70,768,949 Overall, Utility Tax collections of $71.9 million are tracking 1.5% above the prior year collections of $70.8 million. It is anticipated that revenues will end $600,000 to $750,000 above the budget estimate of $93.8 million. Utility Tax contains the following categories: Electric, Gas, Water and Telephone. Collections through April of $71.9 million were tracking 1.5% above the prior year level of $70.8 million. The budgeted estimate assumes an increase of approximately 2.5% from the prior year. Based on current collection trends, overall, Utility Tax receipts are tracking slightly below budgeted estimates, but may meet the budget by year-end. Below is a more detailed discussion of the revenue performance in each category. In the Electric Utility Tax category, collections of $34.1 million are 4.8% above prior year levels. Collections are on pace to slightly exceed the 3.6% growth necessary to meet the Adopted Budget estimate. Gas Utility Tax collections of $7.2 million are 6.8% above prior year collections. The Adopted Budget estimate of $8.9 million requires growth of 5.0% from the

10 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 10 GENERAL FUND (CONT'D.) actual collection levels of $8.5 million. Gas Utility Tax receipts are subject to significant fluctuations from the impact of weather conditions and/or rate changes. Collections of $9.1 million in the Water Utility Tax category were 4.2% above the prior year levels. The Adopted Budget estimate of $11.6 million was based on growth of 1.8% over the projected collection level; however, because revenues in ended the year above the estimated collection level, no growth is necessary to achieve the budgeted estimate Telephone Utility Tax primarily consists of four revenues: telephone, cellular, Voice over Internet Protocal (VoIP), and pre-paid calling cards. Collections of $21.4 million are tracking 5.7% below prior year levels. The budgeted estimate of $29.6 million, however, requires growth of 1.0% from the prior year. It is important to note that collections from prepaid calling cards was anticipated to be $650,000 in , however, only $49,000 has been received through April YTD Prior YTD Revenue Estimate Actual Collections Business Taxes $44,425,000 $39,805,182 $37,664,297 This category consists of the following: General Business Tax, Cardroom Tax, Marijuana Business Tax, and Disposal Facility Tax. Through April, overall receipts of $39.8 million are tracking 5.7% above the prior year actuals of $37.7 million, reflecting higher collections in Cardroom and Marijuana Tax categories. To meet the budgeted estimate, receipts in this category can drop 6.2% from the prior year. Based on current collection trends, revenues are projected to exceed the budgeted estimate by $5.3 million. An increase to this revenue estimate is included in the Year-End Budget Clean-Up memorandum to reflect this higher collection level. General Business Tax revenue collections of $11.2 million were 4.6% below the prior year level of $11.8 million. The Adopted Budget estimate of $11.0 million allows for a drop of 7.2% from the actuals of $11.9 million. Based on year-todate performance, receipts are projected to end the year at $11.5 million, up $500,000 the budgeted estimate of $11.0 million. Cardroom Business Tax collections reflect the gross receipts tax collected from the two cardrooms located in San Jose. Collections of $13.6 million through April are 7.3% above the prior year level of $12.7 million. Based on current receipts, collections are projected to end the year at $ 18.0 million, which is $ 1.0 million above the budgeted estimate of $ 17.0 million.

11 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 11 GENERAL FUND (CONT'D.) Marijuana Business Tax collections (including compliance revenues) of $6.5 million through April are 57.2% above the prior year level of $4.1 million. Collections were lower in primarily due to the closure of a large number of collectives that were located adjacent to residential and other sensitive use areas. Additionally, in compliance audits and assessments were not conducted as extensively as they were in Revenues in have rebounded as patrons purchase their medication from businesses that remain open instead of from closed businesses. This year's collection totals are also a result of one-time compliance revenues. The implementation of compliance audits and assessments have contributed approximately $826,000 to this year's revenue figure. Based on current collection trends, receipts are projected to end the year at $7.8 million, which is $3.3 million above the budgeted estimate of $4.5 million. Disposal Facility Tax (DFT) receipts of $8.5 million are tracking 6.5% below the prior year level of $9.1 million. The modified budget estimate of $11.9 million was built on the assumption that revenues would fall due to improvements in the processing of waste for the commercial program as well as the historic downward trends in this category. Based on current collection trends, receipts are projected to total $12.4 million by yearend, which is belowthe collection level of $12.9 million but above the budgeted estimate of $11.9 million YTD Prior YTD Revenue Estimate Actual Collections Licenses and Permits $ 50,221,223 $ 46,313,631 $ 41,920,756 This category includes Building Permits, Fire Permits, and Other Licenses and Permits. Through April, Licenses and Permits revenue of $46.3 million tracked 10.3% above the prior year level of $41.9 million. The budget estimate requires an increase of 5.7% from the actual collection level. Based on year-to-date activity, revenues are projected to exceed the budgeted estimate by approximately $1.5 million, reflecting higher collections in the development fee programs ($2.5 million) partially offset by lower receipts in Other Licenses and Permit (-$1.0 million). Increases to this revenue category are included in the Year-End Budget Clean-Up memorandum to reflect this higher collection level. Following is a discussion of the major components of this category. Building Permit revenues of $25.1 million through April is tracking 8.4% above the collection level of $23.1 million for the same period. The modified revenue estimate of $27.5 million is in line with prior year actual revenue collections in this category. All revenues in this category are tracking to meet or exceed estimated levels except for new residential permits for building, plumbing, mechanical, and electrical. Development permits to date has consisted of a mix of commercial and industrial new construction and alterations and multi-family residential units. Major residential activity for April included 19 permits for single-family units, including eight

12 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 12 GENERAL FUND (CONT'D.) units in a single-family in-fill development located north of Highway 85 and west of Snell Avenue and a foundation only permit for a 168-unit apartment building on The Alameda west of the SAP Center. Significant commercial activity included a permit for shell construction of a new 63,000 square foot card room located on North First Street just south of Highway 101. Industrial activity consisted of a permit for a cold shell 111,000 square foot single-story warehouse building located on Hellyer Avenue east of Highway 101 and south of Piercy Avenue; permits to finish two six-story, 215,000 square foot buildings on America Center Drive north of Highway 237 that had previously had foundation only permits; and a permit for a 182,000 square foot industrial building on Great Oaks Boulevard in South San Jose. Based on year-to-date performance, receipts are projected to end the year approximately $2.0 million above the budgeted estimate. As part of the Year-End Budget Clean-Up memorandum, budget actions are recommended to recognize this additional revenue and set it aside in the Building Development Fee Program Reserve for works-in-progress. Through April, Fire Permit collections of $10.2 million were above prior year collection levels of $9.2 million (10.3%). The budgeted revenue estimate of $10.6 million is $200,000 higher than the prior year's collection level. This category consists of development and non-development related permits. Development related receipts of $5.9 million through April are tracking above collection levels of $5.2 million (13.4%) for the same period, while the budgeted estimate of $6.4 million assumed a 3.5% increase in revenue from the prior year's collections of $6.2 million. If current collection trends continue, it is anticipated that development-related receipts will exceed the budgeted estimate by year end by $500,000. As part of the Year-End Budget Clean-Up memorandum, budget actions are recommended to recognize this additional revenue and set it aside in the Fire Development Fee Program Reserve for works-in-progress. Non-development program revenues of $4.3 million represent the four major billing cycles for non-development fire permits for this fiscal year and slightly exceed the budgeted estimate of $4.2 million. The Other Licenses and Permits collections of $11.1 million are tracking 15.7% above prior year levels of $9.5 million; however, it is estimated that collections will end the year approximately $1.0 million below the budget estimate of $12.1 million. The estimate requires growth of 25% from the prior year, primarily reflecting the inclusion of Medical Marijuana Collective Annual Operating Fees. The Medical Marijuana Collective Annual Operating Fee estimate of $1.9 million anticipated the inclusion of 20 collectives for the entire fiscal year. However, the Medical Marijuana Collective Annual Operating Fee did not go into effect until the beginning of January 2016, and only 16 collectives have been approved at this time. For these reasons, the fee revenues are expected to end the year at $765,000, falling below the budgeted estimate by approximately $1.1 million. As part of the Year-End Budget Clean-Up memorandum, budget actions are recommended to reduce this revenue estimate.

13 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 13 GENERAL FUND (CONT'D.) YTD Prior YTD Revenue Estimate Actual Collections Departmental Charges $ 42,684,658 $ 38,201,404 $ 34,859,083 Through April, Departmental Charges revenues of $38.2 million were tracking 9.6% above the collection level of $34.9 million. To meet the modified budget estimate, growth of 2.4% over the prior year is needed. The increase from the prior year reflects growth in the Police, Public Works, Planning, Library, and Parks, Recreation, and Neighborhood Services Departmental Charges categories, partially offset by declines in Miscellaneous and Transportation categories. If current collection trends continue, overall Departmental Charges revenues are anticipated to slightly exceed the budgeted estimate by year-end. Development-related revenues are currently tracking above the prior year collection levels, and are expected to exceed the budgeted estimates if trends continue. Through April, Planning Fee revenues of $5.1 million are 24.4% above the prior year collection level of $4.1 million and above the estimate of $4.7 million. Overall revenue collections are exceeded estimated levels, with strong performance in all revenue categories except sale of publications, non-residential development permit adjustments, and non-residential conditional use permits. As part of the Year-End Budget Clean-Up memorandum, budget actions are recommended to recognize additional revenue of $1.3 million and set it aside in the Planning Development Fee Program Reserve for works-in-progress. Public Works Fee revenues through April of $8.9 million are 23.1% above the prior year level of $7.2 million for the same period. Growth of 5.2% is needed to meet the budgeted revenue estimate of $9.8 million in Several revenue categories are tracking above estimated levels including Utility Excavation, Grading Permits, Geologic Fees, Traffic Reports, and Planned Development Permits. Higher collections in these areas are partially offset by lower revenues related to Engineering categories such as Residential, Non-Residential, and Private, which are tracking below estimated levels. At this time, collections are projected to exceed the budget by at least $500,000. As part of the Year-End Budget Clean-Up memorandum, budget actions are recommended to recognize additional revenue of $500,000 and set it aside in the Public Works Development Fee Program Reserve for works-in-progress.

14 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 14 GENERAL FUND (CONT'D.) YTD Prior YTD Revenue Estimate Actual Collections Transfers and Reimbursements $ 76,330,497 $ 61,685,096 $ 61,838,109 This category includes overhead reimbursements from operating and capital funds, transfers, and other reimbursements. Collections of $61.7 million through April are tracking 0.2% below the prior year level of $61.8 million. Receipts in this category are expected to exceed the budgeted estimate by approximately $920,000 due primarily to a surplus from the close-out of improvement district funds ($800,000). Other positive revenue variances include a higher interest transfer from the Construction and Conveyance funds ($293,000), higher interest transfers from various other funds ($185,000), and higher estimated Gas Tax reimbursements ($100,000). These higher collections are partially offset by lower estimated capital overhead reimbursements ($386,000), a lower estimated transfer from the Water Utility Fund ($50,000) as no late fee revenue is expected to be received in , and lower estimated revenue from the Workforce Investment Act Fund ($21,000). To reflect this revised estimate, a net upward adjustment of $920,000 is included in the Year-End Budget Clean-Up memorandum. EXPENDITURES Through April, General Fund expenditures (without encumbrances) of $869.6 million were 6.4% above the prior year level of $817.7 million. Encumbrances of $42.6 million were 6.8% below the prior year level of $45.8 million. Expenditures and encumbrances ($912.3 million) through April constitute 68.1 % of the total revised budgeted uses of funds ($1.3 billion, including reserves; $1.2 billion, or 75.9%, excluding reserves). Overall, expenditures are tracking below estimated levels through April and savings are anticipated by year-end. Overall, departmental and non-departmental budgets are tracking to end the year with savings; however, there are a few instances where expenditures in particular appropriations are tracking above estimated levels. As part of the Year-End Budget Clean-Up memorandum, all of the appropriations that are tracking to end the year above the budget are recommended to be adjusted in order to ensure expenditures remain within appropriated levels. These adjustments can be offset by net-zero shifts between departmental appropriations, expenditure savings in other areas, and excess revenues.

15 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 15 KEY GENERAL FUND EXPENDITURES YTD Prior YTD Department Budget Actual Actual Police $ 341,742,015 $ 273,486,649 $ 247,236,199 On an overall basis, the Police Department's expenditures are tracking to end the year below the modified budget. Personal Services expenditures of $250.7 million tracked below anticipated levels (80.4% compared to the par of 81.3%). Overtime expenditures of $28.1 million through April also tracked below budgeted levels with 79.9% expended of the current modified budget of $35.1 million. Based on current trends, personal services expenditures are tracking to end the year with savings of approximately $5.0 million to $5.5 million, which represents less than 2% of the personal services budget of $312.1 million. Overtime consists of overtime expenditures and compensatory time. The Memorandum of Agreement with the Police Officers' Association (POA) limits how much overtime can be earned for pay versus compensatory time. The compensatory time balance at the end of April 2016 was 209,244 hours for sworn personnel. This represents an increase of 30,673 or 17.2% compared to the April 2015 balance of 178,571. The chart below outlines current authorized sworn staffing levels and the number of street-ready sworn positions available at work: (as of 4/27/2016) (as of 05/15/2015) Authorized Sworn Staffing 1,109 1,109 Vacancies (194) (159) Filled Sworn Staffing Field Training Officer/Recruits (18) (36) Street-Ready Sworn Positions Available Disability/Modified Duty/Other Leaves (60) (56) Street-Ready Sworn Positions Working A total of $22.7 million (76.6%) of the Department's Non-Personal/Equipment budget was expended or encumbered through April. Excluding the remaining balances for centrallydetermined details, including electricity, gas, and vehicle operations and replacement, the Department has approximately $2.7 million, or 14.5% of the non-centrally-determined appropriation available for the remainder of the fiscal year. Overall, non-personal/equipment savings of at least $1 million are anticipated by year-end, primarily due to lower vehicle operations costs. The Police Department personal services and non-personal/equipment savings were anticipated and factored into the development of the budget, including the assumption of $5.0 million in savings that was assumed as a funding source as part of the Ending Fund

16 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 16 GENERAL FUND (CONT'D.) Balance/ Beginning Fund Balance calculation and an additional $1.0 million that was rebudgeted to the Police Department Staffing/Operations Reserve. In order to fill the vacant sworn positions and put more Police Officers back on patrol, the Department will conduct three Police Recruit Academies in (October, February, and June) with the capacity of 45 recruits for each academy. The October 2015 academy graduated with 9 recruits. Currently, the February academy has 7 recruits and the June academy is anticipated to begin with 18 recruits. Although the Department conducts regular police officer recruit academies to hire for the sworn vacancies, it is expected to begin with at least 190 sworn vacancies based on current attrition rates YTD Prior YTD Department Budget Actual Actual Fire $ 193,372,938 $ 155,667,371 $ 137,559,799 On an overall basis, Fire Department expenditures are tracking below estimated levels. Personal Services expenditures of $147.5 million are tracking at 80.4%, which is below par of 81.3% due to vacancies and reimbursements from the State of California for costs associated with strike team deployments and overtime reimbursements from local agencies for various training activities, which were recognized in the Mid-Year Budget Review. The Fire Department's Non- Personal/Equipment budget of $9.9 million was 82.7% expended or encumbered through April; however, non-personal/equipment expenditures are expected to end the year with approximately $300,000 in savings, primarily due to savings in vehicle maintenance and operations. Through April, overtime expenditures of $9.4 million are tracking slightly above anticipated levels with 82.3% expended, compared to par of 81.3%. Previous months had demonstrated peak overtime needs; however, the overtime expenditures are now stabilizing. Higher overtime expenditures were incurred due to the following: vacancies at duty positions, Index D staffing requirements at the Airport, strike team support, and special operations training. The Department has requested and received reimbursements from the State of California for costs associated with strike team deployments. Overall, the sworn vacancy rate of 6.4% is slightly higher than the vacancy rate at this time last year (4.3%); and, vacancies through May 2016 continue to exceed the budgeted rate of 2.8%. There are currently 25 recruits in the February 2016 Firefighter Recruit Academy. These recruits are expected to begin filling line positions by June 30, 2016, which will fill the remaining sworn vacancies. In addition, there are currently 14 non-sworn vacancies in the Department.

17 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 17 GENERAL FUND (CONT'D.) Personal services expenditures in the Development Fee Program of $4.1 million are tracking lower than estimated levels with 80.1% expended. In accordance with the City Council's approval of a March 2010 report on annual vacancy and absence rates, the Fire Department has committed to limiting administrative assignments for sworn administrative personnel for overtime control purposes. As of the end of April, the Fire Department has 30 sworn personnel on administrative assignments, which is lower than the current authorized level of 33. CONTINGENCY RESERVE The General Fund Contingency Reserve was amended as part of the Annual Report, increasing the Reserve to $34.5 million. The adjustment was necessary to comply with Council Policy 1-18, Operating Budget and Capital Improvement Program Policy, that requires the Contingency Reserve to be a minimum of 3% of the operating budget. The Contingency Reserve has not been used in OTHER FUNDS Airport Funds On a fiscal year-to-date basis, the Norman Y. Mineta San Jose International Airport (SJC) has enplaned and deplaned 8.3 million passengers, an increase of 6.2% from the figures reported through April of the prior year. The chart below depicts the year-over-year change for the month of April and Fiscal Year-to-Date since Fiscal Year Fiscal year-to-date mail, freight and cargo totaled 87.2 million pounds, which represents a 0.1% decrease over April 2015 year-to-date. Revenue-generating activities posted increases over the same period of the prior fiscal year: Traffic Operations (landings and takeoffs) by 2.8%, Landed Weights by 7.4%, Gallons of Aviation Fuel Sold by 3.2%, Parking Exits by 0.7%, and Ground Transportation (taxicabs & TNC's) Operations by 59.6%. The Ground Transportation increase is primarily due to the permitting of three Transportation Network Companies (TNCs) which started operations at the Airport in November/December 2015.

18 HONORABLE MAYOR AND CITY COUNCIL June 9, 2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 18 OTHER FUNDS (CONT'D.) FY PAX 10,000, ,000, ,000 3, ,000,000 1,000,000 Fiscal Year & April Pax Comparison APRIL PAX 900, , , , , , , , ,000 FY PAX Growth FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY2013 FY2014 FY2015 FY 2016 (15 o) (8 o) 20/o (2 o) 1% 70/ =23 FY -April Through April, overall revenue performance at the Airport tracked 4% above the pro-rated budget. Airline Rates and Charges revenue is on target while Airfield revenue tracked 18% higher than the benchmark due to in-flight kitchen and ground support concession revenues. The performance of Parking and Roadway tracked 6% higher than the benchmark primarily due to public parking and ground transportation trip fees, including one-time back fees from TNCs operating at SJC prior to obtaining permits. General and Non-Aviation revenues were 7% higher than the pro-rated budget because of greater interest revenues, higher than projected land rental rates resulting from regularly scheduled appraisals, and extension of the Compressed Natural Gas (CNG) tax credit through December 31, In the Maintenance and Operation Fund, Personal Service expenditures were 75.2% of budget compared to the benchmark of 82.7% reflecting savings from a 12.6% vacancy rate to date, while Non-personal/Equipment expenditures were 62.2% (excluding encumbrances) compared to the benchmark of 73.2%. Non-personal/Equipment expenditures in the Customer Facility and Transportation Fee Fund were 72.9% (excluding encumbrances) compared to the straightline benchmark of 83.3%. Based on current trends, year-end expenditure savings are projected. Construction and Conveyance Tax Funds Construction and Conveyance (C&C) Tax revenues continue to experience strong growth compared to receipts from the prior fiscal year. Collections through April 2016 totaled $31.4 million, which is 82.6% of the modified estimate of $38.0 million. This collection level is 17.2% above the $26.8 million received through April However, the City has also received May Conveyance Tax receipts totaling $3.4 million, representing a 46.0% decrease from the $6.3 million received in May It is important to note that the May 2015 receipt level was abnormally high, and likely does not indicate overall revenues are significantly decreasing.

19 HONORABLE MAYOR AND CITY COUNCIL June 9,2016 Subject: Bi-Monthly Financial Report for March/April 2016 Page 19 OTHER FUNDS (CONT'D.) The Adopted Capital Budget was developed with the assumption that C&C Tax receipts would total $35.0 million in and remain steady in In the last quarter of , however, tax receipts had an extremely strong performance, which resulted in the receipts totaling $41.2 million. Due to the unanticipated high collections in , the C&C Tax Adopted Budget estimate of $35.0 million, allowed for a 15.1% decline in tax revenue from the actual tax collection. Given that receipts are exceeding budgeted expectations thus far in the fiscal year, a revised C&C Tax estimate of $38.0 million is anticipated. Over 96% of the total Construction and Conveyance Taxes are comprised of conveyance receipts, a tax based on the value of property transfers (sales). Continuing the recent trend, the local real estate markets continues to see rising sale prices coupled with a high number of property transfers. The record-setting median single-family home price in April 2016 of $950,000 is up 12.4% from the April 2015 price of $845,000. In addition, the amount of time it took to sell these homes has decreased 15.9%, from 22 days in April 2015 to 19 days in April However, the number of property transfers for single-family and multi-family dwellings in April 2016 totaled 769, which is an 8.3% drop compared to the 839 sales that occurred in April The year-to-date sales in , however, have grown 4.3% when compared to the same time period in Other Construction-Related Revenues Through April, revenues associated with construction activity (primarily Construction Excise Tax and Building and Structure Construction Tax) are exceeding expectations. Residential total construction activity is lower than prior year levels ($367.4 million in compared to $538.9 million in ), primarily attributable to significantly lower new construction levels (1,343 units year-to-date compared to 3,127 units through the same period last year). Likewise, valuation for new residential construction is significantly lower than the prior year ($276.1 million in compared to $436.8 million in ). However, overall commercial construction valuation is higher than last year ($344.3 million in compared to $321.1 million in ), as is overall valuation for industrial construction ($515.8 million in compared to $296.0 million in ). Through April, most of the residential construction activity has been for new multi-family units. In April, significant commercial activity included a permit for shell construction of a new 63,000 square foot card room located on North First Street just south of Highway 101. Industrial activity consisted of a permit for a cold shell 111,000 square foot single-story warehouse building located on Hellyer Avenue east of Highway 101 and south of Piercy Avenue; permits to finish two six-story, 215,000 square foot buildings on America Center Drive north of Highway 237 that had previously had foundation only permits; and a permit for a 182,000 square foot industrial building on Great Oaks Boulevard in South San Jose. Permit, activities drive revenue collection in several categories, including the Construction Excise Tax and the Building and Structure Construction Tax, and are an indicator of future activity for several other categories, such as storm and sanitary sewer system fees.