Agenda Report
Fullerton City Council
MEETING DATE: APRIL 23, 2024
TO: CITY COUNCIL / SUCCESSOR AGENCY
SUBMITTED BY: Ellis chang, director of administrative services PREPARED BY: STEVEN AVALOS, BUDGET AND PURCHASING MANAGER
CINNDY BARRIOS, SENIOR BUDGET ANALYST
SUBJECT: FISCAL YEAR 2024-25 PROPOSED OPERATING AND CAPITAL IMPROVEMENT PROGRAM BUDGET
SUMMARY
City Council review and direction for the City of Fullerton Fiscal Year (FY) 2024-25 Proposed Budget (Proposed Budget), focusing on the General Fund, Proposed FY 2024-25 Capital Improvement Projects (CIP) and updated General Fund financial forecast with a macro-overview of the All Funds Budget.
PROPOSED MOTION
Receive and file.
Provide direction on FY 2024-25 Proposed General Fund Budget and Capital Improvements Projects Plan.
ALTERNATIVE OPTIONS
Approve the Proposed Motion
Receive and file and direct City Manager to submit FY 2024-25 Proposed General Fund Budget and Capital Improvements Projects Plan for adoption as presented Other options brought by City Council.
STAFF RECOMMENDATION
Staff recommends the Proposed Motion.
CITY MANAGER REMARKS
The Proposed Budget for Fiscal Year 2024-25 reflects the City Council’s top priorities and is being presented for your review and input at today’s Budget Study Session. Over the last two years, the City has taken a variety of steps to accomplish the goals of the City Council in providing quality services to the community, bringing stability to the organization, and in enhancing funding for infrastructure such as streets. In working toward those goals, we have accomplished several initiatives collectively with the City Council.
Infrastructure. The City increased its funding of streets to $12 and $14 million over the last two years. This was done in major part by allocating lost revenue in the City’s ARPA funding for this purpose. Prior to ARPA, the City had spent $4 to $6 million annually on streets. Now that this ARPA funding has now been fully allocated, the City will utilize $1 million of General Fund next fiscal year to allocate a total of $8 million for street improvements. In addition to the allocation, we are also requesting an earmark and have submitted for $6 million in grant funding for Harbor Blvd.
I have also put together a strategy to increase that funding level to closer to $14 million over the next four years through the use of financing. However, there are both upsides and downsides to this approach which will be discussed with you in more detail at today’s presentation.
Financial Stability. The City has been able to over the last two years (for the first time in recent history of the City) to reach and maintain a 17% contingency reserve level. This budget maintains that reserve level; however due to an operating deficit, we will be utilizing one-time excess reserves this year and coming close to that 17% level in FY 2024-25 and below that in years beyond next year.
Organizational Stability. Due to freezing salaries over multiple years, the City had been losing employees from our work force and having difficulty with recruitment. Due to the City Council’s leadership and actions over last few years, we have seen an increase in retention and recruitment and lowered our vacancy rate from in excess of 20% in the organization to approximately 14%. The City continues to lower the vacancy rate and attract quality staff as we move forward into the new fiscal year.
Public Safety. The City continues to maintain and improve Public Safety service levels to the community. As a result of improved retention efforts, we are able to maintain a higher level of police service with reduced use overtime and are coming closer to fully staffing our full command Fire Department. Further, the Proposed Budget will enhance service levels by adding a 4th ambulance unit to better respond to emergencies and adds staff to initiate the Real-Time Crime Center in collaboration with the County.
Community Preservation. As prioritized last year in FY 2023-24, the City continues putting higher level of maintenance in the parks, trails and right of ways.
Community Services & Events. Finally, we are bringing back valued community events in FY 2024-25, with the return of Fourth of July and First Night events. The Hunt Library also re-opened and will be fully operational with library services and community programming in FY 2024-25.
While the City has taken a variety of steps to accomplish the City Council’s top priorities and goals through enhanced quality services to the community, the proposed budget will use one-time reserves to continue meeting these goals in the upcoming fiscal year. While this budget will support current service levels this year, it is critical to create strategies to address our fiscal situation moving forward.
In reviewing the proposed budget, you will see that we have focused on City Council priorities such as infrastructure. You will also see that there are many important Department requests not being recommended due to constraints on resources.
POLICY PRIORITY STATEMENT
This item matches the following Policy Priority Statements:
Fiscal and Organizational Stability
Public Safety
Infrastructure and City Assets.
FISCAL IMPACT
The FY 2024-25 Proposed General Fund Budget totals $138.3 million (including transfers out) balanced with $129.0 million in revenues (including transfers in) and $9.3 million of available one-time excess reserves (also referred to as unassigned fund balance), including application of the Maintenance of Effort (MOE) reserves City Council set aside in FY 2023-24. The Proposed General Fund Budget maintains the 17% contingency reserve level goal per the City financial policy.
The General Fund Financial Forecast presents the projected fiscal condition for the City over the next five years. The financial forecast is based on a certain set of assumptions and not “set budgets” for future years and identifies fiscal challenges the City will need to be address to maintain near-term financial stability. The City will meet its 17% contingency reserve level goal in FY 2024-25 but staff projectes the City to go below the 17% goal in FY 2025-26. Staff recommends City Council review options over the next year to stabilize the budget and ensure the City remains financially sound.
The FY 2024-25 Proposed All Funds Budget, which includes the General Fund, totals $272.9 million (including transfers out), balanced with $279.4 million in revenues (including transfers in) and available fund balances, including designated funds for capital projects).
BACKGROUND AND DISCUSSION
Introduction
The attached April 17, 2024 Proposed Fiscal Year (FY) 2024-25 Budget (Proposed Budget) Preview memo highlights prior year accomplishments achieved utilizing City Council designated resource allocations and an macro-overview of the proposed General Fund budget and the Five-Year General Fund forecast.
The Budget Study Session provides an overview of the FY 2024-25 Proposed Operating and CIP Budget for City Council review and direction in advance of budget adoption in June 2024. As customary, the Budget Study Session will focus on the General Fund Budget, the chief operating fund providing for traditional municipal services such as public safety, community and economic development, parks and recreation, library, community services and public works. The Study Session will present a high-level overview of the Proposed All City Funds Budget which includes the General Fund and the Proposed Capital Improvements Program (CIP) Budget highlighting the City’s infrastructure and capital projects plan for the new fiscal year.
The City held a Budget Community Meeting on April 17, 2024 to provide education on the Proposed General Fund Budget and give the community an opportunity comment on budget priorities and community needs. The Proposed FY 2024-25 Budget Preview memo includes the Community Meeting presentation materials.
The Budget Study Session materials and presentation provide an overview of the FY 2024-25 Proposed General Fund Operating Budget, highlighting key revenue and expenditure changes from the prior fiscal year (FY 2023-24), City Manager proposed service level enhancements, alternative “Budget Options” for City Council evaluation and highlight current fiscal challenges. The Proposed FY 2024-25 Budget accomplishes and reaffirms the City Council top priorities including public safety service level enhancements, returning key community programs and services, implementing organizational efficiencies to streamline operations and resource commitment and allocation towards Infrastructure.
The General Fund Five-Year Financial Forecast projects the City’s financial outlook over a multi-year period and identifies the fiscal challenges ahead in order to signal the need for advanced decision-making to support financial and organizational stability.
All City Funds
The FY 2024-25 All City Funds Proposed Budget totals $272.9 million in expenditures across all funds, supported by $279.4 million in citywide revenues, transfers in and available fund balances (including designated funds for capital projects). 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 M2 transportation Funds Internal Service Funds
Capital Improvement Program
Successor Agency.
Table 1 presents a high-level overview of the All Funds Budget for FY 2024-25 (by major fund area).
Table 1 – All Funds’ Proposed FY 2024-25 Budget Overview * Note that CDBG and HOME grant funds and Successor Agency budgets are subject to availability of funds and review and approval by additional boards. These budgets are subject to change prior to budget adoption.
Staff will present the All City Funds Proposed Budget in more detail, along with all budget schedules (i.e., Fund Balances, Revenue and Expenditure Summaries) at the budget adoption meeting in June 2024.
General Fund (including Parks and Recreation and Library) The FY 2024-25 Proposed General Fund Budget totals $132.7 million in operating expenditures and $5.6 million in transfers out for a total $138.3 million General Fund expenditure budget. $127.6 million operating revenues, $1.3 million transfers in and $9.4 million excess reserves balance the FY 2024-25 Proposed General Fund Budget. Transfers in includes the remaining $0.7 million ARPA Revenue Replacement funds for government finance stabilization which the City must fully obligate by December 2024.
Table 2 – FY 2024-25 Proposed General Fund Budget Overview The following outlines the FY 2024-25 Proposed General Fund Budget underlying revenue and expenditure assumptions.
Revenues
Staff projects the FY 2024-25 General Fund operating revenues (excluding transfers in) to total $127.6 million, which reflects a $6.9 million (or 5.8%) increase from FY 2023-24 $120.7 million budgeted revenues. Continued economic growth including increased property tax revenue, stable sales tax revenue and increased cost recovery efforts drives this revenue growth.
Property Tax – Property Tax comprises the City’s largest General Fund revenue at 46% of General Fund operating revenues. Staff projects ths fund to total $58.0 million in FY 2024-25, which is a $3.4 million (or 6.2%) increase over FY 2023-24 budgeted levels, primarily due to increased property tax in lieu revenues, secured assessed property valuation growth and residual property tax receipts as successor agencies pay down former redevelopment agency (RDA) obligations. Overall, the City’s diverse and stable property tax base (mixture of commercial, industrial and residential) continues to provide consistent revenue growth due to strong assessed property valuations.
Sales Tax – Staff projects sales tax, the second largest General Fund revenue, to total $30.5 million in FY 2024-25, a slight increase of $0.1 million (or 0.4%) from FY 2023-24 budgeted levels. The projected sales tax revenue in FY 2024-25 remains relatively flat compared to last fiscal year and represents a stable revenue source for the City. The City’s diverse economic base, consumer spending and continued County Pool allocations from a State law enacted in 2019 provide stable sales tax revenues for the City.
Transient Occupancy Tax – Staff projects transient occupancy tax, or TOT, to remain flat, totaling $3.4 million in FY 2024-25. TOT revenues have recovered from the pandemic with increased occupancy as travel and places of tourism increase, despite a hotel in FY 2022-23, aided by the City’s Short-Term Rental (STR) program. The City’s TOT rate is 10% with neighboring cities TOT rates ranging from 10% to 15%.
Charges for Services - The City incurs costs when providing certain services and charges fees to recover those costs which includes staffing and administrative costs. City Council approved a three-year plan last year to incrementally increase Fire Department user fees to achieve full cost recovery. FY 2024-25 implements Year 2 of this plan with Fire Department user fees incrementally increasing towards cost recovery efforts.
The Fullerton Fire Department joined the Public Provider Ground Emergency Medical Transport program, administered by the State of California Department of Health Care Services, in FY 2023-24. The City pays annual and administrative fees to this program but staff anticipates higher medical transport reimbursements will provide additional revenue for the City with projected $6.0 million ambulance billing revenue in FY 2024-25, a $1.7 million or 38.5% increase from the previous fiscal year.
Staff anticipates overall charges for service to increase by $2.4 million in FY 2024-25 and all other General Fund revenues to either increase in line with market trends or remain flat in FY 2024-25.
Expenditures
The proposed FY 2024-25 General Fund operating expenditures (excluding transfers out) total $132.7 million, reflecting a $11.8 million (or 9.8%) increase from the $120.9 million FY 2023-24 adopted budget. Staff attributes the increases to pension costs, salaries, benefit costs driven by approved labor agreements, the cost of doing business and inflation related operating increases. The following summarizes the primary increases:
Salaries and Benefits ($7.3 million) – Staff anticipates salaries and benefits to increase by $7.3 million in FY 2024-25 due to labor agreements with all labor groups approved in FY 2023-24, as well as increases to CalPERS pension costs.
Salaries and Wages ($2.9 million) – Staff anticipates salaries and wages to increase by $2.9 million across all labor groups in FY 2024-25 as a result of the labor MOA agreements approved in FY 2023-24.
CalPERS Pension Costs ($3.2 million) – Staff expects CalPERS pension to increase by $3.2 million in FY 2024-25. A CalPERS -7.5% negative investment return in FY 2021-22 primarily drove the increase in the Unfunded Accrued Liability (UAL). The Safety Group UAL will increase by $2.1 million and the Miscellaneous Group UAL will increase by $525,000. In addition, CalPERS normal costs will increase due to the approved salary increases.
Groups Insurance and Other Benefits ($1.2 million) – Employee benefits program costs (medical, dental and vision) will increase by $1.2 million in FY 2024-25 due to the new Flex Credit benefit approved as part of the labor agreements.
Maintenance and Operations ($1.2 million) – Staff anticipates a $1.2 million increase to maintenance and operations budgets in FY 2024-25 due to the current inflationary environment, as well as annual contractual obligation increases from the City’s existing agreements. Staff capped the cost of doing business at 3% in developing the base FY 2024-25 budget.
Internal Services Funds ($3.3 million) – General Fund contribution increases to City Internal Services Funds (ISF) total $3.3 million in FY 2024-25, largely attributed to salary and benefit-related increases within the ISF funds predominately driven by labor costs such as Building Maintenance and Equipment Maintenance ISFs. Cost of business increases and contractual obligation increases such as software and support agreement increases in the Information Technology (IT) Fund also attributed to overall increased expenditures in the ISFs.
FY 2024-25 General Fund Budget Highlights
Staff developed the Proposed FY 2024-25 General Fund Budget to support City Council top priorities centered around the following major program areas and priorities: Public Safety, Community Preservation, Community Events and Services and Organizational Efficiencies and Sustainability.
Public Safety – The Proposed Budget includes service level enhancements to Public Safety, including adding a fourth ambulance unit to better respond to emergencies in the City and staffing to initiate the Real-Time Crime Center in collaboration with the County. The Proposed Budget also invests in upgrades to critical emergency medical equipment and safety personal protective equipment (PPE).
Community Events and Services – The Proposed Budget includes funding for the Fourth of July and First Night community events and enhances community services with re-opening the Hunt Library to full operations in FY 2024-25. Summer Camp Hillcrest also proposes expansion in FY 2024-25.
Community Preservation – The Proposed Budget includes increased funding to provide 24/7 security services at the Hunt Library.
Organizational Efficiencies and Sustainability – Staff identified citywide operating reductions citywide to support proposed enhancements to the FY 2024-25 Proposed Budget including holding certain positions vacant and a one-time all funds' cost allocation reduction to the Workers Compensation Fund.
Infrastructure – Staff designated $1.0 million in General Funds and $2.0 million Infrastructure Funds in the proposed CIP Budget to support residential street improvements. The Infrastructure Fund would also support $900,000 towards other City facility and Americans with Disability Act (ADA) improvements.
The General Fund would support $1.6 million of critical IT Infrastructure improvements, including replacing end-of-life Police Department laptops and network improvements, continuing the PC Refresh project to replace outdated computers, Citywide Phone Upgrade Project and other critical upgrades to City financial and payroll software.
The Budget Study Session presentation (Attachment 1) highlights the budget enhancements incorporated in the Proposed Budget and the FY 2024-25 Budget Recommendations attachment (Attachment 2) outlines in more detail. Attachment 3 presents alternative “Budget Options” not included in the Proposed Budget for City Council evaluation.
Staff requests City Council direction for any of the incorporated budget enhancements (Attachment 2) to the FY 2024-25 Proposed Budget and any of the alternative “Budget Options” presented in Attachment 3. Staff will incorporate any direction provided in the final FY 2024-25 Proposed Operating Budget for presentation at budget adoption in June 2024.
Capital Improvement Program (CIP) Budget for FY 2024-25 The City Capital Improvements Program (CIP) provides the comprehensive capital projects plan the City intends to undertake in the coming fiscal year. The FY 2024-25 Proposed CIP Budget totals $39.1 million, which includes $8 million for Street Rehabilitation and $20.2 million for Water Infrastructure projects, in addition to other capital improvements, such as sewer utility, storm drain repairs, traffic systems and other City facility improvements. The following outlines a summary of the City’s planned CIP by major category.
Table 3 – FY 2024-25 Proposed CIP Budget
CIP Project Category
FY 24-25
Proposed
Street Rehabilitation
8,000,000
Utility – Water System
20,225,000
Utility - Sewer and Storm Drain Systems
1,500,000
Traffic Systems
1,195,440
Airport
1,173,000
City Facilities (Buildings, Accessibility, etc.)
1,800,000
Parks
4,200,000
Misc. Projects (Sidewalk, PMP, etc.)
1,038,610
Total Proposed CIP Budget
$39,132,050
Staff expects FY 2024-25 Street Rehabilitation projects to entail one or two arterial streets but the majority of funds would focus on residential streets that received a water main replacement. Traffic system improvements consist of safety and traffic signal operation enhancements, equipment upgrades and street light conversion analysis.
Water projects focus on main pipe replacements with additional work addressing the PFAS issues, equipment and operations upgrades and reservoir rehabilitation. Sewer and storm drain projects repair and maintain existing facilities.
The Federal Aviation Administration (FAA) awarded a $1.1 million grant to the City to rehabilitate Airport hangars at the Fullerton Airport.
Various city buildings and other facilities will receive equipment repairs, replacements and accessibility improvements in FY 2024-25.
Staff will submit the FY 2024-25 CIP Program Budget document, including the five-year capital projects plan, for adoption at the budget adoption meeting in June 2024.
Fiscal Challenges
FY 2024-25 presents several fiscal challenges for the City including the following:
Expenditures Outpacing Revenues – Increasing pension and labor costs primarialy drive expenditures that outpace revenues.
Labor Group Agreements –Completion of multi-year labor agreements with all labor groups in FY 2023-24 brought salaries closer to the regional median and stabilized the workforce and service delivery levels across services areas including public safety but the financial impacts have put pressure on the City operating budget.
Rising CalPERS Pension Costs – CalPERS UAL pension costs continue to increase in FY 2024-25 and will do so over the next several years, as City pension costs approach the peak of the UAL amortization period. Further, other external factors and decisions at the State level, such as changes in investment strategies and lowering the discount rate, have affected and contributed to increased pension costs.
Infrastructure – The City needs additional Investment to address the aging infrastructure: repairing streets and potholes (including residential streets), protecting local drinking water through investment in the water utility as well as sewer and sanitation systems, investment in the City parks, trails and community facilities and the City IT infrastructure.
Other Issues – The City needs additional Investment to address other critical issues facing the City including homelessness and community preservation efforts to keep public and right of way areas safe and clean.
The City’s updated financial forecast illustrates these fiscal challenges in relation to the City’s overall fiscal condition.
FY 2024-25 General Fund Five-Year Financial Forecast
A financial forecast provides a sound financial planning tool to project the City’s financial position over a near term, multi-year period. As City financial policy, staff presents an updated financial forecast annually with the budget process. Staff developed the General Fund Five-Year Financial Forecast based on underlying operating revenue and expenditure assumptions for FY 2024-25, as well as other quantitative and qualitative economic assumptions for future fiscal years.
The following presents the updated Five-Year Forecast and with more detail in Attachment 5.
This forecast shows challenges to the City through the next three to four years and provides the City an opportunity to develop strategies to address the future financial forecast.
Table 4 – General Fund Financial Forecast
The Financial Forecast illustrates the City’s fiscal challenges and financial outlook from FY 2024-25 through FY 2028-29 with the following key takeaway:
Over the last few fiscal years, the City has successfully met its contingency reserve goal and will continue to meet the 17% contingency reserve level in FY 2024-25.
The City projects to go below 17% in FY 2025-26, but will meet its minimum 10% contingency reserve level in FY 2025-26. As outlined in prior section, the City faces several fiscal challenges in the coming years. The FY 2024-25 Proposed Budget will support current service levels next fiscal year and maintain its General Fund contingency reserve goal but the City will need to evaluate and implement strategies to address the fiscal situation moving forward.
Street Financing Evaluation
The City could consider utilizing financing as an to provide street improvements funding over the next four fiscal years. Tthe General Fund Financial Forecast highlights the fiscal challenges for the fund as a whole but the Financial Forecast does not shed light on the additional impact of the City’s inability to meet its Maintenance of Effort (MOE) required to continue to receive OCTA Measure M2 street funding.
The following table projects the City’s ability to fund street improvements and maintenance without financing. The City will meet its MOE requirement in FY 2024-25 but based on current projections, beginning with FY 2025-26 the City will not have resources necessary to meet its MOE resulting in a loss of annual OCTA M2 funding of $3.4-$3.6 million per year.
Table 5 – Proposed Road Expenditures-No Financing
The follwing table projects the City’s ability to fund street improvements and maintenance with financing. With $35 million financing (maximum annual debt service of $2.5 million over 20 years), the City could support street improvements with between $7.0 and $9.5 million of bond proceeds over the next four fiscal years thereby meeting the required MOE to continue to receive OCTA M2 funding of $3.4-$3.6 million per year.
Table 6 – Proposed Road Expenditures-Street Financing
At a certain point, the City will not meet its MOE requirement based on current projections in both scenarios (without and with financing).
Without financing, the City will not meet its MOE beginning in FY 2025-26 based on the current level of General Fund resources allocated to street improvements.
With financing, the City will not meet its MOE beginning in FY 2028-29 based on the current level of General Fund resources and debt proceeds allocated to street improvements.
Street financing, while not without risks, would enable the City to continue improving its road condition, thereby minimizing potentially larger financial investments in the future by delaying rehabilitation. Street financing would also provide the City time to evaluate revenue and cost containment options in its efforts to stabilize the General Fund financial condition ando identify resources for continued allocation to street improvements.
One risk of moving forward with street financing without identifying new revenues is the impact on General Fund to support the annual debt service payments and additionally in four years to meet the MOE requirement.
Next Steps
Staff will incorporate City Council direction on the FY 2024-25 Proposed General Fund Budget and Proposed CIP Budget into the final budget presented for adoption. Staff will present the final Proposed FY 2024-25 Operating Budget and the Capital Improvement Program (CIP) along with the All City Funds Budget for adoption at a public hearing on June 4, 2024. Staff will also present the annual Appropriations Limit and updated Schedule of Fees and Charges resolutions for City Council adoption.
Attachments:
Attachment 1 – FY 2024-25 Budget Study Session Presentation Attachment 2 – FY 2024-25 Budget Recommendations
Attachment 3 – Alternative Budget Options for FY 2024-25 Attachment 4 – General Fund Five-Year Financial Forecast Attachment 5 – Projected Road Related Expenditures Without and With Financing cc: City Manager Eric J. Levitt
Budget Study Session on FY 2024-25 Proposed Budget
April 23, 2024 - Page 10