CITY COUNCIL STAFF REPORT
May 6, 2025 {{section.number}}d
MULTI-YEAR GENERAL FUND FINANCIAL FORECAST THROUGH FISCAL YEAR 2029-30 RECOMMENDATION:
Receive Multi-Year General Fund Financial Forecast through Fiscal Year 2029-30 and provide direction as appropriate.
BACKGROUND:
As part of the FY 2025-26 Budget preparation, staff develop a multi-year financial projection of the General Fund, which is presented in advance of the Proposed Budget release. This forecast identifies financial trends and risks, estimates the level at which capital expenditures/investments can be made, and identifies future commitments and demands. The financial projections also provide an opportunity to discuss key variables that impact revenue and expenditures.
ANALYSIS:
Long-Range General Fund Financial Forecast
Staff is forecasting the General Fund revenues, expenditures, transfers and ending balances through FY 2029-30 using historical data and projected trends. Recent trends in property taxes, sales taxes, transient occupancy taxes, and other revenues have been recognized. The discussion below includes the factors that influenced projections for the upcoming fiscal years.
The short-term forecast incorporates an added layer of caution based on the current macroeconomic uncertainties and resulting volatilities. Escalating trade tensions have highlighted the first quarter of 2025 amid newly presented tariffs. The immediate impact included increased costs for businesses reliant on imported materials, notably in sectors like energy and manufacturing. Real GDP for Q1 2025 reduced 0.3%, indicating a slowdown in economic momentum. The Federal Reserve also revised its GDP growth projections for 2025 down to 1.7%.
The Consumer Price Index (CPI) continued to show a modest decrease from 2.8% in February to
2.4% in March. However, the implementation of new tariffs, raising the average U.S. tariff rate to over 20%, the highest since 1909, has presented the specter of inflationary pressures. Consumer behaviors also began to shift in anticipation of rising prices, with a trend of significant purchases made before price increases materialize.
The investment markets experienced early gains in the year, followed by sharp declines. Overall, the investment landscape can be characterized by heightened volatility and investor caution, reflecting concerns over trade policies, inflation, and economic growth prospects.
While the unemployment rate has shown small increases in recent months, it remains resilient, hovering around 4%, with a wage growth rate of 3.8% for the 12 months ending December 2024.
In the local economy, the exact extent of the tariff and related impacts will likely take some time to unfold. On the revenue side, there are clear concerns about impacts on tourism if the investment market underperforms, and volatility will likely have a greater effect on higher net worth individuals and businesses with group bookings. The impacts of cross-border water pollution will also need to be continuously monitored, with potential effects on the local economy.
On the positive side, the major renovations at the Hotel Del Coronado, which placed several hundred rooms out of service for an extended period are approaching completion, with additional rooms to be added to the total room count. Accordingly, the Transient Occupancy Tax (TOT) and Sales & Use Tax revenues are projected for modest gains in FY 2025-26 and beyond.
The City’s Property Tax revenues are projected to be mostly unaffected as FY 2025-26 estimates are based on sales and development in previous years, impacting assessed valuation growth.
The forecast tool provided by the City’s third-party consultants includes a modest 2% CPI granted per Proposition 13 transactions and other factors. The current economic events and policies may impact FY 2026-27 and beyond, but more time is needed for the wide range of possible outcomes to play out. Nevertheless, the average increases for the future years represent a lower rate than we have seen in prior years’ estimates and actuals.
On the expenditure side, the City is anticipating general price hikes in tariff-induced materials, supplies, and equipment, although of an undetermined scale. Overall, the City’s FY 2025-26 projections incorporate these factors in major revenue sources and operating expenditures, resulting in more conservative forecasts and easing to historical norms towards FY 2029-30.
General Fund Revenue Projections
Total Revenues are projected to increase from $75.6 million in FY 2024-25 to $96.4 million in FY 2029-30. This average annual increase is approximately 5.0% through FY 2029-30. The revenue forecast for FY 2025-26 assumes continuing growth in property taxes with Transient Occupancy Tax (TOT) and Sales & Uses Tax returning to a growth mode, partially contributed by the completion of the major renovations at the Hotel Del Coronado.
Property tax revenue is projected to increase from the current level for FY 2024-25 of $43.6 million to $55.1 million in FY 2029-30. A third-party consultant provides this projection and represents an average annual increase of 5.3% per year for five years, a reduction from the prior year’s
ACTUAL BUDGETED
Revenue from Taxes: 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Property (Current) 42,348,120 $ 43,604,820 $ 46,294,556 $ 48,382,440 $ 50,535,459 $ 52,784,287 $ 55,138,466 Franchise Fees 1,719,653 1,360,000 1,350,000 1,377,000 1,418,310 1,460,859 1,504,685 Sales & Use 4,875,464 4,922,876 5,215,320 5,319,626 5,479,215 5,643,592 5,812,899 Public Safety Sales Tax (Prop. 172) 487,606 316,000 400,000 408,000 420,240 432,847 445,833 Transient Occupancy 21,358,089 18,500,000 22,000,000 23,500,000 24,205,000 24,931,150 25,679,085 Sub-totalRevenue from Taxes 70,788,930 68,703,696 75,259,876 78,987,067 82,058,224 85,252,735 88,580,968 Revenue from Other Sources:
Licenses, Fines, Fees & Permits 329,907 346,500 346,025 352,946 363,534 374,440 385,673 Charges for Services 1,721,333 1,614,555 1,527,568 1,558,119 1,604,863 1,653,009 1,702,599 Intergovernmental & Other 544,204 492,340 418,240 1,000,000 1,500,000 2,000,000 2,000,000 Reimbursements 1,898,232 1,330,000 1,545,000 1,591,350 1,639,091 1,688,263 1,738,911 Use of Money & Property 4,318,830 3,067,758 3,104,652 2,750,000 2,500,000 2,250,000 2,000,000 Transfers In - - - - - - -
Sub-totalfrom Other Sources 8,812,507 6,851,153 6,941,485 7,252,415 7,607,487 7,965,712 7,827,183 Grand Total General Fund Revenue $ 79,601,437 $ 75,554,849 $ 82,201,361 $ 86,239,482 $ 89,665,712 $ 93,218,447 $ 96,408,151
GENERAL FUND REVENUE
PROJECTED
projections of 6.4%. The factors in these projections include Consumer Price Index (CPI) adjustments, estimated transfers of ownership, and new construction among others.
After fully recovering and exceeding the pre-pandemic levels, TOT experienced a temporary downturn, primarily due to the major hotel renovation. The renovation is nearing completion, with additional revenue rooms currently being placed in service in phases. Accordingly, staff projects a continued trend towards the pre-renovation level of TOT, at $22.0 million in FY 2025-26. The staff also agrees with the third-party consultant’s projection on sales & use taxes, which shows a reciprocal movement with the projected TOT.
Collectively, property, sales & use, and TOT revenue sources represent about 90% (average over the five projected years) of General Fund Revenues.
Notable revenues from Other Sources include Use of Money & Properties, which continues to anticipate additional rate cuts during FY 2025-26. However, as the principal investment balance has grown over the past couple of years, the forecast reflects a similar level of investment revenue for FY 2025-26, before tapering down in subsequent years. The intergovernmental category is expected to remain level after fully receiving non-recurring State and Local Fiscal Recovery Fund (SLFRF) grants and COVID-19 FEMA reimbursements. The remaining revenue categories mostly project stable CPI-based adjustments through FY 2029-30. The following table presents the growth assumptions related to projected revenues in the next five years. 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Property Taxes 6.7% 3.0% 6.2% 4.5% 4.5% 4.5% 4.5%
Franchise Fees 31.8% -20.9% -0.7% 2.0% 3.0% 3.0% 3.0%
Sales & Use Taxes -2.8% 1.0% 5.9% 2.0% 3.0% 3.0% 3.0%
Public Safety $0.5 Sales Tax (Prop. 172) -6.6% -35.2% 26.6% 2.0% 3.0% 3.0% 3.0% Transient Occupancy Taxes -6.1% -13.4% 18.9% 6.8% 3.0% 3.0% 3.0% Licenses, Fines, Fees & Permits -24.3% 5.0% -0.1% 2.0% 3.0% 3.0% 3.0% Charges for Services 6.3% -6.2% -5.4% 2.0% 3.0% 3.0% 3.0% Intergovernmental & Other -84.9% -9.5% -15.1% 139.1% 50.0% 33.3% 0.0% Reimbursements 69.2% -29.9% 16.2% 3.0% 3.0% 3.0% 3.0%
Use of Money & Property 48.2% -29.0% 1.2% -11.4% -9.1% -10.0% -11.1% Transfers In -100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total General Fund Revenues -0.4% -5.1% 8.8% 4.9% 4.0% 4.0% 3.4%
GENERAL FUND REVENUE GROWTH ASSUMPTIONS
General Fund Expenditure Projections
Operating expenditures for the General Fund are projected to increase by an annual average of
3.9% ($63.7 million in FY 2024-25 to $76.0 million in FY 2029-30) over the next five years.
Operating Expenditures are divided into three main categories: Personnel, Services/Supplies/Property, and Transfers from the General Fund to other Funds.
Personnel Expenditures: These costs represent the most significant cost element in the General Fund (about 57.3% of operating costs). Personnel costs are expected to increase by $9.8 million to $52.9 million (an average increase of 4.5%) through FY 2029-30. These projections mostly incorporate compensation estimates for both the represented and the self-represented groups, as well as the cafeteria plan allotment (health benefits) and pension benefits.
Pension costs have been one of the primary drivers of increased costs in the personnel category.
The discount rate is integral to the actuarial assumptions that calculate the required City contribution for unfunded accrued liability. The discount rate for FY 2025-26 will remain at 6.8%.
Any changes to future discount rates would significantly impact the City's pension and corresponding personnel costs and will be closely monitored.
Supplies, Services, and Community Grants Expenditures: Forecasts are primarily driven by CPI, and after hitting a 40-year high of 9.1% in June 2022, it has steadily decreased to 2.4% as of March 2025. Due to the possibility of inflationary pressure from the U.S. tariff, FY 2026-27 forecasts a higher 4% multiplier, gradually tapering to 3% in the subsequent years. As shown below, the Community Grants are projected based on the percentage of the General Fund revenue as established under Council Policy #28.
ACTUAL BUDGETED
GF Expenditures 2023-24 2024-25 2025-26 2026-27 2028-29 2028-29 2029-30 Personnel $ 37,945,235 $ 43,127,697 $ 46,092,588 $ 47,778,502 $ 49,211,511 $ 51,022,063 $ 52,903,643 Services & Supplies 15,601,573 19,477,828 19,368,223 20,142,952 20,747,240 21,369,658 22,010,747 Community Grants % of GF Revenue
(Council Policy #28) 1,016,025 1,078,000 1,151,000 1,164,000 1,069,000 1,121,000 1,119,000 Total Services & Supplies $ 54,562,832 $ 63,683,525 $ 66,611,811 $ 69,085,453 $ 71,027,751 $ 73,512,721 $ 76,033,390
PROJECTED
General Fund Transfers Projections
Transfer Expenditures Accounts: As shown in the table above, this category accounts for transfers to the Sub-funds of the General Fund and other Non-General Funds. The use of separate self-balancing funds for functions such as Recreation, Community Development, Insurance, Solid Waste/Recycling, IT Equipment Replacement, and Vehicle & Equipment Replacement necessitates the use of transfer accounts (in the General Fund) to account for the allocation of General Fund resources to these activities.
Insurance Fund: The insurance and claims-related expenses are one area where the City continues to experience sustained increases. The City is self-insured to certain retention limits, and the excess insurance covers losses exceeding the retention to their maximum coverage limits.
Storm Drain Enterprise Fund: Staff plan to conduct a Storm Drain Fee Study for a potential future rate adjustment, which projects to decrease the dependence upon transfers from the General Fund over the next five years. The table shows the planned transfers over the next five years.
Capital Projects and Facilities Replacement: Following the budget principles and strategies, the available fund balance will be applied toward the City's General Capital Improvement Program (CIP) after application toward Operating Expenditures. The projections reflect the 5-year CIP schedule and the resulting funding estimates based on the projects’ timing and scope.
The City Council established a transfer program for the Major Capital Facilities Replacement Fund (Fund 436) in FY 2015-16. The contribution formula provides for the increase in the replacement cost for inflation and would approximate $1.4 million for a recommended annual contribution.
However, given the current economic uncertainties, the forecast includes a reduced contribution of $500,000 for FY 2025-26, with a reevaluation of additional transfer to Fund 436 at the mid-year point. During FY 2023-24, the City experienced a higher surplus than was budgeted, and the Council approved a one-time contribution of $10 million, which helped to replenish the fund balance to align with the policy. The fund's estimated balance is $34.7 million on June 30, 2024.
Pension Stabilization: In 2015, the City established an irrevocable trust account to contribute savings from the advance payments made to CalPERS, reducing the City's annual employer contributions. Assets placed in trust allowed for greater diversity in investment allocations designed to provide higher returns over time based on the risk tolerance level set by the City.
The City previously made a $5.0 million prepayment to CalPERS towards unfunded pension liability, and the estimated annual saving of $450,000 in required contributions has been budgeted for contribution to the pension stabilization fund, along with any additional General Fund contributions. The forecast reflects a continued deferral of additional contributions beyond $450,000 for FY 2025-26, before recommencing in FY 2026-27. Based on CalPERS’s most recently published report, the City’s Pension Plans collectively have a funded status of 73.4% as of June 30, 2023. This ratio remained consistent with the prior year, and also closely aligns with the consolidated CalPERS funded ratio. This does not include the pension stabilization irrevocable trust account balance of $17.2 million as of June 30, 2024, which would increase the funded status to approximately 79.4%.
General Fund Sources and Uses of Funds Projections
Sources and Uses of Funds: The table above shows the summary results of Revenues (Sources of Funds), Expenditures (Uses of Funds), and Transfers for the five-year period from FY 2024-25 through FY 2029-30. The overall trend represents a continued revenue and expenditure growth toward a historically normal range, maintaining a balanced budget for a modest but steady growth of the General Fund balance through FY 2029-30.
Restricted General Fund Balance: The City has adopted a policy that provides a Minimum Reserve of six months of operating expenditures to provide adequate resources in the event of an economic downturn or other events that result in a limited or significant reduction in current revenues. The City Council has also set aside two other reserves for future reductions in Property Tax Revenues from Mills Act (historic designation) properties. The amount set aside for this purpose is $500,000. The City Council also provided a reserve of $4 million to be used for future Capital Projects. Collectively, the amount set aside for this factor ranges from $41.5 million in FY 2024-25 to $51.0 million in FY 2029-30. The following table portrays these reserves and the amount of the total Fund Balance that exceeds the reserve requirements, as explained. 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30
Ending GF Balance 83,611,267 84,540,817 85,444,845 86,032,806 86,588,532 86,813,293 Minimum GF Reserve 41,451,800 44,635,900 46,167,700 47,638,900 49,231,400 50,991,700 Putting the Results Together: As a result of positive post-pandemic financial results, the City is well situated to navigate the current uncertain economic environment. The General Fund balance over the next five years is forecasted to remain stable, with the fund balance as of FY 2029-30 projected to be at $86.6 million. To meet or outperform this forecast, the staff will continue to apply the City’s budgetary principles and strategies with goals to maintain the current service levels with a balanced budget.
FISCAL IMPACT:
No fiscal impact is associated with receiving a report on the financial projections. The revenue and expenditure projections are intended for a high-level review. This multi-year projection presentation provides a backdrop and context for the upcoming Fiscal Year 2025-26 Budget Hearing. Several assumptions are used in these projections. Two guiding principles which are employed throughout these estimates are as follows:
1) Operating revenues and expenditures are shown using historical data and projected future trends. Future trends are projected based on current financial conditions and anticipated changes.
2) Departmental operations are maintained at the current level, and current revenues are matched with current operational needs before being allocated for other purposes, i.e., new Capital Improvement Program (CIP) projects or Facilities Replacement projects (legacy facilities).
ALTERNATIVE:
None.
CALIFORNIA ENVIRONMENTAL QUALITY ACT:
Not Applicable.
PUBLIC NOTICE:
No notice required.
ATTACHMENTS:
None.
Submitted By: Administrative Services Department / John Kim