Preliminary Financial Report FY22

October 26, 2022

Honorable Eric Garcetti, Mayor

Honorable Members of the Los Angeles City Council

Re: Preliminary Financial Report for Fiscal Year 2021-22

The Controller’s Office submits the Preliminary Financial Report (PFR) each fall to review the City of Los Angeles’ financials for the prior fiscal year. Our report is the City’s primary look back at municipal finances after the close of the fiscal year, providing an overview and analysis of revenues and expenditures, reserves and bonded indebtedness. In January 2023, the Controller’s Office will follow up by issuing the Annual Comprehensive Financial Report for 2021-2022, which is prepared in accordance with Generally Accepted Accounting Principles and audited by an independent firm of certified public accountants.

Accompanying the PFR are online interactive visualizations with 10 years of data, which may be found at lacontroller.org/pfr2022. Information on special fund balances and uses, Reserve Fund starting balances over the years, and budget appropriations, adjustments, expenditures and revenues, are also on my website.

While the report covers the previous fiscal year, it is meant to help City leaders understand and assess the health of and challenges facing the City’s finances, including the impact of recent inflation and possible economic downturn.

A year of recovery

The previous fiscal year was one of recovery for the City as COVID-19 vaccines became widely available and the economy began to reopen. The City received financial assistance from the American Rescue Plan Act of 2021 (ARPA), accounting for an additional $640 million in revenues available for General Fund expenditures, and subsequently, City revenues rebounded to pre-pandemic levels. 

Highlighted in the PFR are these facts about the 2021-22 fiscal year:

• Actual revenues in budgeted funds were $10.2 billion, a 10.4 percent increase over FY 2020-21 and 12.2 percent more than FY 2018-2019 before the pandemic. This figure does not include ARPA assistance.
• Total expenditures (excluding encumbrances) from budgeted funds were $9.4 billion, an increase of 5.4 percent.
• The Fiscal Year-start adjusted Reserve Fund balance was $601.7 million or 8 percent of General Fund receipts anticipated in the 2022-23 Budget, $229.4 million above the 5.0 percent Reserve Fund Policy goal. The beginning Reserve Fund balance for 2022-23 is at its second highest level for the last 10 years.

Concerns remain

While many City revenues have rebounded since the pandemic-related downturn, economic challenges remain and difficult budgeting decisions could arise next year, including: 

• Pension costs to the City increased slightly last fiscal year, totaling $1.5 billion and making up 15 percent of total spending. Future increases could be mitigated if the City can hold salary expenditures under long-term averages, but this issue should be monitored carefully.
• While the FY 2022-23 budget dealt with deferred wage increases and upcoming labor negotiations by allocating one-time revenues toward compensation adjustments, the City still faces potential spending increases related to pending litigation and other long-term costs. These costs could constrain the City’s ability to expand services in future years, especially if revenues do not keep pace.
• Numerous economic issues could impact City revenues, including cyclical COVID-19 trends, rising inflation, supply chain disruptions and international conflicts.

To proactively address these concerns, the City should preserve a robust Reserve Fund and Budget Stabilization Fund, and remain cautious when considering future spending requests. By exercising caution now, the City can avoid painful cuts should economic conditions deteriorate.

My staff and I appreciate the cooperation shown by City departments as we prepared this report. Should you have questions or require additional information, please contact my Director of Financial Analysis and Reporting, Wally Oyewole at rahoof.oyewole@lacity.org.

Respectfully submitted,

RON GALPERIN
L.A. Controller

cc:     Chris Concepción, Chief Deputy Controller
          Sharon Tso, Chief Legislative Analyst
          Matt Szabo, City Administrative Officer

At the close of each fiscal year, the Office of the Controller reports on the finances of the City for the year that recently closed. This Preliminary Financial Report is the first part of that reporting process and provides cash basis information on revenues, expenditures, reserves, and bonded indebtedness, including comparisons to the prior year and to the Adopted Budget (Budget).

The second part of this reporting requirement is the Annual Comprehensive Financial Report (ACFR), the City’s official, audited financial statement, which will be released later this fiscal year. Together, these two documents elucidate and inform both City decision-makers and the public on the City’s financial position.

An interactive presentation of the report is available at:

/pfr2022

Economic Recovery Continued

Two years ago, the City was confronted with an unprecedented challenge: the global COVID-19 pandemic. In response, the City worked expeditiously and operated in an environment of austerity to maintain core government services, protect small businesses and vulnerable groups, and more. However, in that same year, the City experienced financial challenges as economy sensitive revenues declined and emergency expenditures increased. Fiscal Year 2021-22 was a year of recovery for the City from the COVID-19 pandemic as COVID-19 vaccines became widely available and the economy began to reopen. This same Fiscal Year, the City also experienced a reversal of previous fortunes as the first tranche of financial assistance from the Federal government arrived.  This assistance, otherwise known as the American Rescue Plan Act of 2021 (ARPA), accounted for an additional $639.5 million in revenues available for eligible General Fund expenditures, and subsequently, the City experienced revenues rebounding to pre-pandemic levels.

The Fiscal Year 2021-22 Budget was adopted with a framework of economic improvement, and projected a strong rebound, with 7.7 percent growth in General Fund revenue, excluding the first tranche of $639.5 million ARPA funding received in May 2021. With the City experiencing recovery of most revenue sources, combined with the receipt of Federal funds, the City ended Fiscal Year 2021-22 with total General Fund revenues exceeding the Budget by $91.6 million, growing by 8.4 percent above Fiscal Year 2020-21.

While the recovery from pandemic-era low revenue receipts occurred at such a high growth rate (12.4 percent), the revenues from transient occupancy taxes and parking-related receipts have not fully returned to levels seen before the pandemic.

The Fiscal Year 2022-23 Budget assumes the City will continue economic recovery from the pandemic-related downturn and return to a steadier state. The Budget reflects that the City will continue investing in its communities most impacted by the pandemic with enhanced perception and commitment to incorporate equity and diversity into how services are delivered, continue to invest in the mitigation of homelessness, and invest in public safety.

Although, in general, revenues have rebounded, the economy still faces several headwinds such as cyclical COVID-19 trends that still pose health risks, a new 40-year high inflation, supply chain crises, and disruptions caused by the war abroad. The confluence of these issues threaten to slow down recovery trends, and could negatively impact the City’s revenues.

While not yet visible in much of the economic data, particularly in the job market data, worries about a recession continue to mount. It is therefore prudent that the City preserve a robust Reserve Fund to weather any potential future economic crises without enduring a round of destabilizing cuts. The Reserve Fund started Fiscal Year 2021-22 at 8.6 percent with a record-high balance of $647.0 million. The City began the Fiscal Year 2022-23 at 8.1 percent of the General Fund Budget or $602 million. The pathway to maintaining the City’s long-term fiscal health is to abide by the City’s Financial Policies in maintaining the cumulative value of the Reserve Fund, the Budget Stabilization Fund, and the UB line item for mid-year adjustments at an amount equal to at least 10 percent of budgeted General Fund revenues. Based on the Reserve Fund balance as of July 1, 2022, the City began the Fiscal Year 2022-23 with budgetary reserves totaling 11.0 percent of budgeted General Fund revenues.

This Preliminary Financial Report is organized in four distinct sections, as stated and described below:

1. Revenues and Expenditures: A discussion of the fiscal year ended 2021-22, including trend analysis, notable changes from prior years, and financial performance relative to the Budget;
2. Reserve Fund: A discussion of the current condition of the City’s Reserve Fund, and analysis of the various factors influencing that figure;
3. Budget Stabilization Fund: A discussion of the Fund policy and how actual figures compare to the policy; and
4. Bonded Indebtedness: A statement of the City’s total bonded indebtedness and debt service requirements; as well as comparisons to City policies and legal limitations.

 

1. Revenues and Expenditures

Actual Revenue was 0.7 percent above the Budget, growing by 10.4 percent above Fiscal Year 2020-21 and 11.2 percent over Fiscal Year 2019-20 (excluding transfers from Reserve and ARPA funds). General Fund revenue grew by 7.9 percent compared to last year and was 1.4 percent above the Budget. Almost all General Fund Revenue sources outperformed the budgeted amount. Revenue in budgeted special revenue funds increased by 16.0 percent over the prior year; however, it was 0.5 percent under the Budget due to shortfalls in Building & Safety Building Permits Enterprise Fund’s revenues, State Proposition A revenues, and a delay in Disaster Response Reimbursements. Receipts from the American Rescue Plan Act of 2021 (ARPA) are not included in Budgeted Revenue because the funds were not appropriated for spending in the 2021-22 Budget, and the receipts were transferred to the General Fund as cash.

Both expenditures and encumbrances increased 5.2 and 31.6 percent, respectively, from June 30, 2021 to June 30, 2022. All of the spending categories increased with the exception of Proposition A Local Transit Assistance and Human Resource Benefits.

2. Reserve Fund

The City’s Reserve Fund Policy (CF 98-0459) sets a Reserve Fund cash balance goal of at least 5.0 percent of budgeted General Fund receipts. However, the Reserve Fund started Fiscal Year 2021-22 at 8.6 percent with a record-high balance of $647.0 million, $384.5 million more than twelve months earlier. The large Reserve Fund balance resulted from a combination of a General Fund surplus transfer of ARPA funds revenue, fourth-quarter revenue growth, and reduced General Fund expenditures. Although slightly lower than Fiscal Year 2021-22 balance, the Reserve Fund began Fiscal Year 2022-23 at a healthy 8.1 percent of the General Fund Budget or $602 million.

3. Budget Stabilization Fund

The Budget Stabilization Fund (BSF) is the City’s mechanism for accumulating excess tax revenues in growth years to mitigate shortfalls in lean years. The BSF balance on June 30, 2022, was $119.5 million.

4. Bonded Indebtedness

Bonded indebtedness and the City’s debt service obligations increased due to the issuance of MICLA Revenue Bonds Series 2021-C and General Obligation Bonds Series 2021-A and 2021-B. However, the debt service payments ratio to General Fund receipts decreased from 4.9 percent to 4.7 percent of General Fund revenue, and is well under the City’s 15 percent policy ceiling.

The Preliminary Financial Report focuses on the cash basis financial information of the City for 2021-22, providing information on revenues and expenditures, the Reserve Fund, the Budget Stabilization Fund, and bonded indebtedness. An interactive presentation, along with all the exhibits and schedules used in the report, is available at:

/pfr2022

Audited financial statements, prepared in conformity with Generally Accepted Accounting Principles (GAAP), will be presented in the City’s Annual Comprehensive Financial Report (ACFR) later this Fiscal Year.

Actual revenues in budgeted funds for 2021-22 were $10.2 billion, an increase of 10.4 percent compared to 2020-21, and an increase of 12.2 percent over pre-pandemic 2018-19. The revenues do not include the ARPA funding and transfer from the Reserve fund.

Total expenditures (excluding encumbrances) from budgeted funds increased by 5.2 percent to $9.3 billion compared to 2020-21.  In addition to the expenditures, $679.6 million were encumbered as of June 30, 2022.

Exhibit 1 below shows the ten-year history of total revenues and expenditures.

Since 2012-13, revenues have grown by 49.9 percent (average annual growth of 4.7 percent), while expenditures have increased by 46.2 percent (average annual growth of 4.3 percent). As seen in Exhibit 1, revenues have consistently exceeded expenditures, which has allowed the City to grow the Reserve and Budget Stabilization Funds.

The 2021-22 Budgeted revenue totaled $10.8 billion (excluding $640.1 million in available balances), of which $7.5 billion was in the General Fund, and $3.3 billion was in Special Revenue Funds. Total receipts, including transfers from Reserve and ARPA funds, for the year were $10.9 billion, 0.7 percent more than budgeted, while total expenditures (including encumbrances) were $9.9 billion, 13.4 percent less than budgeted. Detail of budgeted and actual receipts and expenditures is presented in Schedules III and IV.

General Fund Revenues

The General Fund is the primary operating fund of the City. It is used to account for all financial resources except those legally required to be accounted for in other funds. General Fund revenues are derived from such sources as taxes, licenses, permits, fees, fines, intergovernmental revenues, charges for services, special assessments, and interest income. Exhibit 2 presents 2021-22 actual General Fund revenues by percentage.

Fiscal Year 2021-22 General Fund receipts totaled $6.9 billion (excluding the transfers from Reserve and ARPA funds), $91.5 million or 1.4 percent above the Budget, $500.2 million or 7.9 percent higher than 2020-21, and $639.1 million or 10.3 percent higher than the pre-pandemic 2018-19. Over the past five years, General Fund revenue averaged 4.2 percent growth, and is now back on track after negative growth in Fiscal Year 2020-21. Exhibit 3 below compares adopted and actual General Fund receipts by fiscal year.

All General Fund revenue sources outperformed the Budget in 2021-22 except for the following: Property Taxes ($76.8 million or 3.2 percent below Budget), Licenses, Permits, Fees and Fines ($90.5 million or 7.3 percent), Power Revenue Transfer ($0.8 million or 0.4 percent), Parking Fines ($13.3 million or 10.8 percent), and Grant Receipts ($50.8 million or 55.6 percent).

Property Tax receipts were $62.1 million (2.8 percent), higher than 2020-21 receipts but lower than the budget by $76.8 million or 3.2 percent. Ex-CRA Property Tax Increment revenue was $8.5 million over the budget and $7.6 million lower than the prior year.

Utility Users’ Tax was 5.5 percent above the Budget, 3.7 percent higher than last year’s actual receipts; however, it was 0.9 percent lower than pre-pandemic Fiscal Year 2018-19. While all components were above the Budget, Telephone Users Taxes experienced negative growth year over year. It was lower than last year’s receipts by $2.1 million or 1.8 percent, and lower than pre-pandemic Fiscal Year 2018-19 by $38.4 million or 25.7 percent.

The Budget assumed 4.4 percent growth for Business Tax receipts; however, actual receipts were 9.4 percent or $65.2 million higher than last year and 5.7 percent or $41.0 million over the Budget. Non-cannabis Business Tax actual receipts of $632.1 million were 14.7 percent or $81.2 million more than the Budget and 13.8 percent or $76.5 million more than last year.  Meanwhile, the Recreational Cannabis Business Tax generated $125.5 million in revenues, which was lower than the Budget by $40.2 million (24.3 percent), and lower than last year’s actual by $11.3 million (8.3 percent).

Sales Tax Receipts were $80.7 million or 13.3 percent above the Budget, $162.7 million or 31.0 percent more than last year, and $105.9 million or 18.2 percent more than 2018-19 receipts.

Franchise Income ended higher than the Budget by $11.3 million, mainly due to Natural Gas Franchise income that exceeded the Budget by $6.1 million and Commercial and Multi-family Solid Waste Franchise Income which was above Budget by $4.9 million.

Licenses, Permits, Fees and Fines ended at $90.5 million or 7.3 percent lower than the Budget, $103.3 million or 8.2 percent lower than last year’s receipts. However, if the $125.0 million in one-time COVID-19 Federal Relief fund received in prior year were excluded, 2021-22 receipts were actually higher by $21.7 million or 1.9 percent. Departmental receipts (relating mainly to licenses, permits, and various service fees collected by departments) and Emergency and Ambulance Services were above the budgeted amounts of $37.4 million and $22.0 million, respectively. However, other components such as Services to the Los Angeles County Metropolitan Transportation Authority (LACMTA) and Services to Proprietary Departments were under budget by $30.8 million and 17.1 million, respectively. The shortfall in reimbursements from special revenue funds was $102.2 million.

Grants receipts were under Budget by $50.8 million, mainly due to delayed reimbursements from the Federal Emergency Management Agency (FEMA) Public Assistance program for pandemic-related costs.

Transient Occupancy Tax (TOT, commonly known as Hotel Tax) receipts dropped 65.4 percent by the end of Fiscal Year 2020-21 compared to pre-pandemic 2018-19 since travel and hospitality virtually stopped. However, with the reopening, the City experienced notable increases in TOT revenues.  Actual receipts were $55.8 million or 30.5 percent above the Budget and $128.7 million or 116.6 percent higher than last year. While receipts have improved significantly, they are still 25.0 percent below pre-COVID levels. Employee costs and worker shortages appears to be holding back rebound in hospitality and travel. International tourism and business travel still have a long recovery ahead.

Exhibit 4 shows cumulative Transient Occupancy Tax monthly receipts for FY 2019, FY 2020, FY 2021, and FY2022.

Documentary Transfer Tax grew to all-time highs during the pandemic. The actual receipts were $81.8 million or 36.0 percent above the Budget and $72.9 million or 30.9 percent above last year. The tight housing supply has driven strong price growth and increased sales volumes since the beginning of the pandemic. However, Documentary Transfer Tax receipts could take a hit in the later part of the current year or next year due to the ongoing high inflation and high interest rates threatening to slow down housing price growth and sales volume.

The Power Revenue Transfer was $0.8 million (0.4 percent) less than the Budget and $6.7 million or 3.1 percent more than last year, which was the lowest in a decade. It has declined since 2016, with a 3.1 percent average decrease over the previous five years.

Exhibit 5 below displays a 10-year history of General Fund receipts, excluding transfers from the Reserve Fund.

Appropriations, Expenditures & Encumbrances

Total expenditures, including encumbrances, were $9.9 billion. This amount was $621.9 million or 6.7 percent higher than 2020-21 and $1.5 billion or 13.4 percent lower than the Budget.

Exhibit 6 below compares the Budget, the final appropriation (which includes interim appropriations made during the year), and actual expenditures and encumbrances by fiscal year.

For the last five years, total actual Expenditures and Encumbrances have grown by an average of 4.0 percent. For the same period, Salaries (excluding Library and Recreation and Parks) increased by 3.8 percent, and Services, Supplies, Equipment, and Others by 6.9 percent. Salaries are made up of Sworn and Civilian Salaries, which increased by 3.8 percent and 3.4 percent, respectively.

Exhibit 7 below breaks out summarized categories of budgetary and actual expenditures and encumbrances for 2020-21 and 2021-22. Detailed information by department may be found in Schedule IV.

Salaries increased by $87.6 million or 2.3 percent compared to last year, mainly due to payments of deferred excess sick payouts and one-time bonuses to certain labor organization members for a portion of deferred compensation adjustments.

Total contributions to Library and Recreation and Parks increased by $13.1 million and $133.1 million, respectively. Besides regular transfers to Library and Recreation and Parks made pursuant to Charter requirements that are tied to growth in the City’s total assessed valuation, additional transfers of $95.0 million to Recreation and Parks were made from ARPA funding for projects in connection with deferred maintenance and childcare facilities.

Capital Improvement Expenditure Program (CIEP) expenditures were 68.2 percent or $284.0 million lower than the Budget, and $56.2 million more than the prior year. The most significant variance was in Clean Water Projects, which was $210.4 million lower compared to Budget, but was $32.0 million more than the preceding year’s actual.

Human Resources Benefits expenses were $4.7 million or 0.6 percent below the Budget, and lower by $12.6 million or 1.6 percent compared to last year. The decrease was primarily due to decreased health care subsidies for employees, by $16.1 million or 3.0 percent, and Unemployment Insurance costs, which fell by $3.9 million.

Exhibit 8 below breaks out expenditures and encumbrances by Governmental Activity.

As budget priorities shifted and the economy expanded, the share of spending for the Protection of Persons and Property has remained remarkably stable at almost a third of the total expenditures.

Additionally, the contributions to the City’s pension systems totaled $1.5 billion, 15.0 percent of total spending. This amount is up slightly from the prior year. Future increases could be mitigated to the extent that the City can hold salary expenditures under long-term averages, but this issue should be monitored carefully.

The City ended the Fiscal Year with a total of $679.6 million in encumbrances:  $503.6 million in the General Fund and $176.0 million in special revenue funds, $130.8 million was encumbered for salaries to be paid in July 2022, with the balance encumbered in expense, equipment, and special revenue fund project accounts.

Encumbered funds for salaries are earmarked for the fiscal year’s last pay period, and unspent funds are immediately released after payroll is made. Funds encumbered for expense accounts are continued across fiscal years to ensure that cash is available to cover the expenditure when it is made. Schedule V provides a listing of General Fund encumbrances by the department.

The General Fund Encumbrance Policy provides that encumbered funds that remain unspent for a period longer than one Fiscal Year shall be disencumbered every fiscal year, with the exception of capital project funds.  Prior-year encumbrances are automatically disencumbered unless exempted by Mayor and Council approval. As part of the 2021-22 Year-End Financial Status Report, a total of $55.9 million was exempted from this policy, an increase of $2.9 million from last year’s exemptions. As noted in past years, exceptions should be closely monitored.

Unencumbered General funds revert to the Reserve Fund at year-end. As such, exemptions to the automatic disencumbrance policy reduce reversions, thereby reducing the cash available in the Reserve Fund to pay for emergencies and contingencies. Section II below discusses the status of the Reserve Fund in more detail.