Agenda Report
Fullerton City Council
MEETING DATE: APRIL 18, 2023
TO: CITY COUNCIL / SUCCESSOR AGENCY
SUBMITTED BY: Ellis chang, director of administrative services PREPARED BY: STEVEN AVALOS, BUDGET AND PURCHASING MANAGER
CINNDY BARRIOS, BUDGET ANALYST II
SUBJECT: FISCAL YEAR 2023-24 PROPOSED OPERATING AND CAPITAL IMPROVEMENT PROGRAM BUDGET
SUMMARY
City Council review and direction of the Fiscal Year (FY) 2023-24 City Manager Proposed Budget (Proposed Budget) for the City of Fullerton, focusing on the General Fund, Proposed FY 2023-24 Capital Improvement Projects (CIP) and updated General Fund financial forecast with a macro-overview of the All Funds Budget.
RECOMMENDATION
Provide direction on the FY 2023-24 Proposed General Fund Budget and Capital Improvements Projects Plan.
CITY MANAGER RECOMMENDATIONS
I am proud to present a Proposed Budget that accomplishes several goals. It meets the City Council goal for the proposed Fiscal Year of a 17% contingency while at the same time recommending service levels that will maintain current service levels and, in some cases, increase service levels in a variety of areas including parks maintenance, and a set aside of $1.5 million in funding for local streets coming from the General Fund.
In addition, to the Proposed Budget, the City Manager and Administrative Services Department have provided additional options to the City Council if you want to increase services or if you would prefer to decrease services based on concerns with future years.
The City is in the most stable Fiscal shape it has been in recent years. However, we continue to face challenges in retaining and recruiting staff, as well as funding of key Capital infrastructure such as Streets.
The Proposed Budget does not fully reflect the costs of a 2-year implementation plan for the Hunt Library. That item will be discussed during the Regular Agenda.
Finally, we continue to evaluate how to implement the City Council stated desire to have Park Dwelling fees be used closer to the developments that provide the funding. The challenge is that projects have been in the queue for years and Funds were not accounted for in that way in previous years as well as ensuring we are consistent with State law on the use of those Funds.
I recommend based on the above that you approve the projects that are proposed to be funded by Park Dwelling fees and prior to implementation Staff will bring a policy back for City Council consideration as a separate agenda item addressing the use of the Funds prior to the Funds being expended.
BUDGET POLICY PRIORITY STATEMENT
This item matches the following Budget Policy Priority Statements:
Fiscal and Organizational Stability
Public Safety
Infrastructure and City Assets.
FISCAL IMPACT
The Proposed FY 2023-24 Budget will maintain the City’s 17% contingency fund balance goal as adopted by City Council. The Budget attempts to balance maintaining and enhancing some of the core services while maintaining the 17% contingency that the City met for the first time this last Fiscal Year.
The last three years of the forecast present challenges, particularly in the last two years.
DISCUSSION
Introduction
The Budget Study Session provides an overview of the FY 2023-24 Proposed Operating and CIP Budget for City Council direction in advance of formal budget adoption. This report provides a high-level overview of the City’s All Funds FY 2023-24 Proposed Budget and the Budget Study Session will primarily focus on General Fund Budget, the chief operating fund for the City that provides traditional municipal services such as public safety, community and economic development, parks and recreation, library community services and public works.
The Budget Study Session presentation focuses on the FY 2023-24 Proposed Operating Budget for the General Fund, highlighting key revenue and expenditure changes and the City Manager’s proposed service level enhancements. The City Manager’s proposed budget includes increases to support improved community service levels, public events and programs and organizational efficiencies to support public safety, infrastructure, economic development and community service efforts. The presentation also includes additional “Budget Options” for City Council consideration to add or remove from the FY 2023-24 Proposed Budget.
The General Fund Five-Year Financial Forecast projects the City’s financial outlook over a multi-year period to facilitate advanced decision-making efforts to support financial stability. Lastly, the Budget Study Session will provide a high-level overview of the City’s Proposed Capital Improvements Program for FY 2023-24, highlighting the City’s infrastructure and capital projects plan for the new fiscal year.
All City Funds
The Citywide FY 2023-24 All Funds’ Proposed Budget totals $253.7 million in expenditures supported by $244.0 million in citywide revenues. Some of the funds in the all funds budget represent Capital Funds where the City set aside money in earlier years to expend in the current year. The Proposed All Funds budget includes:
General Fund
Enterprise Funds such as Water and Sewer funds
Special Revenue Funds such as Gas Tax and Measure M transportation funds Capital Improvement Program
Successor Agency.
Table 1 presents a high-level overview of the City’s All Funds Budget for FY 2023-24 (by major fund area).
Table 1 – All Funds’ Proposed FY 2023-24 Budget Overview All Funds by Major Fund or Funds Category
FY 23-24
Proposed Budget
General Funds
119,676,764
Special Revenue Funds
34,929,672
Water Fund (excluding capital projects)
37,456,353
Other Enterprise Funds (excluding capital projects)
12,102,177
CIP Budget
40,314,550
Successor Agency
9,248,190
All Funds Expenditures Total
$253,727,706
All Funds Revenues Total
$243,973,371
Ongoing revenues, available fund balance set aside from previous years and interfund transfers within each respective fund will balance and support the All City Funds Budget for FY 2023-24. Total citywide projected revenues may not fully support total citywide budgeted expenditures due to timing of capital projects and grant reimbursements. Staff will provide a more in-depth look and fund-by-fund detail level at the June 2023 budget adoption meeting.
General Fund (including Parks and Recreation and Library) The FY 2023-24 Proposed General Fund Budget totals $119.7 million in operating expenditures and $4.2 million in transfers out for a total $123.9 million General Fund Budget. $119.7 million in operating revenues and $7.2 million of transfers in, which includes application of the remaining $6.95 million of ARPA Revenue Replacement funds for stabilization of government finances in accordance with US Treasury guidelines and the approved ARPA spending plan balance the FY 2023-24 Proposed General Fund Budget.
The following outlines the underlying revenue and expenditure assumptions for the FY 2023-24 Proposed General Fund Budget.
Revenues
Staff projects FY 2023-24 General Fund operating revenues (excluding transfers in) to total $119.7 million, which reflects a $6.1 million increase (or 5.4%) from FY 2022-23 $113.6 million budgeted revenues. The City’s continued strong economic growth in post-pandemic, as illustrated by continued property tax growth, projected sales tax revenue increases and planning and development related fees drives this revenue growth.
Property Tax – Property Tax is the City’s largest General Fund revenue at 46% of General Fund revenues. Staff projects property tax to total $54.6 million in FY 2023-24, a $2.5 million increase (or 4.8%) over FY 2022-23 budgeted levels, primarily due to an increase of property tax in lieu revenues, secured assessed property valuation growth and uptick in residual former redevelopment agency property tax receipts. Overall, the City’s diverse and stable property tax base (mixture of commercial, industrial, and residential) continues to pace consistent revenue growth due to the strong assessed property valuations in Fullerton.
Sales Tax – Staff projects sales tax, the second largest General Fund revenue, to total $30.2 million in FY 2023-24, an increase of $0.8 million (or 2.6%) from FY 2022-23 budgeted levels. The projected sales tax revenue growth in FY 2023-24 highlights the City’s continued economic post-pandemic recovery.
Many factors drove the City’s sales tax growth, including:
the City’s diverse economic base
continued economic recovery
the current inflationary environment
an uptick to the City’s County Pool allocation from a State law enacted in 2019 new business retailers coming to the City in recent years.
Transient Occupancy Tax - Transient Occupancy Tax, or TOT, revenue has recovered to pre-pandemic levels in FY 2023-24. Staff projects TOT to total $3.5 million in FY 2023-24, as travel and places of tourism have rebounded. TOT revenues have recovered with increased occupancy, aided by the City’s Short-Term Rental (STR) program, despite a hotel closure in FY 2022-23.
Planning and Development Fees - Development activity and projects, such as Goodman Logistics and Fox Block, resulted in increases in planning and development-related permit and fee revenues in FY 2022-23. Increased permit and fee revenue also supported planning revenue, bringing the City closer to full cost recovery for these services. Development volume trends expect a 54% increase in activity. Staff projects this to generate an additional $1.6 million in FY 2023-24.
Staff expects all other revenues in the General Fund to either increase in line with market trends or remain flat in FY 2023-24.
Proposed Fee Changes
Staff will present proposed fee changes for FY 2023-24 for various departments as standalone agenda reports prior to budget adoption. The proposed budget presented with this report does not incorporate the fiscal impact of these proposed fee changes. Staff will incorporate the projected revenue impact of any fee changes approved by City Council prior to budget adoption in the budget presented for adoption in June.
The majority of the proposed fee changes support the City’s cost recovery efforts related to the services provided. The Fire, Public Works, Community and Economic Development and Library Departments plan to submit fee changes for City Council consideration.
Expenditures
Staff projects the FY 2023-24 General Fund operating expenditures (excluding transfers out) to total $119.7 million, which reflects an increase of $5.4 million (or 4.7%) from FY 2022-23 budgeted levels of $114.3 million. The primary increases to the FY 2023-24 expenditure budget are due to the following:
Salaries and Benefits ($1.5 million) – Staff anticipates salaries and benefits to increase due to approved MOA salary increases for Police and Fire safety groups approved in FY 2022-23, anticipated employee salary step increases, other compensation considerations and CalPERS pension costs. Salaries and benefits also factor for a normalized annual vacancy savings.
Maintenance and Operations ($2.5 million) – Staff anticipates a $1.6 million increase to Maintenance and Operations budgets in FY 2023-24 due to the City’s Maintenance-of-Effort (MOE) budget practice capped at a 4.5% increase in FY 2023-24 to account for inflation and contracted increases for multi-year agreements. Increased utility costs also increased the maintenance and operations budget. Staff anticipates utility costs in the FY 2023-24 General Fund to increase by $0.9 million.
City Manager Recommended Service Enhancements ($1.4 million) – The FY 2023-24 budget includes enhancements to improve service levels to the community, offer additional community programming and events and create organizational efficiencies to better deliver such services to the community. All recommended enhancements center around major program areas and City priorities of: Public Safety, Community Preservation, Community Events and Services and Organizational Efficiencies and Sustainability.
The proposed expenditure budget incorporates City Manager recommended service enhancements and highlighted in the Budget Study Session presentation (Attachment 1) and in Attachment 2 for ease of reference.
Transfers Out ($2.7 million) – Staff anticipates general fund transfers out to increase by $2.7 million in FY 2023-24, attributed to a $1.2 million increase to the City’s Infrastructure Fund, which per City ordinance, diverts actual secured property tax and sales tax revenues received over a certain baseline level to the Infrastructure Fund for improvement projects. Significant increases to sales tax revenues (in FY 2021-22) from the pandemic year (FY 2020-21) and continued, sustained property tax growth primarily account for the higher contribution to the Infrastructure Fund.
City Manager recommended enhancements include a $1.5 million General Fund contribution towards improvements for residential streets. The FY 2023-24 Proposed CIP Budget factors for the $2.7 million transfer out.
Additional Budget Options
The City Manager identified “Additional Budget Options” for City Council consideration:
Additional Budget “Enhancement” Options – These options enable City Council to direct budgetary increases to support enhanced service levels and programs above the City Manager Proposed FY 2023-24 Budget and / or
Additional Budget “Reduction” Options – These options enable City Council to direct budgetary reductions from the service level and program enhancements included in the City Manager Proposed FY 2023-24 Budget.
Staff will incorporate City Council direction with respect to any of the additional budget enhancement or reduction options into the FY 2023-24 Budget and present at budget adoption in June 2023.
FY 2023-24 General Fund Five-Year Financial Forecast
A financial forecast is sound, financial planning tool that projects the City’s financial position over a near term, multi-year period. Staff developed the forecast based on the underlying operating revenue and expenditure assumptions for FY 2023-24, as well as other quantitative and qualitative economic assumptions for future fiscal years. Attachment 3 includes the updated five-year forecast presented in Table 2.
Table 2 – General Fund 5-Year Financial Forecast
Financial Forecast Overview
ARPA Revenue Replacement for Fiscal Stability – Staff will apply $9.6 million of City Council-obligated ARPA funding to the General Fund to stabilize government finances impacted by COVID-related revenue loss. $2.65 million will apply in FY 2022-23 and $6.95 million will apply in FY 2023-24.
Infrastructure Fund - With projected increases to secured property tax and sales tax, per Ordinance No. 3284, staff anticipates the General Fund to transfer out $2+ million year over year to the Infrastructure Fund for infrastructure improvement projects.
Measure M2 Maintenance of Effort (MOE) Reserves - Based on current projections, the City Manager and Administrative Services Director share concerns that the City will not have sufficient funding to meet its annual MOE matching requirements beginning in FY 2025-26. This would be significant because it could reduce future street repaving funding. To enable the City to support its MOE to continue to receive Measure M2 funding, staff recommends setting aside MOE reserves of $5.5 million from Fiscal Year 2022-23 to 2024-25 as assigned General Fund balance to support the City’s MOE matching requirements beginning in Fiscal Year 2025-26.
FY 2023-24 (Year 1) – Staff projects the General Fund to exceed 17% reserve with $6.8 million above the 17% reserve level. Staff will carry unassigned fund balance above reserve levels forward to Fiscal Year 2024-25.
Contingency Reserves – Staff projects the General Fund to maintain its 17% reserves goal in Year 2 (FY 2024-25) and its minimum 10% reserves in Years 3 and 4 (FY 2025-26 and 2026-27). Staff will carry forward any unassigned fund balance above reserve levels to the subsequent fiscal year. Staff projects the City to go below its minimum reserves level in Year 5.
A financial forecast does not serve as a “budget balancing mechanism”, but rather as a financial planning tool to assess the City’s financial condition in the years to come to aid decision-makers with policy decisions. Staff revisits financial forecasts every few years or as necessary as staff bases projections on a certain set of assumptions developed utilizing information available as of a point in time. Staff presents an updated financial forecast annually per the City’s financial policy.
Proposed Capital Improvement Program (CIP) Plan for FY 2023-24 The City prepares a Five-Year Capital Improvements Program to provide a comprehensive plan for the capital projects the City intends to undertake in the coming fiscal year and beyond. The Proposed FY 2023-24 CIP Budget totals $40.4 million, which includes $14.3 million for Street Rehabilitation and $17.0 million for Water Infrastructure projects in addition to other capital improvements. The following outlines the City’s planned capital infrastructure funding levels for: Street Rehabilitation, Utility Infrastructure (Water, Sewer and Storm Drain Repairs and Replacements), Traffic Systems, Parks and Recreation, Facility improvements and Airport.
Street Rehabilitation - $14.3 Million
The proposed street rehabilitation capital improvements planned for FY 2023-24 total $14.3 million, which includes $5.5 million of the total $13.1 million City Council obligated ARPA revenue replacement funds towards vital infrastructure projects. In addition, this includes allocating $1.0 million of Infrastructure funds and an additional $1.5 million transfer out from the General Fund for Residential Streets.
Significant projects include State College Boulevard from Yorba Linda Boulevard to City Limits and Las Palmas area.
Utility Infrastructure (Water, Sewer and Storm Drains) - $20.5 Million The City’s Utility Infrastructure capital improvements (water mains, PFAS treatment, system upgrades, sewer, repairs, etc.) planned for FY 2023-24 will total $20.5 million. Of that, the Water Fund will contribute $17.0 million toward various residential water main replacements.
Significant sewer infrastructure projects include Euclid Street at Union Pacific Railroad.
Traffic Systems Infrastructure - $1.2 million
Traffic Systems infrastructure capital improvements, such as new traffic signals, equipment replacement and neighborhood traffic management planned for FY 2023-24 will total $1.2 million with Measure M2, Gas Tax and Traffic Mitigation fees as the primary funding sources.
Significant traffic systems projects include Euclid Street and Rosecrans and State College Blvd and Kimberly Avenue traffic signal improvements.
Parks and Recreation Infrastructure - $1.2 million
The Parks and Recreation infrastructure projects total $1.2 million in FY 2023-24, funded primarily by the Park Dwelling Fund and Community Development Block Grant (CDBG) program. These infrastructure projects comply with Americans with Disabilities Act (ADA) requirements, improve children’s playgrounds and provide exercise equipment.
Significant projects include Hillcrest Park exercise equipment, Valencia Park repairs and accessibility improvements and park playground equipment.
Facility Improvements - $2.4 million
Improvements to City facility projects planned for the next fiscal year will total $2.4 million to enhance site functionality, technology upgrades and provide greater accessibility to the community. The City’s Infrastructure Fund will contribute approximately $1.3 million for these projects along with $0.6 million from the Facility Capital Repair Fund.
Significant projects include accessibility improvements to the Fullerton Transportation Center, Library Conference Center technology upgrade, Library elevator replacement and improved Fire Station #1 kitchen.
Airport Improvements - $0.8 million
Airport infrastructure projects total $0.8 million primarily funded through Federal Aviation Administration and State Aviation grants. The Airport Fund will contribute $33,000 towards airport infrastructure projects.
Significant projects include Runway Precision Approach Path indicator and Perimeter fencing enhancement.
Next Steps
Staff will incorporate direction received from City Council on the FY 2023-24 Proposed General Fund Budget and Capital Improvements Projects Plan into the budget to submit for adoption. Staff will also incorporate projected revenue impacts from any fee changes approved by City Council in advance of the June 6, 2023 meeting. Staff will present the final FY 2023-24 Operating Budget and the Capital Improvement Program (CIP) for formal adoption on June 6, 2023 as well as request City Council adoption of the annual Appropriations Limit and updated Fee Schedule.
Attachments:
Attachment 1 – FY 2023-24 Budget Study Session Presentation Attachment 2 – FY 2023-24 Budget Recommendations and Additional Budget Options Attachment 3 – General Fund Five-Year Financial Forecast cc: City Manager Eric J. Levitt
FY 2023-24 Proposed Budget Study Session
April 18, 2023 - Page 10