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HomeMy WebLinkAboutSection H - Budget FoundationSection H Background Materials BUDGET FOUNDATION: DECEMBER 4, 2018 WORKSHOP Department Name: Finance Cost Center: Budget For Agenda of: December 4, 2018 Placement: Business Item Estimated Time: 90 minutes FROM: Derek Johnson, City Manager Brigitte Elke, Finance Director Prepared By: Alex Ferreira, Budget Manager SUBJECT: 2019-21 FINANCIAL PLAN PROCESS; ECONOMIC OUTLOOK, BUDGET POLICIES, AND CAPITAL IMPROVEMENT PLAN REVIEW RECOMMENDATION 1. Review and approve the 2019-21 Financial Plan Goal Setting Process. 2. Review the City’s budget policies. 3. Review and discuss the Economic Outlook for the 2019-21 Financial Plan development. 4. Review the current and long-term capital improvement plan. REPORT-IN-BRIEF The City of San Luis Obispo utilizes a two-year financial planning process to create its budget. This process includes extensive public outreach to assist the City Council in establishing Major City Goals. The benefits of this process are two-fold; it ensures that resources are allocated in the budget to accomplish the community’s highest priority, most important objectives while also addressing the support and maintenance of the City’s current services and capital assets. It therefore provides a process to help create a mutual understanding among community members, decision makers, and City staff and a platform of collaboration toward a common goal. The process includes a wide-reaching community priorities survey, the Community Forum, advisory body recommendations, and several other inputs to prepare the City Council for selecting community goals and priorities for the next financial plan during its Goal-Setting Workshop. Subsequent Council meetings will provide direction to City staff for work programs in support of these goals. Also, the Financial Plan process includes a review of the local economy and its potential impact to the City’s forecast financial position. Beacon Economics presented its Central Coast Economic Forecast on November 2, 2018 which included positive overall trends for the County of San Luis Obispo as the overall economy of California continues to grow. Additionally, a major feature in the City’s Financial Plan process is reliance upon clear polices. In looking at cities across the nation that have reputations for being financially well-managed and have maintained their fiscal health through good times and bad, one finds that they have in common clearly articulated fiscal policies used in financial decision-making. This report Major City Goals represent the most important, highest priority goals for the City to accomplish over the next two years, and as such, resources should be included in the 2019-21 Financial Plan.   highlights two new policies adopted in the 2018-19 Budget Supplement that will also be included as part of the 2019-21 Financial Plan. DISCUSSION Two-Year Financial Plan Process For over thirty years, the City has used a two-year financial planning process to create its budgets. The benefits of budgeting based on a two-year plan include: 1. Reinforcing the importance of long-range planning in managing the City's fiscal affairs. 2. Concentrating on developing and budgeting to accomplish significant objectives. 3. Establishing realistic timeframes for achieving objectives. 4. Creating a pro-active budget that provides for stable operations and assures the City's long-term fiscal health. 5. Reducing the amount of time and resources allocated to preparing annual budgets. The fundamental purpose of the City’s budget process is to link, through public engagement and strategic deliberation, the interest of the community to the available financial resources to achieve the desired outcome. The process allows the City Council to engage the community in identifying Major City Goals for the City while also providing information regarding the City’s core services, including the day-to-day work and responsibilities carried out by City employees to support residents’ quality of life. 2019-21 Goal-Setting Process There are a variety of possibilities to provide input to the City Council to enable them to establish Major City Goals with the community’s interest in mind. These opportunities are highlighted on the following chart: Many of these efforts are already under way. For example, City Advisory Bodies have developed recommended goals, the Community Priorities Survey (Attachment C) has been mailed out and was posted on-line at www.slocity.org/opencityhall, and the Council has held the November 13 “Setting the Stage” workshop. Notice has also been sent to over 200 community groups and individuals inviting their input and participation (Attachment B). The two principal elements of the City’s goal setting process still to come are the Community Forum, to be held on Wednesday, January 23, 2019, at 5:00 PM at the Veterans Hall on Grand Avenue, and the Council Goal-Setting Workshop to be held all day on Monday, February 4, 2019 in City Hall’s Council Chamber. Staff plans to build on past successes in integrating Council goal-setting into the budget process including the integration of proposed uses for the City’s local half-percent sales tax. 1. Community Forum The Community Forum, scheduled on January 23, 2019, is intended to solicit suggestions from residents, community groups stakeholders and interested individuals on City goals. It is also intended to meet the requirements regarding the City’s half-percent local sales tax, by providing an opportunity for the Revenue Enhancement Oversight Commission (REOC) to “review and discuss the use of the revenue generated by the Local Revenue Measure.” As such, the Community Forum will be a joint meeting of both the City Council and REOC. Due to the significant attendance at previous Community Forums, this year’s forum will be held at the Veteran’s Hall on Grand Avenue. The proposed agenda for the Community Forum is included in Attachment A. This Community Forum will build on best practices from prior years as well as implement several changes based on feedback. Those changes include: 1. Incorporation of a workshop format which will allow for more interaction and conversation with staff and the public. Public comment will be included for those that wish to address the Council and REOC directly and elaborate on an idea or concept. 2. The use of stations to build on input already received through the survey including existing Major City Goals. This will allow community members to provide more specific feedback and ideas on what could be included future workplans. There will also be a station for new Major City Goal ideas. 3. A dot exercise that will allow community members to prioritize potential Major City Goals. 4. An opportunity to prioritize project and services categories for Local Revenue Measure funding. 5. Opportunities to learn more about the City’s core services, Fiscal Health Response Plan and other topics. The proposed changes are intended to broaden the ways in which the public can provide feedback, provide additional focus on core services and current Major City Goals and build on input already received through the survey. 2. Council Assignment Based on all the feedback and input received, Council Members are asked to prepare and submit up to seven candidate goals as Major City Goals by 9:00 a.m. on Friday, January 25, 2019 for consideration during the February 4, 2019, Goal Setting Workshop (Attachment D). Council Members are also asked to prepare and submit suggestions for changes in current programs and services that might help fund their desired goals. Staff will compile verbatim, compose lists, organized by common topics, without identifying who submitted the particular statements, for review and consideration before the workshop. This list will be distributed to all Council Members and made available to the community at the close of business on Friday, February 1, 2019. While staff will retain individual submissions in the working files, it is recommended that Council members refrain from releasing their personal lists so that each Council member can review all of the submissions and discuss them at the Goal-Setting Workshop before taking a position. 3. Council Goal-Setting Workshop At the February 4, 2019, workshop, the Council will review the consolidated goals presented by Council Members to ensure clarity, completeness and understanding; and then narrow the list to finalist goals that are supported by a majority of Council Members. While the Council proceeds with the discussion outlined above, staff will prepare a final listing that the Council can use in prioritizing goals. In years past, the Council has used a ranking system of 0 through 5 for each candidate goal and staff recommends continuing its use for 2019- 21, summarized as follows: 5 - most important, highest priorities for City to achieve over the next two years. 4 - very important goal to achieve. 3 - important goal to achieve. 2 - address if resources are available. 1 - defer to 2021-23 for consideration. 0 - not a priority goal. The number of points used for ranking is typically figured out through discussion on the day of the workshop. Based on experience, it is likely that two priority “tiers” will emerge from this process: 1. Major City Goals. These represent the most important, highest priority goals for the City to accomplish over the next two years, and as such, resources to accomplish them should be included in the 2019-21 Financial Plan. The initial list of Major City Goals following the ranking will include only those goals where a majority of Council Members rank the goal as a 4 or 5. Subsequent discussion will allow the Council to refine the goal list, however, the list should remain consistent with the “Criteria for Major City Goals” (Attachment G). 2. Other Important Objectives. Goals in this category are important for the City to accomplish, and resources should be made available in the 2019-21 Financial Plan if possible. The outline for the Goal Setting Workshop is provided in Attachment E; and suggested guidelines for Council Members during the goal-setting process are provided in Attachment F. Included as Attachment G are the suggested “Criteria for Major City Goals” which have been used by the Council for many years. These criteria capture the relevant considerations to determine a Major City Goal, but the Council could refine the criteria at this time if desired. No follow-up meeting has been needed in the last several goal-setting sessions as the Council concluded all necessary actions at the Goal-Setting Workshop. Continued consideration of goals for 2019-21 can be scheduled for the next regular Council meeting following the workshop if needed. Local Revenue Measure Priorities  Open Space Preservation  Bicycle and Pedestrian Improvements  Traffic Congestion Relief/Safety Improvements  Public Safety  Neighborhood Street Paving  Code Enforcement  Flood Protection  Parks and Recreation/Senior Programs and Facilities  Other Vital Services and Capital Projects 4. Local Revenue Measure As previously mentioned, the Community Forum will also be the Annual Citizens’ Oversight Meeting for the Local Revenue Measure. This allows for integration of the Local Revenue Measure into the City's budget and goal-setting process. The estimated revenue and proposed use of funds generated by the Local Revenue Measure shall be an integral part of the City's budget and goal- setting process, and significant opportunities will be provided for meaningful participation by citizens in determining priority uses of these funds. It is important to know that the Local Revenue Measure is a general-purpose measure, and the proceeds are not restricted to specific purposes. However, the language on the ballot measure approved by voters in 2014 provides the types of uses that would be funded. The language on the ballot was: “To protect and maintain essential services and facilities – such as open space preservation; bike lanes and sidewalks; public safety; neighborhood street paving and code enforcement; flood protection; senior programs; and other vital services and capital improvement projects – shall the City’s Municipal Code be amended to extend the current one-half percent local sales tax for eight years, with independent annual audits, public goal-setting and budgeting, and a Citizens’ Oversight Commission?” While the ballot language provided examples of the types of uses that could be funded - based on community input received before placing the measure on the ballot – the Local Revenue Measure is a general-purpose tax providing Council with flexibility to respond to new circumstances and challenges. For 2017-18, total expenditures were $7.2 million and an additional $5,618,008 in funding was carried over for several projects (many of which are now under construction). The Revenue Oversight Committee will hold a meeting on December 6, 2018 and reviewed a preliminary 2017-18 year-end financial report in detail. These are still the unaudited results. The final information will be included in the Certified Annual Financial Report, which will be published before the end of the calendar year. ECONOMIC FORECAST On November 2, 2018, the annual Central Coast Economic Forecast presented national, state, and countywide economic trends. The information, together with the audited financials and internal analysis will provide the basis for the City’s own five-year fiscal forecast which will be presented to Council with the mid-year report on February 5, 2019. Overall, the outlook for San Luis Obispo is stable for now and into 2019, but all signs point to a slowdown into 2020. Employment: Employment growth slowed from 2017 levels, but still shows growth in non-farm jobs. These sustained gains in payroll jobs have helped drive the unemployment rate down to 2.8%, the lowest in nearly two decades. Natural Resources and Construction added the most jobs and nearly one third of non-farm jobs gains. In San Luis Obispo, 1,350 jobs were added in 2017. However, total non-farm employment is likely to increase less than 2% for all of 2018, and growth will slow further beyond 2018. Mounting labor shortages and affordability remain key challenges that will only worsen in the coming years. Sales Tax: Overall, sales tax revenue increased modestly from the first half of 2017 to the first half of 2018. The main force behind the slowdown in consumer and business spending was a decrease in business-to-business spending which fell significantly during that time. Although it is expected that taxable sales continue to grow into 2019, it will be more modest in San Luis Obispo as population growth lags behind other parts of California. As such, San Luis Obispo will rely on continued growth in business activity and tourism. Tourism: Tourism and hospitality are becoming a bigger part of the economy in San Luis Obispo as is seen with the County airport reaching two years of record-breaking passenger levels, making it the fifth-fastest growing airport in the nation. However, income from transient occupancy tax is expected to grow only 2.2% in San Luis Obispo; slightly above the countywide increase of 1.6%. Spending by tourists remains strong as is evident in an increase in hospitality employment and the continued increase in spending at restaurants. Real Estate: The housing market has begun to show signs of slowing and housing inventory remains tight. Though price appreciation continues, it is at a smaller percentage gain compared to recent years. Sales are little changed from a year ago, but the median number of days on the market has increased significantly. In San Luis Obispo, the median house price has increased by 6.7%, but single-family home sales dropped by 9.5%. Construction Activity: Though development permitting activities have been disappointing in the county overall, it remains strong in the City of San Luis Obispo. Year-to-date permit numbers for single-family residences as well as multi-family building are up significantly. There is also noticeable commercial real estate construction either under way or in various permitting stages. Development revenue continues to be strong as planning and building activity continues into 2019. Overall, the economic forecast indicates modest growth relative to the local economy and should be beneficial for the City’s revenue projections into 2019. However, as mentioned above, the possibly of an economic slow-down sometime in the near future is likely. Short term interest rates have climbed over the past year flattening the Treasury yield curve. An increase in interest rates translates into increase loan rates for consumers making purchases on credit. This could lead to a possible slowdown in home sales as mortgage payments increase as well as in overall consumer confidence and spending. Additionally, along with its regional partners, the City continues to address the closure of the Diablo Canyon Power Plant and prepare for the impacts to the region due to significant loss of jobs and property taxes. On September 19, 2018, Governor Brown signed SB 1090, directing the CPUC to approve the $85 million economic mitigation settlement and PG&E’s full $350 million proposed employee retention and retraining program. The City enters the 2019-21 Financial Planning period in a stable economic condition, but will face challenges and economic uncertainty. As a result, the City has positioned itself to address these challenges with the adoption and implementation of the Fiscal Health Response Plan adopted on April 17, 2018. The City is committed to maintaining quality core services for the community and will be asking for the community’s priorities throughout the goal setting process as described in this report. The City continues to have substantial advantages compared with many communities in California due to the following: 1. A balanced budget and reserves above minimum policy levels; 2. Dedication to fiscal responsibility; 3. Strong financial systems, policies and procedures; 4. Commitment to transparency and principles of engagement; 5. Strong Council leadership; 6. Citizens who care deeply about the City’s quality of life and services; 7. Staff committed, dedicated and passionate about achieving the City’s mission and serving the community; and 8. A great tradition of responsible stewardship. The civic infrastructure will serve San Luis Obispo well in successfully meeting challenges ahead. 2019-21 FINANCIAL PLAN POLICIES As noted in the discussion above, Council goal-setting is an important “first step” in the City’s Financial Plan process. The second major feature in the City’s Financial Plan process is reliance upon clear polices. In looking at cities across the nation that have reputations for being financially well-managed and have maintained their fiscal health through good times and bad, one finds that they have in common clearly articulated fiscal policies for financial decision- making. This best practice, as implemented by the City of San Luis Obispo, has been acknowledged repeatedly by the bond rating agencies as an important factor in sustaining the City’s excellent credit rating. Formal statements of key budget and fiscal policies provide the foundation for assuring long- term fiscal health by establishing a clear framework for effective and prudent financial decision- making. The City’s Budget and Fiscal Policies are traditionally set forth in the reference section of the Financial Plan. The policies cover a broad range of fiscal topics, including:  Financial Plan organization  General Revenue Management  User Fee Cost Recovery Goals  Enterprise Fund Fees and Rates  Revenue Distribution  Investments  Appropriations Limitation  Fund Balances and Reserves  Capital Improvement Management  Capital Financing and Debt Management  Human Resource Management  Productivity  Contracting for Services At the outset of each financial planning cycle, the City reviews the policies in place to see if any updates are necessary. Changes are generally intended to create consistency amongst City fiscal policies and create a system that is efficient and effective to administer. As staff begins preparing the 2019-21 Financial Plan, other additions or revisions to the City’s current budget and fiscal policies may arise; if so, these will be presented for Council consideration at that time. The most recent additions were two policy additions adopted by the City Council with the 2018- 19 Budget Supplement. 1. General Fund Revenue Stabilization Fund. The City will maintain a reserve for the purposes of offsetting unanticipated fluctuations in general fund revenues to provide financial stability. The funding target for the Revenue Stabilization Reserve will be $1,000,000 during the term of the adopted Fiscal Health Response Plan. Use and allocations of funds of the Revenue Stabilization Fund will be made upon Council approvals of the Financial Plan or as becomes necessary during any fiscal year. 2. Capital Projects Reserve Fund. The City will maintain a reserve for the purposes of offsetting unanticipated cost increases, unforeseen conditions, and urgent unanticipated projects to provide continued investment in infrastructure maintenance and enhancement. Use and allocations of funds from the Capital Projects Reserve Fund will be made to Capital Projects including Fleet, Information Technology, and Major Facility Replacement upon Council approvals of the Financial Plan or as necessary during any fiscal year. The General Fund Revenue Stabilization Fund has been accounted for in the financial forecast at $1,000,000. Staff plans on returning to Council with a recommendation regarding a Section 115 Trust fund with the mid-year report on February 5, 2019. The recommendation will include the release of a request for proposal to review the available options in the market. CAPITAL IMPROVEMENT PLAN (CIP STATUS) As part of the budget process, the City reviews its capital improvement plan and the maintenance of its assets. Attachment J provide the Council with a summary of the status of the City’s Capital Improvement Plan (CIP) projects. As discussed in greater detail within the attachment, the City is making excellent progress in achieving its current CIP goals. Of the 97 active projects in the 2017-19 Financial Plan period: 1. 20 are complete, 2. 29 will be complete within 6 months, 3. 21 will be complete within 12 months, 4. 27 are longer term and projected to be completed beyond a 12-month period. In preparation of the goal-setting process for the 2019-21 Financial Plan, it is important to understand the status of current status of the CIP projects, as well as the long-term need of the City’s assets (Attachment K). LONG TERM CIP AND FUNDING THE FUTURE As Council is aware, in 2018, as an element of the Fiscal Sustainability Major City Goal, staff analyzed long-term capital needs and explored potential funding scenarios. Council discussed this issue at several meetings in early 2018. In April, Council directed staff to continue to explore funding options and time frames for potential future ballot measures. Council also requested staff to pursue additional public engagement and project refinement. Below is a summary of the conclusions of the analysis to date relative to Funding the Future of SLO: 1. The City’s Capital needs can be categorized into 1) Maintenance of Existing Assets, 2) Replacement of Existing Assets, and 3) New Assets. 2. Current funding, primarily through the Local Revenue Measure (Measure G) and 2017 Road Repair and Accountability Act funds, can fund most of the identified needs in the first category, Maintenance of Existing Assets. 3. The second and third categories, Replacement of Existing Assets and New Assets, are primarily unfunded, to the extent that funding for Maintenance of Existing Assets is prioritized. The City could choose to fund projects in the Rehabilitation and New project categories, the tradeoff would be deterioration of existing City assets. 4. As a result of extensive review of approved City planning documents, the General Plan, and Area Specific Plans, the total General Fund allocation for Replacement of Existing Assets and New Assets is approximately $400 M. 5. That amount of funding is currently not available, again, assuming priority allocation to Maintenance of Existing Assets. 6. The projects identified as necessary by various planning documents, over the next 30 years, is currently referred to as ‘Funding the Future of SLO’ 7. That General Fund allocation for projects within the AB 1600 Capital Facilities Fee Program was increased by Council decision to provide credits and incentives for other important City goals, specifically, the provision of affordable housing stock in the City. 8. The General Fund allocation could also increase pending actual receipt of the regional funds assumed for regional AB 1600 projects. 9. The Council determined a property tax increase was not a feasible funding mechanism for Funding the Future of SLO. 10. Council asked staff do additional project analysis, public outreach, and considerations for funding options for their future Council discussion., At the February 4th Council meeting, staff will present information regarding proposed next steps for the Funding the Future of SLO proposal. As part of the Budget Foundation discussion, staff is presenting the City’s Long-Range Capital Program (Attachment K). This program is presented to Council as part of the Goal Setting Process in order to present Council with the long-range context of capital needs. In past years, the Long-Range Capital Program was presented without a proposed strategy to address those needs. Funding the Future of SLO represents a proposal to address the long-term General Fund obligations for the city’s capital needs. Regarding both the Long-Range Capital Project list, and the list of projects for Funding the Future of SLO; it is important to remember some individual project costs will be modified in the future. Some projects are still be refined relative to costs for property acquisition, staffing and delivery, and other issues. In addition, the Facilities Master Plan (due at Council in early 2019), Parks and Recreation Master Plan (still in process), and the ADA Transition Plan are pending final adoption. It is important, however, to understand the difference between the Long-Range Capital Program and the projects within Funding the Future of SLO. The chart below is a visual representation of the differences. Essentially, the characteristics of the two lists are: Long Range Capital Program Funding the Future of SLO Includes all projects for all funds, including Enterprise Fund needs Includes all projects which have any General Fund obligation Includes Ideal funding levels of Annual Asset Maintenance Does not include any Annual asset maintenance projects under the assumption they are funded – not at Ideal level in the Long-Range Plan, but at levels to provide public safety and improved quality of life Time frame – current to beyond 2040 Time frame – current to 2040 Total need is $995 million – all funds Total need is approx. $400 million – General Fund only CONCURRENCES The City’s internal Financial Plan Steering Committee and the Department Head Team concurs with the recommendations included in this report. PUBLIC ENGAGEMENT This Financial Plan development process involves significant public engagement and outreach as described above. The approach will follow the collaborate model from the City’s Public Engagement and Noticing Manual which involves interactive processes and partnering with the public to develop ideas and identify priorities using a variety of the tools available to the City. POLICY CONTEXT FOR FINANCIAL PLAN The City’s budget polices address a multitude of areas that govern the production of the two- financial plan and the annual budget. In addition to the Council adopted policies, several other codes dictate the need for the budget process. California State Law Though there is no explicit requirement in state law for a California city to adopt a budget, there are many laws that make the budget procedures essential for every city. 1. A city may not spend public funds without the legal authorization to do so. Among other things, a budget appropriates public funds, thereby providing the legal authorization from the governing body to expend these funds. 2. Like other California public agencies, each city must annually establish its appropriations limit pertaining to the proceeds from taxes in compliance with Article XIIIB of the California Constitution and California Government Code Sec. 7910. The City of San Luis Obispo uses the annual budget to establish its appropriations limit. 3. The California Constitution (Section 18 of Article XVI) states that no city or county may incur any debt or liability in any year that exceeds the income and revenue anticipated for that year without two-thirds voter approval. By determine the anticipated income and revenue, the budget process verifies these thresholds. 4. California Government Code Sec. 53901 requires each local agency to file its budget with the county auditor within 60 days after the beginning of its fiscal year. 5. In order to qualify to receive federal funds, a local agency must comply with the federal single audit act and must retain a certified public accountant to prepare an annual audit of its financial records. This compliance will be very difficult without an adopted budget. City Charter Article VIII of the City’s Charter contains the requirements for the fiscal administration for the City. The following sections provide guidance regarding the budget: 801. Fiscal Year – determines the City’s fiscal year from July through June. 802. Annual Budget – determines the mandate of the City Manager to bring forth an annual estimate of income and expenditures. 803. Public Hearing – sets forth the requirement for a public hearing to adopt the annual budget. 804. Adoption of Budget – requires the Council to adopt the budget after necessary revisions after input from the public hearing. City Budget and Fiscal Polices The City’s adopted fiscal policies set forth the purpose of the Financial Plan. They determine under section: A. The Financial Plan Objectives B. The two-year budget C. Measurable objectives D. The Second-Year budget E. Operating Carryover F. Goal Status Reports G. Mid-Year budget reviews Additionally, under long-term financial planning, the policies stipulate the requirement for a balanced budget and the addressing of long-term liabilities and the maintenance of infrastructure. They also outline the requirements for annual and interim reporting and the City’s budget administration in accordance with the City Charter. ENVIRONMENTAL REVIEW The California Environmental Quality Act does not apply to the recommended action in this report, because the action does not constitute a “Project” under CEQA Guidelines Sec. 15278. FISCAL IMPACT Budgeted: N/A Budget Year: Funding Identified: Fiscal Analysis: Funding Sources Current FY Cost Annualized On-going Cost Total Project Cost General Fund State Federal Fees Other: Total There is no fiscal impact associated with the conduct of the City’s two-year financial planning process. The City budgets for all of the planned activities that are part of this process. Preparing budgets are one of the core government functions that the City is responsible for carrying out. ALTERNATIVE Modify the proposed Goal Setting activities. The Council could direct staff to pursue a different process for goal-setting this year. Staff does not recommend this alternative because there is value in conducting a similar process that residents are familiar with. If the Council is interested in making changes, staff recommends that they be incremental adjustments to the activities planned. If major changes are desired, they should be discussed and planned during the first year of the next financial plan. Attachments: a - 2019-21 Community Forum Outline b - Invitation to Community to Participate in Goal Setting c - Community Survey d - Homework for Council Goal-Setting e - Outline for Goal-Setting Workshop f - Guidelines for Council Members During Goal-Setting Process g - Criteria for Major City Goals h - Economic Outlook i - Budget and Fiscal Policies for 2019-21 j - CIP Status Report 2019-21 k - Long Term CIP 2019-21