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6.1 B MANAGEMENT'S DISCUSSION AND ANALYSIS Page 32 FINANCIAL ANALYSIS OF THE CITY�S FUNDS As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with finance-related legal , requirements. Governmental Funds The general government functions are contained in the general, special revenue, debt service, and capital project funds. The focus of the City's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unreserved fund balance may serve as a useful measure of the City's net resources available for spending at the end of the fiscal year. At June 30, 2010, the City's governmental funds reported combined fund balances of $102.1 million, which reflects a decrease of $12.3 million from the beginning year balance. Governmental fund revenues increased $3.9 million this year to $111.2 million. Increases occurred in the general fund, capital outlay fund, and grants fund revenues. Expenditures, including capital outlay, increased $7.5 million this year to $122.7 million. Most of the increase was attributable to an increase in principal expenditure as the City redeemed the 1998 City Hall Lease Revenue Certificates of Participation and the 1997 Tax Allocation Bonds in the current fiscal year. This increase was partially offset by decreased capital outlay expenditures due to the purchase of the CEMEX property in the prior fiscal year. The general fund is the primary operating fund of the City. At lune 30, 2010, unreserved fund balance of the general fund was $21 million of which $17.6 million is available for subsequent years' expenditures while total fund balance decreased to $24.7 million from a beginning fund balance of $39.1 million. As a measure of the general fund's liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represents 27% of total fund expenditures, while total fund balance represents 32% of that same amount. The City's general fund balance decreased by $14.4 million during the current fiscal year. The following are the major funds that qualified under the reporting criteria for major funds selection: General Fund - General fund revenues increased approximately $.5 million this fiscal year primarily due to increases in property tax, and planning revenue related to the Saltworks and Stanford projects, offset by declines in all other categories of revenues. Sales taxes decreased $.5 million and utility users' tax decreased $.3 million due to the recession. The increase in property tax resulted from an increase in the amount of reimbursement from San Mateo County for prior year payments to the Education Revenue Augmentation Fund (ERAF). The general fund received $3.9 million from the county as its share of the ERAF rebate in FY 2009/10, an increase of $955,420. ERAF, which was created by state law in the early 1990's, allowed the state to shift on an ongoing basis a portion of each city, county, and special district's property taxes to school districts. This shift allowed the state to decrease the state's general fund support to schools throughout the state and concomitantly reduced state funding of schools. Within each county, ERAF revenues are allocated to schools based upon a formula that considers, among several factors, the average daily attendance and the amount of each school district's own property tax revenue. Within San Mateo County, the outcome of applying this formula was that the school districts did not require all of the funds shifted from the cities, county, and special districts. Consequently, these funds were returned to each entity in proportion to the amount that was initially collected. General fund expenditures decreased $2.4 million as a result of adopted budget reductions and a citywide salary freeze to offset the effects of the recession. Transfers out of the general fund increased $10.3 million in FY 2009/10 primarily due to an increase in transfer to the 1998 City Hall Lease Revenue Certificates of Participation fund to cover the early redemption of the outstanding certificates of participation. 9