CITY COUNCIL SPECIAL MEETING
AGENDA SUMMARY
Monday, February 10, 2025, 9:00 a.m.
In person at:
The Agrarian Hotel Conference Room
325 E. Branch Street, Arroyo Grande, CA 93420
This City Council meeting is being conducted in-person. Members of the public may participate and provide public comment on agenda items during the meeting in person at the location identified above, or by submitting written public comments to the Clerk of the Council at [email protected].
1. CALL TO ORDER
2. ROLL CALL
3. FLAG SALUTE
4. CITY COUNCIL GOAL SETTING WORKSHOP
RECOMMENDED ACTION: Conduct a facilitated City Council Goal Setting Workshop focused on priorities for the Fiscal Year (FY) 2025-27 Budget.
Discussion of matters of general interest for the City may include the following topics:
• Introduction and Overview
• Financial Forecasts and Budget Outlook
• Update on Major Infrastructure Investment underway
• Community Survey Results Summary
• Priority Projects and Actions
Facilitated by Nancy Hetrick, Raftelis
5. ADJOURNMENT
All staff reports or other written documentation, including any supplemental material distributed to a majority of the City Council within 24 hours of a special meeting, relating to each item of business on the agenda are available for public inspection during regular business hours in the City Clerk’s office, 300 E. Branch Street, Arroyo Grande. If requested, the agenda shall be made available in appropriate alternative formats to persons with a disability, as required by the Americans with Disabilities Act. To make a request for disability-related modification or accommodation, contact the Legislative and Information Services Department at 805-473-5400 as soon as possible and at least 48 hours prior to the meeting date.
This agenda was prepared and posted pursuant to Government Code Section 54954.2 Agenda reports can be accessed and downloaded from the City’s website at www.arroyogrande.org If you would like to subscribe to receive email or text message notifications when agendas are posted, you can sign up online through the “Notify Me” feature.
MEMORANDUM
TO: City Council
FROM: Nicole Valentine, Director of Administrative Services SUBJECT: Five-Year Financial Forecast
DATE: January 28, 2025
RECOMMENDATION:
Review and discuss the Five-Year Financial Forecast (“Forecast”).
IMPACT ON FINANCIAL AND PERSONNEL RESOURCES:
The forecast provides an analysis of the financial impact of revenue and expenditure changes in the current fiscal year and the following five years. Preparation of the forecast required several hours of staff time, with additional review and input provided by the City’s financial consultant.
BACKGROUND:
As shown in Figure 1, Step 1 in the Biennial Budget Process, the focus is on providing information to the City Council and community on the state of the City’s finances. This background sets the stage for goal-setting and budget development that will occur over the next several months. Accordingly, this report provides an updated Five-Year Forecast of General Fund operations, along with information on revenues and expenditures from the recently approved local sales tax, Measure E-24, as well as Measure O-06. Here are some key points regarding this Forecast:
Forecast is not a budget proposal, but rather a planning tool to facilitate a discussion for the creation of the upcoming FY 2025-27 Biennial Budget; Focuses on the General Fund and Measures E & O;
Assumes no enhancements to current service levels or increases in staffing (Status Quo); and
Contains estimates based on the best information available at the time it is prepared.
ATTACHMENT 1
City Council
Five-Year Financial Forecast
January 28, 2025
Figure 1 – Biennial Budget Process
On June 11, 2024, City staff presented a 2024-25 Mid-Cycle Budget Update1 to the City Council that showed a General Fund that was balanced overall with the use of an excess available fund balance. The largest use of the fund balance in the FY 2024-25 budget was for a $2.36 million transfer to the Capital Improvement Program2 for pavement
improvement. Repairing and maintaining the City’s 73 miles of roads was one of three top priorities3 identified by Arroyo Grande residents in 2024, and City staff believes that community priority contributed to the passage of Measure E-24 in November of 2024.
Given this high priority identified by the community, in addition to the one-time General Fund dollars included in the FY 2024-25 budget, this Forecast assumes all $6+ million received annually from Measure E will be allocated to road infrastructure improvements.
Note that this is not a proposal from City staff at this time. The City Manager will make a recommendation on the allocation of this funding to the City Council as part of the upcoming budget process. However, as a starting point for purposes of forecasting the City’s future finances, staff has assumed Measure E would be used to fund the large infrastructure needs. It is also important to note that while this allocation would give a 1 https://pub-arroyogrande.escribemeetings.com/filestream.ashx?DocumentId=11090 2 https://pub-arroyogrande.escribemeetings.com/filestream.ashx?DocumentId=10770 3 https://pub-arroyogrande.escribemeetings.com/filestream.ashx?DocumentId=10915
City Council
Five-Year Financial Forecast
January 28, 2025
significant boost to the City’s road improvement program, it will not directly pay for City services paid for by the General Fund in an ongoing manner.
ANALYSIS OF ISSUES:
As previously prefaced, below are some highlights of this Forecast:
Projected beginning fund balance of $7.7 million for FY 2025-26; o $1.6 million higher beginning fund balance than the FY 2024-25 mid-cycle budget update, primarily due to:
FY 2023-24:
o Revenues higher than estimate by $0.6 million;
o Expenditures lower than estimate by $0.5 million;
FY 2024-25:
o Revenues expected to be $0.5 million higher;
General Fund shortfall projected to an average of $1.4 million annually throughout Forecast;
o Note: this shortfall does not include any impact from Measure E since that new funding is allocated to only road improvement projects in this Forecast; Fund balance drops below 15% minimum target by FY 2027-28 and to only 2% by FY 2029-30 as shown in Table 1.
Table 1: Status Quo Financial Forecast
For discussion and information only, staff made two adjustments to the above Forecast scenario to give an example of how a portion of the $1.4 million annual shortfall could be addressed. Currently, the General Fund pays for 75% of the cost of the Five Cities Fire Authority (FCFA) contract and the Measure O Local Sales Tax Fund pays for 25%. In addition, Measure O currently pays for one police officer position. The following table includes two changes to these two safety budget items:
1. Change percentage split of FCFA contract from 75% General Fund/25% Measure O to 65%/35%
City Council
Five-Year Financial Forecast
January 28, 2025
2. Add funding for one additional police officer position to Measure O, for a total of two positions.
Table 2: Scenario - Increased Measure O Contributions to Public Safety With the above two budgetary shifts in public safety funding, the average General Fund shortfall for the Forecast period (FY 2025-26 through FY 2029-30) drops from $1.4 million annually to approximately $740,000 annually over the same period. This is shown in Table 2 by a larger fund balance at the end of the five-year period.
Again, this is not a budget proposal but is presented to the City Council for the purpose of discussion. Of course, shifting even more public safety costs from the General Fund to Measure O would change the budget picture further. For example, a 50/50 split of FCFA costs between the General Fund and the Measure O Fund would result in an almost $700,000 annual savings to the General Fund, bringing the average shortfall to almost zero. This would limit what the Measure O Fund could spend on infrastructure improvements. However, with the funding from the new Measure E, most of the road improvement costs would be budgeted using that source.
Analysis of Major Revenues and Expenditures in Forecast After an expected modest increase of 0.4% projected for FY 2024-25, revenues are projected to increase 3.2% annually thereafter. Chart 1 shows major revenue projections in the Forecast.
City Council
Five-Year Financial Forecast
January 28, 2025
Chart 1 – Major Revenue Projections
Property Tax
40% of General Fund revenue.
Key drivers: annual increase assessed by the County of up to 2%, home sales, and home prices.
County Auditor-Controller’s office provided property tax estimates for FY 2024-25 and FY 2025-26.
Forecast includes growth of 4.25% annually.
Sales Tax
24% of General Fund revenue.
Key drivers: consumer confidence, unemployment, consumer spending, business retention and development.
City’s sales tax consultant provided estimates of 1.5% in FY 2024-25 and 2.8% in FY 2025-26.
Sales tax is projected to grow approximately 3% per year for remaining years of the Forecast.
Transient Occupancy Tax (TOT)
7% of General Fund revenue.
Key drivers: lodging capacity, room rates, and occupancy rates. TOT is forecasted to grow 3% annually throughout this Five-Year Forecast. Forecast does not factor in any increase in room capacity.
Expenditures
Chart 2 shows the major expenditure categories and projected costs throughout the Forecast period. This assumes the two changes in public safety funding discussed above.
City Council
Five-Year Financial Forecast
January 28, 2025
Since cities are largely service agencies that provide general government services, personnel-related costs represent the majority of expenditures.
Chart 2 – Major Expenditure Projections
Under the scenario noted above, that funding for public safety be allocated from the General Fund to Measure O, an 8.7% decrease in General Fund expenditures would be expected in FY 2025-26. This is primarily due to:
• Moving some public safety costs (greater FCFA funding and one additional police officer funding) to the Measure O Fund;
• One-time expenditures in FY 2024-25 budget for pavement maintenance that are not present in the FY 2025-26 Forecast;
• For the remainder of the Forecast period, expenditures are projected to increase
3.7% on average annually thereafter.
Salary and payroll taxes are forecasted to increase 4.3% in FY 2024-25 and 3.5% in FY 2025-26. The increase in FY 2025-26 would be 1.1% under the scenario that moved the cost of one additional police officer to Measure O Local Sales Tax funding. For the remainder of the Forecast salaries and taxes are projected to increase 3.5% per year.
The City’s unfunded accrued liability (UAL) is expected to increase 9% annually on average according to projections from CalPERS. Employee benefits are projected to increase on average 4.6% over the Forecast period. Health insurance costs alone account for 85% of all employee benefit costs. Workers’ compensation costs are forecasted to increase 8% per year over the Forecast period.
City Council
Five-Year Financial Forecast
January 28, 2025
After an expected 7.2% decrease in contractual and professional service costs in FY 2025-26, due to the completion of the General Plan update, these costs are expected to increase 2% per year for the remainder of the Forecast. During the period of the Forecast, the cost of services provided by Five Cities Fire Authority is projected to average $4.5 million annually.
General Fund, Measure O, and Measure E Consolidated Five-Year Forecast Sales tax revenue received from Measures O and E are deposited into separate funds in the City’s financial accounting system. This enhances transparency and allows for more efficient reporting on how these voter-approved tax sources are being spent. However, since sales tax funding from these two measures are designed to be used for programs that are also funded by the General Fund (e.g. public safety and street and road improvements), their budgets should be looked at as a whole when allocation decisions are being made. Table 3 below is a consolidation of all three funds (General, Measure O, Measure E) so the budgetary connection between the funds can be seen more clearly.
The numbers in Table 3 for the General Fund are the same as shown earlier in Table 2.
This can be seen most clearly in the FCFA expenditure line when the cost increases from $995,000 in FY 2024-25 to $1,487,000 in FY 2025-26.
The impact of allocating all Measure E funding to pavement improvement can be seen most clearly in the ending fund balance line for that fund, that shows a zero balance for the entire five-year forecast. Note that this assumption (like the assumption moving public safety costs to Measure O) has not been approved by the City Council. It is only a starting point for discussion of the General Fund’s shortfall throughout the Forecast.
City Council
Five-Year Financial Forecast
January 28, 2025
Table 3 – General Fund, Measure O, and Measure E
Consolidated Five-Year Forecast
City Council
Five-Year Financial Forecast
January 28, 2025
ALTERNATIVES:
The following alternatives are provided for the Council’s consideration:
1. Review and discuss the Five-Year Financial Forecast “Forecast” and determine that the Five-Year Financial Forecast is not a project subject to the California Environmental Quality Act (“CEQA”) because it has no potential to result in either a direct, or reasonably foreseeable indirect, physical change in the environment. (State CEQA Guidelines, §§ 15060, subd. (c)(2)-(3), 15378); or
2. Provide other direction to staff.
ADVANTAGES:
Receiving and discussing the Five-Year Financial Forecast Report will assist in informed discussions between the community, City Council, and staff about budgetary priorities as the City develops the upcoming FY 2023-25 Biennial Budget. In future budget cycles, this Report will be provided prior to the City Council’s goal-setting process.
DISADVANTAGES:
There are no disadvantages in relation to the recommended action.
ENVIRONMENTAL REVIEW:
No environmental review is required for this item. Review and discussion of the Five-Year Financial Forecast is not a project subject to the California Environmental Quality Act (“CEQA”) because it has no potential to result in either a direct, or reasonably foreseeable indirect, physical change in the environment. (State CEQA Guidelines, §§ 15060, subd. (c)(2)-(3), 15378.)
PUBLIC NOTIFICATION AND COMMENTS:
The Agenda was posted at City Hall and on the City’s website in accordance with Government Code Section 54954.2.
4 question survey Survey deployed
December 9 - January 15
259 total respondents
Promoted at local businesses
(Village/ Grand Ave)
Combination of multiple
choice and short response
Promoted via several social
communication channels
2025 ARROYO GRANDE COMMUNITY PRIORITIES
SURVEY RESULTS
Attachment 2
THEMES FROM MAINTAIN AND REPAIR STREETS AND SIDEWALKS CATEGORY
STRIPING DO FULL DEPTH REPAIRS
INSTEAD OF OVERLAYS FIX POTHOLES
REPAIR HALCYON ROAD FIX BROKEN SIDEWALKS
CLOSE BRISCO RAMP
THEMES FROM ECONOMIC VITALITY/THRIVING ECONOMY CATEGORY
STREAMLINE
ENTITLEMENT/DEVELOPMENT PROCESS
FILL EMPTY STOREFRONTS INCREASE TOT REVENUE
OPPORTUNITY
BUILD THE VILLAGE INTO A
TOURISM SPOT
WELCOME NEW BUSINESSES
THEMES FROM INCREASE COMMUNICATION/PUBLIC ENGAGEMENT CATEGORY
COMMUNICATE WITH RESIDENTS
ABOUT LARGE UPCOMING PROJECTS
PRIORITIZE PROJECTS BASED ON
RESIDENT FEEDBACK
INCREASE ENGAGEMENT FROM YOUNG
PROFESSIONALS AND FAMILIES
STREET MAINTENANCE
SUPPORT LOCAL BUSINESSES