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• Partial hotel tax revenues from two new hotels, scheduled to open sometime next fiscal year, are reflected in the FY 2023/24 budget, and the full year of revenue is reflected in the FY 2024/25 budget. Accounting for this new revenue, the annual average increase is projected at about 7.5% over the next two years. FY 2023/24 and FY 2024/25 hotel tax revenues are projected at $4.4 million and $4.7 million, increasing from $4.1 million in FY 2022/23. Hotel tax has not recovered to the pre-pandemic level of$6.5 million. Expenditures • Salaries and benefits are expected to continue to increase due to cost of living adjustments in the labor contracts and cost assumptions and projected increases in benefits (e.g., health insurance, worker's compensation, and pension). FY 2023/24 and FY 2024/25 General fund personnel costs are projected at $103.4 million and $108.6 million. City services and programs are delivered by employees; as a result, salaries and benefits are our key cost drivers. • Materials and supplies represent a significant portion of the General Fund expenditure. FY 2023/24 and FY 2024/25 costs are projected at $33.6 million and $33.0 million, respectively. • The increase in insurance costs is expected to be more than 10.0% each year based on the insurance pool's experience and the industry trend. • Annual contribution to the CIP is projected at the $2.0 million level. • Annual contribution to the Repair and Replacement (R&R) funds is projected at the $5.0 million level. • Contribution to facility R&R will need to be increased in future years to pay the PUSD for maintenance and repair for the use of shared facilities. Update to Reserve Policy Staff recommends the City's reserve policy be updated to reflect best practices recommended by the Government Finance Officers Association (GFOA). The GFOA recommends that "at a minimum, that general-purpose governments, regardless of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures." The City's current reserve policy includes restricted pension funds as part of the reserve calculation. It is more appropriate to separate the restricted reserve from the unrestricted reserve. Pension funds are still available to support operations during challenging times. The minimum reserve target for the Water and Sewer operating funds remains at 30.0%. The reserve level will be reviewed as part of the rate study, which is anticipated to be completed in FY 2023/24. There were no significant changes to the reserve levels Page 4 of 9