Summary

$993,000 is set aside for the Unassigned Fund (the “rainy day” fund) to maintain a balance of 17% of FY2025 expenditures, a financial policy necessary to maintain the City’s credit rating.
The School Board will receive $449,000 according to the revenue share agreement between the schools and the City, and $400,000 to match a $400,000 grant to buy two electric school buses. The School Board expected a much larger revenue share of the FY2024 budget surplus.
City Manager Wyatt Shields told the City Council that City Hall does not have the staff to take on additional projects. The FY2025 budget’s 8% increase has made it challenging to accomplish all that they set out to do this fiscal year. They are experiencing difficulties hiring the required engineers and project managers.
The money will be spent on budget shortfalls of ongoing capital projects. Only the Fellows Park project will be added, and consultants will be hired for the design work on the bicycle routes to the Secondary Schools Campus and the West Falls route.
$1.67 million will be added to the Capital Reserve. The City Council asked for a separate detailed review of the Capital Reserve projections and risks because of concerns that it is projected to fall below the $3.75 million policy limit by 2029 without this infusion of funds.
These decisions will be implemented as amendments to the FY2025 budget. The Council voted unanimously to approve the first reading of these options on October 28, 2024.
The City Council rejected the request to increase funding for the Tinner Hill parklet.

Background

Details of the FY2024 budget surplus were provided in the companion Pulse post The FY2024 Year-End Financial Report – a $6 Million Surplus! City Manager Wyatt Shields presented his recommendations and options for using the funds at the City Council Budget and Finance Committee meeting on October 18, 2024, and at the City Council work session on October 21, 2024.

Decisions on the use of funds would be implemented as amendments to the FY2025 budget that was adopted in May 2024. In addition to the surplus, staff also proposed amendments to increase funding for some items in the FY2025-2030 Capital Improvement Program budget. The primary concern was the additional 82% increase for the Tinner Hill Plaza parklet.

Topping up the Unassigned Fund balance to 17% of expenditures

The City financial policy requires that the Unassigned Fund balance (the City’s “rainy day fund”) be maintained at 17% of annual expenditures. This policy helps the City maintain its credit rating for issuing bonds. The City expects to issue $30 million in bonds for a new property yard and more to fund the sanitary sewer infrastructure project in the near future.

City Financial Officer Kiran Bawa explained that an additional $993,000 would be set aside to bring that fund balance to 17%. This amount will be drawn from the surplus tax revenues, leaving a total surplus of $5 million for City Council consideration.

Staff recommendations for the FY2024 budget surplus funds

Recommendations for using the FY2024 budget surplus — Staff recommendations for use of surplus funds for FY 2025. Source: FY2025 Budget Amendment REVISED, October 21, 2024

City Manager Shields presented their recommendations for allocating the surplus as summarized in the table above. The budget surplus and $129,935 of remaining unallocated funds from the $18 million American Rescue Plan Act (ARPA) funds were considered together.

Three projects in the FY2025 Capital Improvement Program came in higher than budgeted. Mr. Shields suggested applying the funds to these budget shortfalls. There were also three items from FY2024 that needed to be carried forward to FY2025.

$849,000 for the School Board

Revenue share calculation — *Calculation of the School Board’s share of the tax surplus. Source:* *FY2024 YE and ARPA Update_PPT*

Under a revenue sharing agreement, the City and the School Board share equally in any tax revenues appropriated. Because the City was appropriating the surplus tax revenues for FY2025, the School Board would receive an equal share. The additional amount due to the schools was $449,000. (Both the School Board and the City General Government had been asked to reduce their budgets by $283,500 each back in April to allow a 1 cent reduction in the real estate tax rate in the FY2025 budget. This new appropriation more than compensates for that reduction. Read the Pulse post, FY2025 Budget Adopted After Squeezing Another Penny Off The Tax Rate, May 16, 2024.)

At the Budget and Finance Committee meeting on September 20, 2024, both School Board Chair Tate Gould and School Superintendent Peter Noonan said that they had expected that the School Board would share an estimated $4-5 million FY2024 year-end surplus based on conversations during the FY2025 budget discussions last April. They recently discovered that much of the surplus was from investment returns that were excluded from the revenue sharing agreement and expressed their frustration that communication could have been clearer.

In addition to the revenue share, staff recommended taking advantage of a $400,000 grant from the Environmental Protection Agency (EPA) Clean School Bus Program to buy two electric school buses. This would require an additional $400,000 of the surplus to be transferred to the School Board.

City Manager says, “Our cup is very full”; recommends setting aside funds

At the October 18 Budget and Finance Committee meeting, Mr. Shields explained why he recommended setting aside the remaining $3.47 million. He said, “We are not proposing to fund the long list of [staff’s] unmet needs in the budget book … Both the school and the general government budgets grew by 8% [in FY2025] … We are in a growth mode and that does present its own administrative challenges.”

He added, “We still have positions that the Council funded that we have not filled, though we are working very hard to fill them, and initiatives that we have funded in the budget … so our cup is very full in terms of what we are undertaking as an organization. … [We] did draw down Capital Reserves to the tune of $8 million this year [FY2025] for new initiatives … but that is also a big lift to execute on what has already been committed to in the budget.”

Nonetheless, he provided a few unfunded projects that the City Council was interested in that could realistically be done. He has a term position for the long-promised park at the Fellows Property on S Oak Street [Read the Pulse post, Proposed Park Design At The Fellows Property, December 7, 2023). There is a transportation position that is not yet filled but can be used to begin the design work on two routes in the Bicycle Master Plan. He also suggested that $500,000 could be appropriated to the Affordable Housing Fund.

(Update 11/18/24: Planning Director adds to the list of leadership departures, read Stoddard Exits Staff, Creating 3 Key Vacancies.)

The Tinner Hill Plaza parklet costs 82% more

Design concept for the Tinner Hill Plaza parklet. — Proposed Tinner Hill Plaza parklet conceptual design. Source: Tinner Hill Parklet Concept

In addition to considering options for the budget surplus, staff also recommended transferring unobligated funds in the Sidewalks program of the Special Transportation Fund to the Parklets program to cover the increased cost of the Tinner Hill Plaza parklet on S Washington Street. Originally budgeted at $408,000, the current estimate is $743,000. Deputy City Manager Andy Young said that $51,000 in savings from the Triangle Park parklet plus $291,000 from the Sidewalks program would cover the shortfall.

Location of the Tinner Hill Plaza parklet. — Location of Tinner Hill Plaza Parklet between Emily’s Restaurant and VCS, Fox Music buildings.

City Council Discussion

Many City Council members spoke in favor of moving forward on the Fellows Park project and looked for ways to reduce its $1.7 million cost. The project includes sidewalks around the property that would be beneficial to Oak Street Elementary School students and families. Mayor Letty Hardi said that while she was very much in favor of the Fellows Park, the cost seemed high for a “passive park.” After some discussion, it was agreed that staff should proceed with $1.5 million as the budget goal, scaling the original concept down as necessary.

Some City Council members urged staff to prioritize the bike route to the Secondary Schools Campus. Vice Mayor Debora Schantz-Hiscott said that it had been promised many years ago. The proposed route passes through private properties, so the City would need the cooperation of these owners as well as condominium homeowners associations (HOAs). Mr. Shields agreed to focus on this route first.

Council Member David Snyder brought up the issue that one of the HOAs had opposed the schools’ bike route and asked if that issue should be settled before starting any design work. Mr. Young explained that they would need the professional design services to work with the condo owners to come up with an approach to which all could agree. Mr. Young warned that they have staff shortages right now, and he has had difficulty hiring, so that they will not be able to work on the bike route design immediately.

Council Member Erin Flynn was concerned that the Tinner Hill parklet estimate was 82% over budget and the development of the parklet had not considered the Quinn project. An expensive, newly finished parklet would not attract people if it sat next to a multiyear construction site. She was in favor of a scaled down, less costly design, preferably being constructed after the completion of the Quinn project. Such a plan would have the advantage of being able to design the parklet to complement the park and historical features proposed on the Quinn site.

She was supported by other Council members. Mr. Snyder said that it was hard to justify taking money out of the Sidewalk program when so many streets don’t have sidewalks, and there are sidewalks in poor condition. He added, “It’s extremely difficult to get sidewalk money [from the state] due to General Assembly formulas for the expenditures of regional money.” Mayor Hardi suggested sending it back to the Economic Development Authority, the project’s sponsor, to scale it back to the original budget. She noted that Mr. Brown’s parklet cost $300,000 in 2020.

Both Ms. Schantz-Hiscott and Mr. Snyder were concerned about the drawdown on the Capital Reserves to $2 million by 2030. (The City financial policy sets a minimum of $3.75 million.) Ms. Hiscott worried about how the City would fund the debt service on the property yard. The City is currently using some of the Capital Reserve to pay for debt service for the school bonds.

Mr. Snyder raised an additional concern that the results of the presidential election might have a negative economic impact on the region. He said that City Council and staff need to revisit the revenue and debt projections because “we are heavily leveraged at this point.” He would like to see some worst-case analysis before spending the remaining $3.5 million of the surplus.

Mayor Hardi supported Mr. Snyder’s request for a more detailed analysis of the Capital Reserve projections, saying that she was not in favor of using this fund to pay for debt service. (This arrangement was the result of the West Falls agreement that provided funds to pay for the new high school. Read Pulse post The History of West Falls – Part 1. An Opportunity to Finance the Building of a New High School.)

On the Affordable Housing Fund, Ms. Schantz-Hiscott said that more data are needed on what the affordable housing needs are and whether there are sufficient funds to meet them. Mayor Hardi echoed her concerns and added that she was not in favor of “putting money toward the fund that sits there without a use.”

Council Member Justine Underhill asked that the electric commercial vehicle tax credit of $80,000 for the electric school buses be returned to the City’s general fund.

The final agreement on the use of the surplus

The table below summarizes the Council’s decisions on how to use the FY2024 budget surplus. No additional funds will be added to the Affordable Housing Fund at this time as it appears to be sufficient for current needs. No additional funds will be given to the Tinner Hill parklet, but cost savings from other parklet projects can be used for it. $1.67 million will be added to the Capital Reserve. These changes will be implemented as FY2025 budget amendments; the first reading of this measure was passed unanimously at the City Council meeting on October 28, 2024.