TO: PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE. FROM: Jennifer A. Maguire. DATE: June 8, 2017

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1 PSFSS COMMITTEE: 06/15/17 ITEM: (c) 2 TO: PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE SUBJECT: BI-MONTHLY FINANCIAL REPORT FOR MARCH/APRIL 2017 Approved FROM: Jennifer A. Maguire DATE: Date 6/8/17 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 2017 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 and the Finance Department has prepared the attached report that reflects the financial results for the ten months ending April Through April, revenues and expenditures were generally tracking within the budgeted estimates in most 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 Budget Clean-Up memorandum as necessary. Following are key highlights in this report: Overall, General Fund revenues are currently tracking slightly above budgeted levels, with some categories tracking above estimated levels and others, most significantly Sales Tax, tracking below expectations as discussed in this report. General Fund departmental and non-departmental expenditures are tracking within budgeted levels through April and are expected to generate savings by year-end. However, due to unanticipated flood-related expenses, the Environmental Services Department, the Park, Recreation and Neighborhood Services Department and the Public Works Department are anticipated to exceed their budget by year-end. Budget actions to increase the funding for these departments will be included in the Year-End Budget Clean-Up memorandum, which is scheduled for City Council consideration on June 20, 2017.

2 Page 2 OVERVIEW (CONT D.) On an overall basis, the recommended year-end budget adjustments use expenditure savings in departmental, non-departmental and reserve categories as well as excess revenues to address projected expenditure overages and revenue shortfalls and, with the remaining funds, establish a Ending Fund Balance Reserve of $11.0 million. As part of the Proposed Budget, it is assumed that excess revenues, expenditure savings, and the liquidation of prior year carry over encumbrances in would generate $19.6 million in Ending Fund Balance/ Beginning Fund Balance to be available as a funding source in The remaining Ending Fund Balance above the $11.0 million set aside in the year-end actions is expected to be generated from additional revenue and expenditure savings to fully meet the estimate assumed in the Budget. Development-related revenues in the General Fund are currently tracking to meet or exceed the budgeted estimates in each of the Development Fee Programs. Development-related tax collections (Building and Structures Construction Tax and Construction Excise Tax) remain very strong and are on track to significantly exceed the budgeted estimate by year-end. These higher collection levels were assumed in the development of the Proposed Budget. In the Silicon Valley, several economic indicators remain positive with strong growth in private development activity, median home prices up 3.2% from the same period last year, and an unemployment rate down to 3.2%, remaining below both State and national levels. However, while economic indicators are generally positive, performance in a couple of the economically sensitive revenue categories, primarily Sales Tax and Construction and Conveyance Taxes, are down from the prior year and those revenues will be important to monitor to determine if downward trends emerge. In addition, employment growth has slowed. Construction and Conveyance Tax collections have been declining compared to receipts in the prior year, but are still anticipated to meet the budgeted estimate at year-end. The local real estate market continues to see tightening in the number of property transfers, however the single-family median home prices are reaching historic highs. The Norman Y. Mineta San José International Airport (SJC) has enplaned and deplaned 9.3 million passengers, an increase of 11.7% from the figures reported through April of the prior year and compares to an estimated 2.25% growth in passenger activity in

3 Page 3 OVERVIEW (CONT D.) Economic Environment The Silicon Valley continues to show solid economic performance. Employment indicators, commercial and industrial permit activity, and median single-family home prices continue to remain positive. The April 2017 employment level for the San José- Sunnyvale-Santa Clara Metropolitan Statistical Area (San José MSA) of million was 1.4% above the April 2016 level of million. However, this employment level is unchanged from the March 2017 level and is very close to the pre-holiday levels experienced in Unemployment Rate (Unadjusted) San Jose Metropolitan Statistical Area* April 2016 March 2017 April 2017** 3.8% 3.5% 3.2% State of California 5.4% 5.1% 4.5% United States 4.7% 4.6% 4.1% * San Benito and Santa Clara Counties Source: California Employment Development Department. ** April 2017 estimates are preliminary and may be updated. The unemployment rates at the local, State, and national levels remain extremely low. In April 2017, the unemployment rate for the San José Metropolitan Statistical Area of 3.2% represents a decrease from the March 2017 rate of 3.5%, and is below the 3.8% rate experienced a year ago. In this region, the April 2017 unemployment rate continues to track well below the unadjusted unemployment rates for the State (4.5%) and the nation (4.1%). Local construction activity remains very strong through April, with valuation up 28.6% from prior year levels. Residential permits for new dwelling units through April totaled 2,567, an increase of 91.1% from the 1,343 units during the same period in the prior year. Correspondingly, valuation for new residential construction is also significantly higher than the prior year levels ($464.8 million in vs. $276.1 million in ); however, valuation for alteration activity is lower than the prior year ($81.8 million in vs. $91.3 million in ). Combined residential valuation of $546.6 million through April 2017 is 48.8% above the prior year level of $367.4 million. Permits were recently issued for the construction of a 268-unit apartment building over a podium garage south of the intersection of West San Carlos and Sunol

4 Page 4 OVERVIEW (CONT D.) Streets, the construction of a 31-unit three story apartment building on Monterey Road just north of Tully Road, and the construction of 27 attached townhouses off Dobbin Drive east of North King Road, which are part of a planned development permit allowing up to 101 attached townhomes. Overall commercial valuation through April is also significantly above the level ($534.7 million in compared to $344.3 million in ). Both new commercial construction and alteration activity are up 55.3% compared to prior year levels. Major commercial projects for March and April include permits for the construction of an office building (15,036 square feet) located near the intersection of Cherry Avenue and Almaden Expressway and for the construction of the concrete foundation Private Sector Construction Activity (Valuation in $ Millions) YTD April 2016 YTD April 2017 % Increase Residential $ $ % Commercial $ $ % Industrial $ $ (3.7%) TOTAL $ 1,227.5 $1, % and at grade concrete podium structure for a 357,000 square foot below grade parking garage at Valley Fair mall. Combined industrial construction valuation through April is 3.7% below the level ($496.5 million in vs. $515.8 million in ). Valuation for new industrial construction is lower than the prior year levels ($100.0 million in vs. $274.6 million in ); however, valuation for alteration activity is higher than the prior year ($396.5 million in vs. $241.2 million in ). Alteration construction accounted for most of the industrial activity in March and April. Home sale prices continue to show growth but the number of sales has declined this year. The median singlefamily home price in April 2017 of $980,000 is up 3.2% from the April 2016 price of $950,000. However, the year-to-date number of property transfers through April 2017 was 6,223, which represents a 5.5% decrease from the number of sales that occurred during the same period the prior year. Finally, the amount of inventory available in the local real estate market has been steadily decreasing, with the number of new listings for single-family and multi-family dwellings totaling 888 in April 2017, a 12.2% drop from the same period in the prior fiscal year.

5 Page 5 OVERVIEW (CONT D.) On a national level, consumer confidence increased in March, but then declined in April. Lynn Franco, Director of Economic Indicators at The Conference Board Consumer Research Center, stated Consumer confidence declined in April after increasing sharply over the past two months, but still remains at strong levels. Consumers assessed current business conditions and, to a lesser extent, the labor market less favorably than in March. Looking ahead, consumers were somewhat less optimistic about the short-term outlook for business conditions, employment, and income prospects. Despite April s decline, consumers remain confident that the economy will continue to expand in the months ahead. 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.

6 Page 6 GENERAL FUND REVENUES General Fund revenues through April 2017 totaled $875.9 million, which represents an increase of $102.8 million (13.3%) from the April 2016 level of $773.1 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, revenue categories are tracking above the prior year level, with the largest growth in the following categories: Property Tax (34.2%); Use of Money/Property (33.9%); Revenue from Local Agencies (26.5%); Sales Tax (25.2%); Licenses and Permits (10.1%); Transient Occupancy Tax (10.1%); and Utility Tax (7.8%). These higher collections were primarily due to growth in these budgeted line items as well as timing of payments. A few categories are tracking below the prior year, with the largest declines in the following: Revenue from the Federal Government (- 76.2%), Telephone Line Tax (-5.0%), and Fees, Rates, and Charges (-3.1%). The lower collections are due primarily to the timing of payments and lower activity levels. Based on current collection trends and information, revenues are anticipated to end the year between $5-$6 million above budgeted levels. The following discussion highlights General Fund revenue activities through April. KEY GENERAL FUND REVENUES Revenue Estimate YTD Actual Prior YTD Collections Property Tax $ 271,737,000 $ 249,082,421 $ 185,620,403 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, $249.1 million has been received, reflecting 91.7% of the budget for this category. The increase in collections compared to the prior year was primarily the result of higher Secured Property Tax and SB 813 receipts and the timing of payments. Based on recent information received from the County, revenues are on track to slightly exceed the budgeted estimate by approximately $4.8 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 91.8% of the budget estimate revenue in the Property Tax category. For , the Adopted Budget estimate of $249.4 million includes $247.4 million from regular Secured 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 assumed that receipts (excluding ERAF funds) would increase approximately 6.0% in compared to the

7 Page 7 GENERAL FUND (CONT D.) estimate. The current estimate from the County of Santa Clara for regular Secured Property. Taxes of $248.1 million is 6.5% above the prior year and above the budgeted estimate by approximately $700,000. The Adopted Budget also assumed $2.0 million from excess ERAF funds. 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. However, 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 March 2017, the County provided information that the payment for San Jose totals $4.4 million, which is $2.4 million higher than what was assumed in the Budget. In the Unsecured Property Tax category, collections through April of $13.4 million were 3.5% below prior year collections of $13.9 million. Typically, collections through April reflect all the annual revenue for this category. Based on current receipts, collections in this category will end the year below the budgeted estimate of $14.2 million by approximately $800,000. For the SB 813 Property Tax category, collections totaled $4.6 million through April, representing a 19.6% increase from the $3.9 million received last year at this time. The Adopted Budget estimate of $4.4 million is below the actual collection level of $6.2 million. In recent years, SB 813 revenues have been difficult to project due to a change in distribution methodology and a backlog of adjustments in prior years. The backlog has now been addressed and the new methodology is in place, which should help reduce variances moving forward. The most recent estimate from the County for this category of $6.8 million is $2.4 million above the budgeted estimate. Airport Property Tax receipts of $2.8 million have been received through April, reflecting growth of 6.2% from the prior year ($2.7 million) and exceeding the budgeted estimate of $2.6 million. Typically, collections through April reflect all the annual revenue for this category. In the Homeowners Property Tax Relief category, $486,000 was received through April, which was slightly below the prior year collection level of $498,000. Based on the most recent estimate from the County and historical collection patterns, revenue is projected to end the year close to the Adopted Budget estimate of $1.0 million.

8 Page 8 GENERAL FUND (CONT D.) Revenue Estimate YTD Actual Prior YTD Collections Sales Tax $ 224,695,553 $ 131,862,870 $ 105,354,051 The Sales Tax category includes General Sales Tax, Local Sales Tax, and Proposition 172 Sales Tax. Overall, revenues are tracking below budgeted estimates and, if current trends continue, it is projected that collections may fall below the budgeted estimate by almost $13 million. The Adopted Budget assumed Sales Tax receipts would grow over 11% in , primarily due to the passage of the Local Sales Tax. However, while Sales Tax has grown from the prior year levels, it is currently anticipated the year-over-year growth will be closer to 5%. A decrease to this revenue estimate is included in the Year-End Budget Clean-Up memorandum to reflect this lower collection level. The Adopted Budget estimate for General Sales Tax totals $188.8 million, which is 3.7% below from the year-end figure of $196.0 million. In , General Sales Tax collections of $196.0 million were 11.5% ($20.2 million) above the collection level of $175.8 million due in large part to the receipt of one-time funds associated with the wind down of the Sales Tax Triple Flip of $12.0 million. The Adopted Budget estimate assumes 3.5% growth from estimated collections (excluding one-time payments in associated with the Sales Tax Triple Flip ). However, because actual collections in exceeded expectations, the Adopted Budget estimate only requires growth of 1.5% from the year-end adjusted figure (excluding the one-time Triple Flip payment of $12.0 million and other one-time adjustments). Information on actual receipts for the first and second quarters of General Sales Tax was received in December 2016 and March In the first quarter (July through September 2016 activity), receipts were down 9.4% from the same quarter in the prior year. This large decline was primarily driven by a correction associated with jet fuel sales tax revenues that were allocated to San José in in error and therefore reversed in the first quarter of Factoring out the correction, receipts were down 3.8% from the same quarter in the prior year. This primarily reflects declines in the Business-to-Business (-8.6%) and General Retail (-0.6%) economic sectors, partially offset by an increase to the Food Products (5.0%) economic sector. In the second quarter (October through December 2016 activity), receipts were down 3.1% from the same quarter in This primarily reflects declines in the Business-to-Business (-8.4%), General Retail (-4.0%), and Construction (-3.8%) economic sectors, partially offset by an increase in the Food Products (4.0%) economic sector. This performance contrasts with the growth experienced for Santa Clara County (up 1.2%), the Bay Area (up 2.6%), and the State (up 2.8%). As shown in the chart below, several economic sectors contributed to the total Sales Tax receipts though nearly 75% was generated from General Retail, Transportation, and Business-to-Business categories.

9 Page 9 GENERAL FUND (CONT D.) Sales Tax Revenue Economic Performance Economic Sector % of Total Revenue General Retail 29.0% Business-to-Business 21.2% Transportation 21.2% Food Products 17.5% Construction 10.4% Miscellaneous 0.7% Total 100.0% Source: MuniServices, October 2015 December 2016 quarter The quarterly declines in General Sales Tax compared to the same quarter in the prior year have not occurred since and is concerning given the general health of the local economy. As described above, jet fuel revenues were attributed to San José in error in When comparing quarterly performance to last year, a portion of the decline in both the first and second quarters is associated with jet fuel revenue that was received in and is no longer being reflected in Given the performance experience in the first two quarters, no growth is projected for the remaining two quarters, which would bring receipts to approximately $180 million in This collection level is well below the budgeted estimate of $188.8 million and the prior year receipts of $196.0 million. As described above, receipts in included a one-time payment of approximately $12 million associated with the Triple Flip wind down; excluding that payment, projected receipts in would end the year down 2.2% from the adjusted actuals. Starting in , the Sales Tax category includes Local Sales Tax. In June 2016, San José voters approved a ¼ cent local sales tax that was estimated to generate $30.0 million in (October 2016 implementation) and $40.0 million annually beginning Receipts through April totaled $14.1 million, which represented the first quarterly payment and advances for the second quarter. In March, the City received information on the actual revenue for the first quarter of implementation (October through December 2016 activity), which totaled $8.7 million. Based on the limited information available, Local Sales Tax receipts are now estimated to generate $26.0 million in and $35.0 million annually beginning Through April, receipts for the Proposition 172 Sales Tax, which represents the ½ cent sales tax that is allocated to counties and cities on an ongoing basis for funding public safety programs, totaled $4.5 million, which is 3.4% above the $4.3 million received in the same period in the prior year. The budgeted estimate of $5.9 million requires growth of 3.3% from the collection level of $5.8 million. Based on actual performance and current collection trends, it is anticipated that collections will meet the budgeted estimates by year-end.

10 Page 10 GENERAL FUND (CONT D.) Revenue Estimate YTD Actual Prior YTD Collections Transient Occupancy Tax $ 16,952,000 $ 13,113,506 $ 11,906,815 Through April 2017, receipts recorded in the General Fund of $13.1 million are 10.1% ($1.2 million) above the prior year's collections for the same period. Receipts to-date total 77.4% of the Adopted Budget revenue estimate of $16.95 million. The budgeted estimate was built upon a 4% growth in TOT collections over the modified budget estimate of $16.3 million. However, since actual receipts came in above estimated levels at $16.6 million, growth of only 2.3% is needed to meet the budgeted estimate. Based on receipts through April, TOT collections are trending to end the year above the budgeted estimate, at approximately $18.0 million, which is $1.0 million above the Adopted Budget estimate. An increase to this revenue estimate is included in the Year-End Budget Clean-Up memorandum to reflect this higher collection level, offset by an increase to the General Fund Cultural Facilities Capital Maintenance Reserve. Through April, the average hotel occupancy rate at the 13 major hotels was 75.5%, which remains flat with occupancy rate for the same period in of 75.3%. For the same 13 hotels, the average daily room rate through April was $207.55, up $13.73 or 7.1% from the $ room rate for the same period in The year-to-date average revenue-per-available room (RevPAR) metric of $ represents an increase of 7.2% from the prior year level. 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. 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. As a budget balancing strategy, the City Manager s Proposed Operating Budget recommends the elimination of this set aside beginning in , instead allocating an ongoing annual contribution of $450,000 for Cultural Facilities Capital Maintenance not associated with TOT collections. Revenue Estimate YTD Actual Prior YTD Collections Utility Tax $ 95,749,500 $ 77,424,239 $ 71,850,799 Through April, Utility Tax receipts of $77.4 million were tracking 7.8% ($5.5 million) above last year s collection level of $71.9 million due primarily to higher collections in the Gas, Water, and

11 Page 11 GENERAL FUND (CONT D.) Telephone Utility Tax categories. The Adopted Budget estimate requires an increase of 2.5% from the prior year collection level. Overall, based on the current collection trends, Utility Tax receipts are tracking to end the year with collections of $99.0 million, which is $3.3 million above the budgeted estimate. An increase to this revenue estimate is included in the Year-End Budget Clean-Up memorandum to reflect this higher collection level. In the Electric Utility Tax category, collections of $35.3 million are 3.3% above prior year levels. The Adopted Budget of $44.8 million requires growth of 1.1% from actual collections of $44.3 million. If current collection trends continue, receipts are projected to reach $45.9 million, exceeding the budgeted estimate by approximately $1.1 million. Gas Utility Tax collections of $8.9 million were 23.7% above prior year collections through April. The Adopted Budget estimate of $8.9 million requires growth of 0.4% from the actual collections of $8.9 million. It is currently anticipated that collections will exceed the budgeted estimate by approximately $1.5 million, ending the year at $10.4 million. Telephone Utility Tax primarily consists of four revenues: telephone, cellular, pre-paid calling cards, and Voice over Internet Protocol (VoIP). When the Adopted Budget was developed it was assumed that receipts would total $29.0 million in and remain flat in However, because actual collections of $27.9 million were below estimated levels, growth of 4.1% is needed in Through April, collections of $20.6 million are tracking 3.7% below prior year levels and are anticipated to end the year at $28.6 million, approximately $400,000 below budgeted levels. Collections of $11.2 million in the Water Utility Tax category were 23.3% above prior year levels. The Adopted Budget estimate of $13.0 million was based on growth of 8.0% over the projected collection level; however, because revenues in ended the year above the estimated collection level, growth of 5.5% is necessary to achieve the budgeted estimate. If current collection trends continue, receipts are tracking to end the year at least at $14.1 million, which is $1.2 million above the budgeted estimate. It is important to note that receipts are subject to significant fluctuations from the impact of weather conditions. Revenue Estimate YTD Actual Prior YTD Collections Business Taxes $ 48,800,000 $ 43,048,194 $ 39,805,182 This category consists of the following: General Business Tax, Cardroom Tax, Marijuana Business Tax, and Disposal Facility Tax. Through April, overall collections of $43.0 million are tracking 8.1% above prior year collection levels of $39.8 million, reflecting higher collections in

12 Page 12 GENERAL FUND (CONT D.) General Business, Marijuana Business, and Disposal Facility Tax categories. The budgeted estimate of $48.8 million allows for a decline by 4.1% from the prior year. Based on collection trends through April, revenues are anticipated to exceed the Adopted Budget estimate by approximately $4.8 million, primarily due to increased Marijuana Business Tax and General Business Tax receipts. 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 $12.8 million were 14.4% above the prior year level of $11.2 million and above the budgeted estimate. The Adopted Budget estimate of $11.65 million allows for a 1.6% drop from the actuals of $11.8 million. Revenues are currently anticipated to end the year at $13.0 million, exceeding the budgeted estimate by $1.35 million. Cardroom Tax receipts of $13.8 million through April were 1.9% above the prior year level of $13.6 million. The Adopted Budget estimate of $17.8 million allows for a 1% drop from the actuals of $18.0 million. Based on current receipts and historic trends, it is anticipated that collections will end the year at $18.1 million, exceeding the budgeted estimate of $17.8 million by $300,000. Marijuana Business Tax receipts of $7.4 million were 13.6% above the prior year level of $6.5 million. The Adopted Budget estimate of $7.2 million allows for a drop of 19.4% from the actual collection level of $8.9 million. This category includes marijuana business tax as well as marijuana business tax compliance. Marijuana business tax collections through April total $7.3 million, which is 28.3% higher than prior year collection level of $5.7 million. However, marijuana business tax compliance collections of $105,000 are significantly lower than last year s collections of $826,000 through the same period. With the increasing compliance of registered collectives, collections from compliance revenues were expected to drop to $150,000 in Overall, marijuana business tax collections of $10.2 million are currently anticipated, exceeding the budgeted estimate by approximately $3.0 million. Disposal Facility Tax (DFT) receipts of $9.0 million were tracking 5.7% above the prior year level of $8.5 million, which is partially due to the timing of payments. Collections in this category, can vary as they are impacted by waste exports, waste diversion efforts from San José and other municipalities and members of the public that use landfills within the City, and the economy. Based on current collection trends and historic collection patterns, it is anticipated revenues will end the year at $12.3 million, slightly above the budgeted estimate of $12.2 million.

13 Page 13 GENERAL FUND (CONT D.) Revenue Estimate YTD Actual Prior YTD Collections Licenses and Permits $ 51,572,553 $ 51,011,953 $ 46,313,631 This category includes Building Permits, Fire Permits, and Other Licenses and Permits. Through April, Licenses and Permits revenue of $51.0 million were 10.1% above the prior year level of $46.3 million, while the budgeted estimate allows for a decline of 4.1% from the collection level of $53.8 million. Based on activity through April, it is anticipated that revenues in this category will exceed the budgeted estimate by over $5 million due to higher collections in the development fee programs. Following is a discussion of the major components of this category. Building Permit revenue of $27.0 million through April was 7.6% above the collection level of $25.1 million for the same period. The adopted revenue estimate of $27.5 million allows for a 9.9% drop from prior year actual revenue collections in this category of $30.5 million. All revenues in this category are exceeding estimated levels except for permits for new residential construction and processing fees. Activity levels for all categories of building use (residential, commercial, and industrial) are higher than the same period last year primarily due to strong building permit activity levels for new residential multi-family projects, new commercial construction and alterations, and industrial alterations. Due to the high collections through April, Building Permit revenues are anticipated to reach $31.5 million, exceeding the budget revenue estimate of $27.5 million by $4.0 million. 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. Residential activity through April consisted of 2,393 multi-family units and 174 singlefamily units for a total of 2,567 units. Major residential projects for March and April included permits issued for the construction of a 268-unit apartment building over a podium garage south of the intersection of West San Carlos and Sunol Streets, the construction of a 31-unit three story apartment building on Monterey Road just north of Tully Road, and the construction of 27 attached townhouses off Dobbin Drive east of North King Road, which are part of a planned development permit allowing up to 101 attached townhomes. The valuation of commercial activity through April totaled $534.7 million (new construction valuation of $304.4 million and alterations of $230.4 million). Alterations have accounted for most of the commercial activity since December. Significant new commercial projects for March and April include permits for the construction of an office building (15,036 square feet) located near the intersection of Cherry Avenue and Almaden Expressway and for the construction of the concrete foundation and at grade concrete podium structure for a 357,000 square foot below grade parking garage at Valley Fair mall.

14 Page 14 GENERAL FUND (CONT D.) Industrial activity through April had a valuation of $496.5 million (new construction valuation of $100.0 million and alterations of $396.5 million). Alteration construction accounted for most of the industrial activity in March and April. Through April, Fire Permit collections of $11.9 million were 16.9% above prior year levels of $10.2 million. Fire Permit revenues are tracking to exceed the Adopted Budget estimate by approximately $1.8 million. This category consists of development and nondevelopment related permits Development related receipts of $7.2 million through April are tracking 23.1% above collection levels of $5.9 million for the same period. However, the budgeted estimate of $6.9 million allows for a decline of 5.5% from the prior year s collections of $7.3 million. Through April, Development-related receipts have exceeded the budgeted estimate by $300,000. If current collection trends continue, it is anticipated that development-related receipts will exceed the budgeted estimate at year end by approximately $1.4 million. 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 revenues of $4.7 million primarily represent the four major billing cycles for non-development fire permits for this fiscal year and have exceed the budgeted estimate of $4.3 million by approximately $400,000. The Other Licenses and Permits collections of $12.1 million through April are tracking 9.6% above the collection level and it is currently anticipated that overall receipts will end the year close to the budgeted estimate of $12.9 million. Revenue Estimate YTD Actual Prior YTD Collections Departmental Charges $ 42,196,974 $ 36,941,089 $ 38,201,404 Through April, Departmental Charges revenues of $36.9 million were tracking 3.3% below the collection level of $38.2 million. The decrease from the prior year reflects declines in the Police, Public Works, Miscellaneous, Library, and Planning categories, partially offset by increases in the Parks, Recreation and Neighborhood Services and Transportation categories. The budgeted estimate for the Departmental Charges category allows for a drop of 10.3% from the actual collection level of $47.1 million. It is currently anticipated overall Departmental Charges revenues should meet or slightly exceed the budgeted estimate by year-end.

15 Page 15 GENERAL FUND (CONT D.) Planning Development-related revenues and Public Works Development-related revenues are currently tracking below the prior year collection levels. Both, however, are expected to meet or exceed the budgeted estimates by year-end. Through April, Planning Fee revenues of $3.7 million are 27.5% below the prior year collection level of $5.1 million. This decline is in line with the adopted Planning Fee revenue estimate of $4.5 million, which allows for a drop of 28.6% from prior year actual revenue of $6.3 million. Through April, performance was strong for non-residential tentative maps, public noticing, preliminary reviews, non-residential general plan amendments, residential and non-residential conventional prezonings/rezonings, residential environmental clearances, annexations, residential and non-residential site development permits, residential development permit adjustments, residential conditional use permits, single-family design review, and miscellaneous permits. The decrease in revenues from the prior year is due to lower than estimated revenues for the following permits: residential tentative maps, public information services, residential general plan amendments, residential and non-residential prezonings/rezonings, non-residential environmental clearances, residential and non-residential planned development permits, non-residential development permit adjustments, and non-residential conditional use permits. Based on collections through April, Planning Fee revenues are anticipated to meet the budget revenue estimate of $4.5 million. Public Works Fee revenues through April of $8.8 million are slightly below the prior year level of $8.9 million (0.8%) for the same period. The revenue collections are comprised of $5.4 million from the Development Services Fee Program and $3.4 million from the Utility Fee Program. Revenues in materials testing-residential, engineering residential and non-residential, and planned development pre-zoning/re-zoning categories are all tracking below estimated levels due to lower activity levels. However, these are offset by higher than estimated levels in the record retention, geologic fees, utility excavations, grading permits, and parcel maps categories. Based on collections through April, Public Works Fee revenues are projected to exceed the budget by approximately $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 Public Works Development Fee Program Reserve for works-in-progress.

16 Page 16 GENERAL FUND (CONT D.) EXPENDITURES Through April, General Fund expenditures (without encumbrances) totaled $896.5 million, 3.1% above the prior year level of $869.6 million. In addition, encumbrances totaled $54.7 million through April, which is 28.4% above the prior year level of $42.6 million. Total General Fund expenditures and encumbrances through April of $951.2 million constitute 68.5% of the total revised budget ($1.4 billion, including reserves; $1.3 billion, or 75.7%, excluding reserves). 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 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. These actions include flood-related adjustments to the Parks, Recreation and Neighborhood Services, Public Works, and Environmental Services Departments. All other departments were able to absorb the flood-related expenses. On an overall basis, the recommended year-end budget adjustments use expenditure savings in departmental, non-departmental and reserve categories as well as excess revenues to address projected expenditure overages and revenue shortfalls and, with the remaining funds, establish a Ending Fund Balance Reserve of $11.0 million. Following is a discussion of the performance of the Police and Fire Departments, the largest General Fund departments. In addition, the Parks, Recreation, and Neighborhoods Services Department and the Public Works Department are discussed due to the flood-related expenses; the Environmental Services Department is not discussed below because of its relatively smaller floodrelated expense of $110,000. KEY GENERAL FUND EXPENDITURES Department Budget YTD Actual Prior YTD Actual Police $ 351,976,489 $ 280,940,457 $ 273,486,649 Overall, the Police Department s expenditures are tracking slightly below estimated levels. Personal services expenditures of $259.8 million tracked slightly below anticipated levels (79.9% compared to the par of 80.8%). Overtime expenditures of $32.0 million through April tracked higher than anticipated levels with 88.6% expended of the current $36.1 million budget.

17 Page 17 GENERAL FUND (CONT D.) Based on current trends, personal services expenditures are tracking to end the year with savings of approximately $3.0 million, which represents approximately 0.9% of the personal services budget. Budget actions are included in the Year-End Budget Clean-Up memorandum to allocate $1.6 million of these savings to the Ending Fund Balance Reserve, as assumed in the development of the Proposed Operating Budget. Overtime consists of overtime expenditures and compensatory time. The Memorandum of Agreement with the Police Officer s Association (POA) limits how much overtime can be earned for pay versus compensatory time. The compensatory time balance at the end of April 2017 was 236,429 hours for sworn personnel. This represents an increase of 27,185 hours or 13.0% compared to the April 2016 balance of 209,244. The chart below outlines current authorized sworn staffing levels and the number of street-ready sworn positions available at work: (as of 4/27/2017) Authorized Sworn Staffing 1,109 Vacancies (178) Filled Sworn Staffing 931 Field Training Officer/Recruits (60) Street-Ready Sworn Positions Available 871 Disability/Modified Duty/Other Leaves (80) Street-Ready Sworn Positions Working 791 The Police Department is conducting regular police officer recruit academies to hire for sworn vacancies and continues to review strategies to improve the rate of sworn hiring and training, however, the Department is anticipated to begin with approximately 128 sworn vacancies based on current attrition rates. To fill the vacant sworn positions and put more Police Officers back on patrol, the Department will conduct three Police Recruit Academies in , including academies that will begin late June 2017, October 2017, and February The June 2017 academy is projected to have 55 Police Recruits, which is the highest level in recent years. Each academy has the capacity to host up to 60 recruits. The February 2017 academy is currently in progress with 27 recruits. A total of $21.2 million (78.4%) 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 operation and replacement, the Department has approximately $2.4 million, or 14.4% of the non-centrally-determined appropriation available for the remainder of the fiscal year.

18 Page 18 GENERAL FUND (CONT D.) Department Budget YTD Actual Prior YTD Actual Fire $ 204,807,609 $ 162,819,155 $ 155,667,371 Overall, Fire Department expenditures are tracking below estimated levels. Through April, Personal Services expenditures of $155.2 million are tracking at 79.5%, which is slightly below the par level of 80.8%. Overtime expenditures of approximately $11.4 million are tracking within anticipated levels with approximately 80.1% expended. Overall, Personal Services savings of $2.1 million are anticipated at year-end. Budget actions are included in the Year-End Budget Clean-Up memorandum to reduce the budget by $1.0 million and use these savings to address other expenditure overages and/or to increase the Ending Fund Balance Reserve. The Fire Department s Non-Personal/Equipment budget of $9.5 million was 80.0% expended or encumbered through April Non-personal/equipment expenditures are expected to end the year within budgeted levels. Overall, the average vacancy rate of 7.1% is about 3% higher than the vacancy rate at this time last year for sworn personnel; and vacancies continue to exceed the budgeted rate of 2.8%. The Firefighter Recruit Academy, consisting of 25 Firefighter Recruits started on April 23, This Academy is expected to be completed by the end of August 2017, reducing the number of vacancies of sworn staff to 14. The Development Fee Program Personal services expenditures of $4.7 million are tracking slightly below estimated levels with 79.2% expended. To meet service commitments to the Development community, the Department has used a combination of overtime and temporary resources to meet peak workload demands and to temporarily fill vacancies. 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 March, of the 32 current authorized staffing level, the Fire Department had 32 sworn personnel on administrative assignments. Department Parks, Recreation & Neighborhood Services YTD Prior YTD Budget Actual Actual $69,580,140 $57,196,234 $50,821,318 Overall, Parks, Recreation and Neighborhood Services (PRNS) expenditures are tracking above estimated levels through April due to higher non-personal/equipment expenditures, partially offset by lower personal services expenditures. PRNS personal services are tracked on a seasonal basis instead of a straight line basis since seasonal activity better represents the department's trend. Through April, PRNS has spent $32.3 million, or 80.4%, of their personal services budget ($40.2

19 Page 19 GENERAL FUND (CONT D.) million) and a recent month analysis indicates the department will end the year with approximately $300,000 in vacancy savings. PRNS non-personal/equipment expenditures are tracking significantly above benchmark levels; year-to-date non-personal/equipment expenditures and encumbrances of $17.1 million are at 85.5% of budget. A large increase in non-personal/equipment expenditures was due to supplies and materials costs associated with the PRNS clean-up efforts in the neighborhoods impacted by the 2017 Coyote Creek flood. It is anticipated an upward adjustment of $500,000 to the department s non-personal/equipment appropriation will be needed at year-end. Budget actions are included in the Year-End Budget Clean-Up memorandum to increase the PRNS Non-Personal/Equipment budget by $500,000 to address this cost. Fee Activities expenditures and encumbrances totaled $7.8 million, or 83.0% of the budget of $9.3 million. Expenditures in this category are expected to end the year above the budgeted estimate due to higher activity levels. Recommended budget actions are included in the Year- End Budget Clean-Up memorandum to increase the PRNS Fee Activities budget by $630,000, offset by additional revenue of $700,000, to address this cost YTD Prior YTD Department Budget Actual Actual Public Works $42,600,668 $28,493,184 $26,285,656 Overall, Public Works expenditures are tracking above estimated levels. Through April, Personal Services expenditures totaled $23.9 million, which is 81.6% of the total Personal Services budget of $29.3 million (compared to a par level of 80.8%). In addition, Non-Personal/Equipment expenditures through April total $12.1 million, 91.5% of the total budget, which is significantly above benchmark levels Due to expenditures related to the 2017 Coyote Creek flood, the Public Works Personal Services and Non-Personal appropriations are both tracking to exceed budgeted levels at year-end. The expenditures include the initial flood response costs as well as the operating costs of the Emergency Operation Center for the duration of the flood emergency. Flood recovery costs also include emergency repairs and evaluation of flood damages; however, some repairs are still outstanding. In addition, other expenditures include inspections for damaged buildings and the subsequent re-construction, victim shelter costs at community centers, structural repairs including pavement and street material testing, and ongoing repairs. Based on expenditures through April, it is anticipated an upward adjustment of $1.0 million to the Public Works Department Personal Services appropriation ($350,000) and Non-Personal/Equipment appropriation ($650,000) will be needed at year-end. Recommended budget actions are included in the Year-End Budget Clean-Up memorandum to increase the Public Works budget by $1.0 million to address these costs.

20 Page 20 GENERAL FUND (CONT D.) The portion of the Personal Services budget associated with the Public Works Development Fee Program ($9.1 million) is also tracking slightly higher than anticipated with 80.9% expended ($7.4 million) based on the higher activity levels. A year-end budget action is recommended to increase this Personal Services budget by $150,000, offset by a reduction to the Public Works Development Fee Program Reserve. CONTINGENCY RESERVE The General Fund Contingency Reserve remained at $35.5 million through April, with no revisions this fiscal year. This reserve level complies with Council Policy I-18, Operating Budget and Capital Improvement Program Policy, that requires the Contingency Reserve to be a minimum of 3% of the operating budget. OTHER FUNDS Airport Funds On a fiscal year-to-date basis, the Norman Y. Mineta San José International Airport (SJC) has enplaned and deplaned 9.3 million passengers, an increase of 11.7% from the figures reported through April of the prior year and compares to a budgeted increase of 2.25%. International passengers were boosted (FY YTD +73%) by the start of Air China to Shanghai in September 2016 and Lufthansa to Frankfurt in July 2016 as well as British Airways to London and Air Canada to Vancouver which both started in May The chart below depicts the year-over-year change for the month of April and Fiscal Year-to-Date for the last eight years. Fiscal year-to-date mail, freight, and cargo totaled million pounds, which represents a 16.5% increase over year-to-date April of Many revenue-generating activities posted increases over the same period of the prior fiscal year: Traffic Operations (landings and takeoffs) by 11.4%, Landed Weights by 17.0%, Gallons of aviation fuel sold by 20.4%, and Ground Transportation (taxicabs & TNC s) operations by 88.0%. The Ground Transportation increase is due to the permitting of three Transportation Network Companies which started operations at the Airport in November/December 2015.

21 Page 21 OTHER FUNDS (CONT D.) Through April, overall revenue performance at the Airport tracked 3% above estimated levels. Airfield revenues tracked 38% higher than the benchmark substantially due to air carrier parking, the in-flight kitchen, and ground support concession revenues. General and Non-Aviation revenue tracked 8% higher than the benchmark primarily due to interest earnings. Terminal Concessions also tracked 6% higher than the benchmark. It is significant to note, public parking revenue trailed anticipated levels by 4% and is not tracking with enplaned passenger growth of 12%. Although Ground Transportation revenue is 21% higher than its benchmark, it only partially offsets the much larger contraction occurring in public parking. Through April, both the Airport Customer Facility and Transportation Fee Fund and Airport Maintenance and Operation Fund expenditures tracked below budgeted levels. In the Maintenance and Operation Fund, Personal Service expenditures were 75.9% of budget compared to the benchmark of 80.8%, while Non-personal/Equipment expenditures were 59.6% compared to the benchmark of 75.1%. Non-personal/Equipment expenditures in the Customer Facility and Transportation Fee Fund were 74.1% compared to the straight-line benchmark of 83.3%. Construction and Conveyance Tax Funds Construction and Conveyance (C&C) Tax revenues overall have slightly declined compared to receipts from the prior fiscal year, but are anticipated to meet or slightly exceed budgeted levels. Collections through April 2017 totaled $30.7 million, which is 85.3% of the Adopted Budget estimate of $36.0 million. This collection level is 2.3% below the $26.2 million received through April The City has also received May Conveyance Tax receipts totaling $4.0 million, a 21.2% increase from the May 2016 collection level of $3.3 million. The Adopted Capital Budget was developed with the assumption that C&C Tax receipts would total $38.0 million in and dip slightly to $36.0 million in These assumptions were based on historical collection trends and actual receipts received in 2015-

22 Page 22 OTHER FUNDS (CONT D.) 2016, allowing for some moderation in activity levels. In the last quarter of , however, tax receipts had a stronger than expected performance, which resulted in the receipts totaling $42.7 million. Due to the unanticipated high collections in , the C&C Tax estimate of $36.0 million, allows for a 15.7% decline in tax revenue from the actual tax collection. It is currently anticipated revenues will slightly exceed the budgeted estimate, with receipts projected at $38.0 million by year-end. This year-end estimate was used in the development of the Proposed Capital Budget. Over 99% of the total Construction and Conveyance Taxes are comprised of conveyance receipts, a tax based on the value of property transfers (sales). Similar to the current trend with C&C collection levels, the local real estate market is experiencing slight declines in property transfers compared to prior year levels. The year-to-date number of property transfers through April 2017 totals 6,223, which represents a 5.5% decrease from the sales that occurred in the same period in the prior fiscal year. In addition, the number of new listings for single family and multi-family dwellings in April 2017 totals 888, which is a 12.2% decrease from April However, the median single-family home price in April 2017 of $980,000 is up 3.2% from the April 2016 price of $950,000. Other Construction-Related Revenues Through April, revenues associated with construction activity (primarily Construction Excise Tax and Building and Structure Construction Tax) are significantly higher than levels through the same period. Construction 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 other categories, such as storm and sanitary sewer system fees. The revenue estimate for the Construction Excise Tax is $17.0 million, a decrease of $5.5 million (24.0%) from revenues of $22.5 million received in Construction Excise Tax receipts totaled $25.6 million through April, which is $8.5 million above receipts from the same period in the previous year. The collection levels have significantly increased from prior year collections primarily because of strong residential new construction and commercial activity. Due to the extremely high collections through April, tax receipts are anticipated to significantly exceed the budgeted revenue estimate of $17.0 million, with a revised year-end projection of $32.0 million. This higher year-end estimate was used in the development of the Proposed Capital Budget. The revenue estimate for the Building and Structure Construction Tax is $13.0 million, a decrease of $6.4 million (33.0%) from revenues of $19.4 million received in Receipts through April totaled $20.0 million, which is $4.6 million above receipts from the same period in the previous year. Similar to the Construction Excise Tax, the Building and Structure Construction Tax collection levels have significantly increased from prior year collections primarily because of strong residential new construction, commercial activity, and industrial alterations. Based on extremely high collections through April, collection levels are anticipated to exceed the budgeted revenue estimate of $13.0 million, with a

23 Page 23 OTHER FUNDS (CONT D.) revised year-end projection of $24.0 million. This higher year-end estimate was used in the development of the Proposed Capital Budget. Municipal Golf Course Fund Overall, expenditures in the Municipal Golf Course Fund are generally incurred for two purposes: payments to course operators to cover any net operating losses at Los Lagos and Rancho del Pueblo Golf Courses; and payment of the debt service for the bonds used to develop the two courses. Expenditures in this fund are tracking to exceed the modified budget due to the performance at the Los Lagos Golf Course and the recent Coyote Creek flood, which damaged part of the golf course and limited access to that area of the course. Los Lagos net operating losses are tracking significantly higher than levels and total revenue related golf rounds are down by 9.1% compared to the prior year. Once adjusted for differences in timing of payments and year-end accruals indicated in their profit and loss statement, the true net Los Lagos operating loss year-todate for is $514,000 compared to prior year s true net operating loss of $398,000. Net operating losses are currently tracking to end the year approximately $75,000 above the budget. Rancho del Pueblo Golf Course net operating losses are also tracking higher than levels and total revenue related golf rounds are down by 7.7% compared to prior year. Once adjusted for differences in timing of payments and year-end accruals indicated in the profit and loss statement, the true net operating loss year-to-date for is $355,000, compared to prior year s true net operating loss of $308,000. Net operating losses are currently tracking to end the year within budgeted levels. While budget increases were brought forward as part of the Mid-Year Budget Review to address the projected overages for the Los Lagos and Rancho del Pueblo Golf Courses, an additional adjustment of $75,000 is projected to be necessary for the Los Lagos Golf Course. Budget actions are included in the Year-End Budget Clean-Up memorandum to address this cost. CONCLUSION Overall, City funds are generally performing within expectations. In the General Fund, revenues are generally tracking to meet or exceed budgeted estimates and most expenditures are tracking to realize modest savings by year-end. Excess revenue, expenditure savings, and the liquidation of prior year carryover encumbrances in the General Fund were assumed as a funding source in the Operating Budget. These sources were expected to generate $19.6 million in the Ending Fund Balance/ Beginning Fund Balance and were programmed as a funding source in

24 Page 24 CONCLUSION (CONT D.) The Year-End Budget Clean-Up memorandum scheduled for City Council consideration on June 20, 2017, includes recommendations to adjust both the General Fund and various Special and Capital Funds to align the budget with current estimates to avoid any overages in individual appropriations, and to recognize new revenues and associated expenditures or reserves. The final outcome of the budget performance will be reported through the Annual Report, scheduled to be released on September 30, 2017 and reviewed by the City Council in mid-october JENNIFER A. MAGUIRE Senior Deputy City Manager/ Budget Director Attachment: Finance Department Monthly Financial Report, Financial Results for the Month Ended April 30, 2017, for Fiscal Year

25 FINANCE DEPARTMENT Monthly Financial Report Financial Results for the Month Ended April 30, 2017 Fiscal Year (UNAUDITED)