City Council Study Session
March 11, 2025
FY 2024-2025 MID-YEAR BUDGET
PRESENTATION
2 OVERVIEW
• FY 2024-25 General Fund Adopted Budget
• FY 2024-25 Amended General Fund Budget Estimate
• Recommended FY 2024-2025 Budget Modifications
• FY 2024-25 Capital Improvement Program (CIP) Update
• Federal Grant Funding Update
• FY 2025-26 Budget Calendar
FISCAL YEAR 2024-2025
BUDGET OVERVIEW
4 • City Council approved the All Funds FY 2024-25 budget of $239.8 million in June 2024, with a General Fund Budget of $189.9 million; • Structurally balanced budget with no use of General Fund Reserves or ARPA Funds;
• Dedicated 53% of General Fund to public safety departments; • Fully funded Capital Assets Needs (CAN) allocation of $6.9 million; • Fully funded Year 5 of the Information Technology Strategic Plan (ITSP); • Prefunded CalPERS Unfunded Accrued Liability (UAL), saving the General Fund approximately $900,000; and
• General Fund has maintained a strong credit rating of AAA.
CURRENT YEAR FY 2024-25 HIGHLIGHTS
5 Certain key revenues are received at different times throughout the fiscal year
Sales Tax represents 43% of General Fund (GF) revenues and is primarily received two months in arrears;
Property Tax represents 32% of GF revenue and is primarily received in December/January and April/May;
Transient Occupancy Tax (TOT) represents 5% of total GF Revenues and is received one month in arrears; and
Cannabis Gross Receipts Tax represents 2% of total budgeted GF Revenues and is received one month in arrears.
FY 2024-25 GENERAL FUND REVENUES
6 • Best Practice is to continuously monitor revenues and manage expenditures to ensure a balanced budget on a daily, weekly, and monthly basis;
• Swift and early action is key to ensure a structurally balanced budget at the end of the fiscal year and beyond;
• Revenue estimates for any given fiscal year are prepared 15 to 18 months in advance (for example, the revenue estimates for Fiscal Year 2025-26 for the General Fund estimated to be received by June 30, 2026 are being finalized now); and
• Key is to monitor revenues and expenditures throughout the year.
GENERAL FUND BUDGET DEVELOPMENT
AND MONITORING PROCESS
ECONOMIC OVERVIEW
8 ECONOMIC OVERVIEW
• In late 2023/early 2024, economic data was reflecting strong consumer spending, high levels of consumer confidence, solid GDP and a resilient housing market, despite high inflation and high interest rates as pandemic stimulus still fueled much of the economy.
• Anticipation of rate cuts by the Federal Reserve helped to influence consumer and business outlooks in early 2024
• Sales Tax was beginning to show some early signs of a slowdown, but many industry forecasts still anticipated year over year growth based on a resilient consumer.
• Costa Mesa staff conservatively budgeted a reduction of $1.1M in Fiscal Year 2024/25 from the Fiscal Year 2023/2024 Adopted Budget
9 ECONOMIC OVERVIEW
Currently, Macro Economic negativity create concerns for business outlooks (in addition to the consumer), and potentially impact City revenues
Macro Economic Challenges:
• Labor Market Strains Potential impacts of immigration policies especially in certain labor segments;
Increased cost of labor
• High Interest Rates Impacts capital expenditures, business expansion, new business activity
• Confidence Delayed business growth, reluctance to
expand workforce/preemptive downsizing
• Inflation Inability to pass along increased cost of goods & labor to consumers
• Federal Policy Shifts Tariff & Immigration policies could impact certain businesses disproportionally (e.g.,
autos, service sector)
10 Economic Overview
Taken together, headwinds to consumers and businesses present potential slowdowns to City revenues
• Particularly in Sales Tax, the City’s largest revenue category Sales Tax is a higher proportion of total revenues in Costa Mesa (many other cities have a higher reliance on Property Taxes)
• As a lagging indicator, impacts to Property Taxes can be delayed (versus a coincident indicator like Sales Tax)
National and State level economic data may not necessarily reflect the local business impacts due to variances in business composition, consumer and labor demographics
• Costa Mesa has higher percentage of businesses in the Consumer Goods and Auto sectors
• California businesses rely heavily on immigration for labor in the service sector, farming, and construction
11 • Sales Tax projections are trailing by 3.4% for a year-end estimate of $75.2M; a reduction of $6.4M from the Adopted Budget;
Slowdowns in General Consumer Goods and Auto sectors primarily • Property Tax is essentially inline with the Adopted Budget of $60.5M reflecting a projected increase of 7.1% from the prior fiscal year; • Transient Occupancy Tax (Hotel Tax) coming in slightly under at $9.7M, approximately $0.4M under the Adopted Budget; and • Total Cannabis Tax is projected to have a slight increase of $0.1M for a year-end estimate of $3.6M.
FY 2024-25 GENERAL FUND REVENUES
12 FY 2024-25
GENERAL FUND OVERVIEW
(IN MILLIONS)
Category FY 2023-24
Actuals
FY 2024-25
Adopted
FY 2024-25
Projected
Diff FY 2024-25
Adopted vs
Projected %
Property Taxes $56.5M $60.5M $60.4M $(0.1)M -0.2%
Sales Tax 77.8 81.6 75.2 (6.4) -7.8%
TOT (hotel tax) 10.2 10.1 9.7 (0.4) -4.0%
Cannabis Tax 2.9 3.5 3.6 0.1 2.9%
Other Revenues 37.1 34.2 34.6 0.4 1.2%
Total Revenues 184.5 189.9 183.5 (6.4) -3.4%
Total Expenditures 183.2 189.9 187.1 (2.8) -1.5%
Net Gain/(Loss) $1.3M - $(3.6M) $(3.6M)
13 FY 2024-25
GENERAL FUND EXPENDITURES
(IN MILLIONS)
Category FY 2024-25
Adopted
FY 2024-25
Projected
Diff FY 2024-25
AD vs Proj %
Total Revenues $189.9M $183.5M $(6.4)M -3.4%
Salaries & Benefits $133.1M $132.9M $(1.8M) -0.2%
Operating 47.1 44.5 (1.0M) -5.5%
Subtotal $180.2M $177.4M $(2.8M) -1.6%
Transfers Out:
Capital Improvement 6.8 6.8 - -
IT Replacement 2.9 2.9 - -
Total Expenditures $189.9M $187.1M $(2.8M) -1.5%
Net Gain/(Loss) - $(3.6M) $(3.6M)
14 • Ended last fiscal year with a $1.3 million surplus; • Strategically utilized ARPA to offset fiscal impact of the pandemic, including small business grants, rental assistance, project Room Key; • Provided an ongoing revenue stream for the Equipment Replacement Fund; • Financed public safety apparatus taking advantage of the low interest environment for both Police and Fire fleets;
• Dedicated 1.5 percent to the I.T. Replacement Fund to address replacement of aging technology software and equipment to fully fund the 5-Year Plan; • Fully funded the CAN (Capital Asset Needs) projects of 5% of General Fund revenues;
• Exceeded the City Council Reserve Fund Balance Policy of $55 million by $5.4 million over the past four years; and
• Current reserves of $60.4 million are at 32.8% of General Fund revenues exceed the GFOA best practice of having a minimum of 16% to 17%.
ACHIEVEMENTS
Recommended Solutions
and Options
16 • Realign General Fund street sweeping costs to the Gas Tax Fund • Defer Capital Improvement Projects in Capital Improvement Fund • Soft Hiring Freeze effective April 1, 2025
No impact to public safety personnel
RECOMMENDED BUDGET MODIFICATIONS
Fund Description Amount
Gas Tax Realign street sweeping $0.7M
Capital Improvement Defer Capital Projects 2.9M
Total $3.6M
CIP Temporary Deferral
Recommendations
18 CIP PROJECT TEMPORARY DEFERRALS
(Option A1)
Project Name Budget
Funding
Deferrals Remaining
Savings from Completed Projects 300,000 300,000 -
Butterfly Gardens 100,000 100,000 -
Citywide Community Choice Energy Study 150,000 150,000 - City Hall 5th Floor Air Handler Replacement 140,000 140,000 - City Hall Breezeway Roof 245,000 245,000 -
City Hall Cast Iron Drain Re-pipe 328,000 254,019 73,981 City Hall Heater(s) Replacement 350,000 350,000 -
Citywide Street Improvements 5,713,297 250,000 5,463,297 Parkway Maintenance Program Citywide 275,000 233,757 41,243 Westside Restoration Project 1,215,000 450,000 765,000
Costa Mesa Country Club Modernization 400,000 400,000 - TOTAL 9,216,297 2,872,776 6,343,521
19 CIP PROJECTS TEMPORARY DEFERRALS
(Option A2: All Projects Yet to Start General Fund Supported ) Project Name Balance
Butterfly Gardens 100,000
City Hall 5th Floor Air Handler Replacement 140,000
City Hall Cast Iron Drain Repipe 254,019
City Hall Heater(s) Replacement 350,000
Citywide Community Choice Energy Study 150,000
Costa Mesa Country Club Modernization 400,000
NHCC- AV System Repair & Upgrade 55,000
Police Dept - Locker Rooms Remodel 400,000
Police Dept - Weather Proofing 350,000
Senior Center- HVAC Replacement 725,000
Senior Center Improvements 250,000
Sewer Line Improvement Project 260,000
Westside Police Sub-Station Improvements 850,000
Capital Projects Pending 4,284,019
20 • The General Fund reserves policy established the Economic Reserves Category to address possible economic instability resulting in a decline in sales tax, property tax, and transient occupancy tax (hotel tax).
• Utilize Economic Reserves Category to address all or a portion of the $3.6 million projected revenue shortfall.
• The resulting General Fund balance would still be $1.8 million above the City Council minimum of $55.0 million.
Use of General Fund Reserves – Option B
21 FUND BALANCE IN GENERAL FUND
(IN THOUSANDS) – OPTION B
Fund Balance Category FY 21/22
Audited
FY 22/23
Audited
FY 23/24
Audited
FY 24/25
Projected
Committed
Declared Disaster $14,125 $14,125 $14,125 $14,125
Self Insurance 2,000 2,000 2,000 2,000
Economic Reserves 9,000 9,000 9,000 5,400
Assigned
Compensated Absences 5,584 6,209 5,982 5,982
Police Retirement 1% Supplemental Plan 1,885 1,737 1,572 1,572 Workers’ Compensation 1,000 2,000 2,000 2,000
Facilities Reserve 2,000 2,000 2,000 2,000
Strategic Plan Projects 2,000 2,000 2,000 2,000
Restricted
Pension and OPEB 3,061 3,178 3,367 3,367
Non-Spendable 604 460 630 630
Unassigned 16,517 16,328 17,686 17,686
TOTAL $57,776 $59,037 $60,362 $56,762
22 • Pros
• Avoid reallocating street sweeping cost, preserving future funding flexibility in the Gas Tax fund.
• Prevents deferral of Capital Improvement Projects.
• Provides more opportunity to deliberate future financial solutions. • Cons
• Leads to short-term fixes, delaying necessary revenue adjustments or spending realignments.
• Instead of using reserves immediately, alternative funding solutions should be prioritized to maintain long- term financial sustainability. Reserves should remain a last-resort safety net for economic downturns or unexpected emergencies. • Given potential of Federal funding cuts, the use of reserves may be necessary to fill funding gaps temporarily, while identifying other revenue sources and/or program cuts.
Pros & Cons of Using General Fund Reserves
Federal Funding Update
24 • On January 27, 2025, President Trump signed an executive order essentially freezing all federal funding which is currently paused by the courts.
• Finance staff will continue to monitor the status of the Executive Order, as well as other orders or actions that may potentially impact City revenues.
• Annual Federal CDBG grant funding is used to fund 4.17 FTE’s at a cost of $785K.
FEDERAL FUNDING
25 FEDERAL FUNDING IMPACTS
Community Development Block Grant (CDBG)
Type Programs/Projects Amount
FY 2024-2025 CDBG Annual Allocation 971,431
CDBG Prior Year Unspent/Available Allocation 187,000
CDBG Program Income (Loan Repayment) 30,900
TOTAL CDBG FUNDING SOURCES 1,189,331
Community Improvement / Code Enforcement
Salary & Benefits (2 Full Time and 1 Part Time
Officers) 385,000
Annual Capital Improvement Projects Funding
Senior Center Roof Replacement 414,331
Public Service Grants
Senior Center Social Worker - PT 30,000
Boys & Girls Club of Central Orange Coast 14,464
Families Forward 28,500
Human Options (Domestic Violence Prevention) 28,500
Project Hope Alliance 23,750
Trellis International 20,500
Subtotal 145,714
Housing Rehabilitation
Administration 50,000
CDBG Program Administration 174,286
Fair Housing Foundation (Legal Workshops) 20,000
TOTAL CDBG ALLOCATION 1,189,331
26 FEDERAL FUNDING IMPACTS
HOME FUND
Type Programs/Projects Amount
FY 2024-2025 HOME Allocation 395,571
FY 2023-2024 HOME Reimbursement Rehabilitation Loans 108,670 Prior Year HOME Funds 54,702
TOTAL HOME FUNDING SOURCES 558,943
Housing Rehabilitation
SFR Loan and Grant Program (up to $25K) 310,051
HOME Tenant Based Rental Assistance 150,000
Housing / Community Housing Development Organization Projects CHDO Project Required Set Aside 59,335
Administration (10% Maximum) 39,557
TOTAL HOME ALLOCATION 558,943
27 AWARDED CAPITAL FEDERAL GRANTS
Project Amount Project Status
Adams Avenue ATP - Multipurpose Trails $4,223,000 Design Phase Signal Modernization for Systemic Safety Improvements 3,906,090 Design Phase Fairview Road ATP– Adams Avenue to Fair Drive 1,935,000 Adams Avenue Bicycle Facility Project 1,760,000 Design and Environmental Phase
Safe Routes to School Action Plan 630,472 Contract Awarded Adams Ave and Pinecreek Drive Intersection Project 620,336 Construction Phase (90%) Pedestrian Safety Festival 400,000
TOTAL $13,474,898
28 • While the national economy is showing some signs of a slowdown, the economic outlook for Costa Mesa is still solid.
• A 3% change in fiscal conditions is manageable and can be achieved with a temporary pause to Capital Projects and realigning costs to other eligible funding streams that have not yet started.
• At this time there are no anticipated cuts to General Fund services or programs. • City has strong reserves that can provide a safety net between now and June 30, 2025 and beyond, if needed.
• With all this in mind, we are planning a Fiscal Year 2025-26 proposed budget with little-to-no growth in discretionary categories and inline with our normal conservative budget development projections.
Summary
Next Steps
30 • Return to City Council with the FY 2024-2025 Mid-Year Budget Agenda Report with $3.6 million in solutions on March 18, 2025. • Staff will present the FY 2025-26 Proposed Operating and CIP Budgets for the Fiscal Year starting July 1, 2025, Study Sessions in April, May, and June 2025.
• Staff will continue to closely monitor revenues and expenditures and will apprise Council of major changes, if any.
NEXT STEPS
31 FY 2025-26 Budget Calendar
FY 2024-25 Mid-Year Budget Update Study Session City Council March 11, 2025 FY 2045-25 Mid-Year Budget Update Presentation
Finance and Pension Advisory
Committee March 12, 2025
FY 2025-26 Proposed CIP Budget Review
Finance and Pension Advisory
Committee April 9, 2025
FY 2025-26 Proposed CIP Budget Study Session City Council April 22, 2025 FY 2025-26 Proposed CIP Budget Review
Parks, Arts and Community
Services Commission May 8, 2025
FY 2025-26 Proposed CIP Budget Review Planning Commission May 12, 2025 FY 2025-26 Proposed Budget Study Session City Council May 13, 2025 FY 2025-26 Proposed Operating Budget
Finance and Pension Advisory
Committee May 14, 2025
FY 2025-26 Proposed Operating and CIP
Budget Public Hearing City Council June 3, 2025
FY 2025-26 Proposed Operating & CIP Budget
Special Meeting/ Study Session #2 (if necessary) City Council June 10, 2025 FY 2025-26 Proposed Budget Adoption (if necessary) City Council June 17, 2025
QUESTIONS