CITY OF MORRO BAY
Notice of Special Meeting of the City Council
Agenda
Tuesday, May 28, 2024, 3:00 p.m.
Veterans Memorial Hall, 209 Surf St., Morro Bay, CA
Public Participation
Public participation is offered in the following ways:
• Community members may attend the meeting in person at the Morro Bay Veterans Hall.
Alternatively, members of the public may watch the meeting and speak during general Public Comment or on a specific agenda item by logging into the Zoom webinar using the information provided below. Please use the "raise hand" feature to indicate your desire to provide public comment.
•
Zoom webinar link:
https://us02web.zoom.us/j/82722747698?pwd=aWZpTzcwTHlRTk9xaTlmWVNWRWFU QT09
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• Password: 135692
Or Telephone Attendee: 1 (408) 638-0968 or 1 (669) 900-6833 or 1 (346) 248-7799; Webinar ID: 827 2274 7698; Password: 135692: Press *9 to raise hand for public comment.
•
• Meetings are also broadcast on cable Channel 20 and streamed on the City's website.
Community Members are encouraged to submit agenda correspondence via email to the City Council at [email protected] prior to the meeting. Agenda correspondence received by 10:00 a.m. on the meeting day will be posted on the City website. •
Pages
1. ESTABLISH QUORUM AND CALL TO ORDER
2. PUBLIC COMMENT FOR ITEMS ON THE AGENDA
3. SPECIAL MEETING AGENDA ITEM(S)
3.a Budget Study Session - Review of Fiscal Year 2024-25 Draft Proposed Budget
1 (City Manager / Finance Department)
Recommended Action
Receive the Proposed Fiscal Year (FY) 2024-25 Citywide Operating and Capital Budget and provide feedback pror to budget adoption, scheduled for June 11, 2024.
4. ADJOURN
/s/ Carla Wixom, Mayor
This agenda is subject to amendment up to 24 hours prior to the date and time set for the meeting. Please refer to the agenda posted at City Hall, 595 Harbor Street, Morro Bay, CA 93442 for any revisions or call the Clerk's office at (805) 772-6205 for further information.
In compliance with the Americans with Disabilities Act, if you need special assistance to participate in a City meeting, please contact the City Clerk's office at (805) 772-6205 or [email protected] at least 24 hours prior to the meeting to ensure reasonable arrangements can be made to provide accessibility to the meeting.
Prepared By: ___EC/MG____ Dept Review: _
City Manager Review: _YK______ City Attorney Review: _CFN___ Staff Report
TO: Honorable Mayor and City Council DATE: May 22, 2024 FROM: Yvonne Kimball, City Manager
Emily Conrad, Finance Director
Melissa Green, Administrative Programs Manager
SUBJECT: Budget Study Session – Review of Fiscal Year 2024-25 Draft Proposed Budget
RECOMMENDED ACTION
Receive the Proposed Fiscal Year (FY) 2024-25 Citywide Operating and Capital Budget and provide feedback prior to budget adoption, scheduled for June 11, 2024.
BACKGROUND
The City of Morro Bay develops an operating and capital budget each fiscal year (FY), which runs from July 1st through June 30th. City Council must review and adopt a budget for the subsequent fiscal year prior to June 30th. Each January, the City Council adopts a budget calendar that guides the budget development process and informs the public about opportunities to provide input. The detailed calendar that City Council approved in January included the following. February - Finance prepares budget framework, training, and instructions Feb 20 Midyear Measure E Budget Presentation to CFAC
Feb 27 Midyear Budget Presentation and Fiscal Update to Council March - Departments prepare FY 2024-25 budget submittals April 17 New capital requests PWAB review
April - City Manager/Exec Team budget meetings; draft budget development April - Preliminary Council input on budget and/or fiscal policies if needed May 9 City Manager delivers draft proposed budget numbers to Council May 21 CFAC reviews budget and provides input, emphasis on Measure E May 28 Budget Study Session #1
May 29 Budget Study Session #2 (if needed)
June 11 Budget Adopted at Council Meeting
June 25 Backup date for Budget Adoption
Council goals inform the budget development process, ensuring that the budget includes funding for all core City services and, to the extent possible, one-time or additional City Council goals. This year’s City Council goals include Public Infrastructure, Economic Vitality, Housing & Homelessness AGENDA NO: 3.a
MEETING DATE: May 28, 2024
Response, and Community Engagement. Each goal also outlines several short-term action items that are detailed in the Proposed Budget.
These goals are in addition to the full complement of services—police, fire, water, sewer, maintenance, community development, recreation, harbor, and code enforcement—that the City provides to the community on an ongoing basis.
DISCUSSION
The May 28
th Budget Study Session will first discuss the Operating Budget and then discuss the Capital Budget. If more time is needed, the study session may continue to May 29th. The FY 2024- 25 Proposed Operating and Capital Budget is available online in web-based and printable PDF formats (links listed under “Attachments”).
Citywide Revenue Budget Summary – All Funds
The Citywide FY 2024-25 Proposed Budget projects $67.3 million of revenue, down 8.5% from the prior year. Net of transfers, the revenue budget is $50.3 million, a 5% increase from the prior year.
Current Services Revenue - The City receives the largest share of its revenue as payment for its services, including water, sewer, lease, planning, permitting fees, and recreation services. Charges for service are a relatively stable revenue source over time for Morro Bay, as the majority comes from water and sewer rate revenue remitted by ratepayers. Lease revenues in the Harbor Fund are also relatively stable in terms of base lease payments, but the portion of lease payments associated with a percentage of gross sales fluctuates over time.
Primary Tax Revenues - Tax revenues, including sales and use tax, property tax, and transient occupancy tax (TOT), represent the second-largest share of City revenues. These revenues provide general services not covered by anyone receiving an individual benefit from a service, such as public safety services and infrastructure maintenance. Property taxes are the most stable of the tax revenue sources and have increased by approximately 3-4% per year in recent years. Sales tax and TOT are more volatile and depend on the status of the economy and the tourism level. These more volatile revenue sources represent roughly one-quarter of the City's total revenues, making the City's financial reserves described below particularly important. Sales tax revenues surged coming out of the pandemic, with approximately six years of growth occurring in two years. However, FY 2023-24 has seen quarterly declines across most industries as consumers return to normal rates of spending. The exceptions are restaurants/hotels and building/construction, which are the only two industries to see modest increases over the prior year. Overall, current year-end projections indicate actual sales and use tax revenues will not quite reach budgeted amounts. The FY 2024-25 budget projections are on par with anticipated FY 2023-24 actuals. Actual revenues for TOT are also projected to come in under budget for FY 2023-24. In response, staff has estimated the FY 2024-25 budget based on an increase over the current year's projected actuals rather than basing estimates on the FY 2023-24 budgeted amount. More moderate growth (2-3% range) is projected for both revenue sources in FY 2025-26 and beyond.
Other Revenues - The other City revenues come from various smaller sources, including intergovernmental revenues, fines, and cannabis taxes. Interfund revenue transfers are transfers between funds to pay for capital improvement projects and other one-time expenses in accordance with the City’s updated Cost Allocation Plan.
Citywide Expenditure Budget Summary – All Funds
The City’s proposed budget covers all city services and capital projects in all funds from July 1, 2024 to June 30, 2025. It includes essential investments in operations, city staff, capital improvements, and pension liabilities while also maintaining healthy financial reserves to handle future emergencies and economic challenges.
The proposed FY 2024-25 expenditure budget for all funds is $76.7 million, or $59.6 million net of transfers. The budget includes $41.6 million for operations and $18.0 million for 15 capital projects.
The budget funds the following: the operational departments that provide core services to our community, including police, fire, water, sewer, parks, roads, recreation, community development, code enforcement, and harbor; the supporting administrative services such as human resources, information technology, and finance; and 15 capital projects to improve our shared built environment.
This year, the Capital Budget includes two new projects, the Morro Bay Bridge Inspection & Assessment Project and the Morro Bay Transit Vehicle Replacement Project, and requests new funding for 13 ongoing projects, including two water projects, five sewer projects, one harbor project, and five general government projects. The Harbor Department’s Storm Recovery-Dock Repairs project is included in the FY 2024-25 One-Year Plan even though it will receive no new revenue. This is because the proposed funding source for that project is reallocated fund balance from a previously approved Harbor project. More information regarding this request is included in the project description.
The budget also funds efforts to achieve the strategic planning goals established by the City Council:
improving public infrastructure, achieving economic vitality, addressing housing needs and homelessness response, and improving community engagement.
This budget reflects a leveling off of City revenues and increasing costs to provide existing service levels, a testament to the City's commitment to meeting community expectations. Economic cooling has slowed revenue growth, while persistent inflation drives higher expenses. This dynamic of expenditure growth outpacing revenue growth is unsustainable in the mid-to-long term, and the City must continually seek additional revenue generation to keep pace with community expectations for a full-service City and to address robust City Council goals.
This budget contains a conservative estimate of anticipated cost-of-living adjustments, and other benefit increases that may result due to ongoing union contract negotiations. Staff recognizes the challenge of tempering cost escalation in the wake of volatile revenues but ultimately believes the benefits of retaining a knowledgeable and skilled workforce outweigh the expense. Although salary savings from vacant positions can appear to offset the cost of turnover, it comes at the additional expense of remaining staff, who take on the burden of the exiting employee and the training of new staff in addition to their own workloads, which in turn results in decreased staff efficiency. The 2023 Classification & Total Compensation Study, a comprehensive analysis conducted by the City's human resources consultants, found that the City's total compensation was more than 5% below the labor market median for 17 out of 26 classifications analyzed, underscoring the need for correction. As of the writing of this staff report, union negotiations are ongoing with one out of three bargaining units having reached tentative agreement.
General Fund Budget Summary
The FY 2024-25 Proposed General Fund Budget projects $19.8 million of revenue, a 3.8% decrease over the prior year. This can be partially explained by the change in how the Fire Department budgets for mutual aid revenue. By waiting until mid-year to include mutual aid revenues and expenditures, the Fire Department's budgeted revenues are over $0.4 million lower than the prior year. With that accounted for, the net decrease over the prior year's revenues is approximately 2%.
Budgeted expenditures, including transfers and one-time expenditures, are projected to decrease by 16% to $20 million in FY 2024-25. The expenditure budget net of one-time expenditures is $18.6 million, similar to the prior year’s adopted budget.
Measure E Fund Budget Summary
The FY 2024-25 Proposed Measure E Fund Budget projects $4.3 million of revenue in FY 2024-25, a 5% decrease over the prior year budget but a 3% increase over estimated actuals for FY 2023-24.
Projected revenues exceed proposed expenditures by approximately $1 million. Budgeted expenditures are projected to decrease by 35% to $3.7 million in FY 2024-25. The decrease in expenditures over the prior year is a result of utilizing available fund balance in FY 2022-23 and FY 2023-24 to fund capital improvements, consistent with recommendations made by the Citizens Finance Advisory Committee (CFAC). For the current year, staff recommends reserving a small surplus for contingency. The decrease in non-departmental spending reflects reduced interfund transfers for capital projects.
Citizens’ Finance Advisory Committee (CFAC) Input
Consistent with CFAC’s scope of work as outlined in the Advisory Body Handbook, the City Council invites CFAC input on the Measure E Proposed Budget, as well as on the broader Citywide budget as time permits. CFAC met on May 21st and provided the input outlined below.
CFAC recommended removing approximately $77,000 of the $4.3 Proposed Measure E budget, as follows:
Remove Harbor Patrol Reserve Program ($77,000)
Remove Local Road Safety Plan (LRSP) Implementation funding ($100,000) Remove Sidewalk Improvements and Street Tree Replacement funding ($250,000) Increase Annual Pavement Management Program funding $350,000 Total Recommended Reduction from Measure E Budget ($77,000) CFAC communicated that the Harbor Patrol Reserve Program was better suited for the Harbor Operating Fund, although the Harbor Lifeguard Program was recommended to remain funded by Measure E.
CFAC also highlighted the importance of funding the Annual Pavement Management Program due to its clear nexus to the original ballot measure language. The Committee recommended eliminating the funding for the LRSP and Sidewalk Improvements and Street Tree Replacements projects and proposed to convert that budget into funding for the Annual Pavement Management Program.
After consulting the Public Works Director, staff believes the additional funding requested for the LRSP is appropriate to remain in the five-year plan as it assists in qualifying for future grant funding.
Additionally, the proposed scope of the sidewalk improvements and street tree replacements project could be absorbed by the Annual Pavement Management Program.
The FY 2024-25 Proposed Harbor Operating Fund expenditure budget exceeds estimated revenues by approximately $20,000. However, revenues have outperformed budgeted projections in FY 2021, FY 2022, and FY 2023, largely due to percent-rent revenues which are typically accounted for after the close of the fiscal year.
CFAC also briefly commented individually on the Citywide budget. The Committee did not make a motion or recommend specific changes to the proposed budget beyond the Measure E Fund.
Projected Reserve Balances
By the end of FY 2024-25, the City is projected to be meeting all reserve policies as adopted by Council with projected minimum reserve balances of $16.5 million Citywide, including in enterprise funds that are restricted as to use. Almost half of that total, at $7.2 million, is projected to be the General Fund Emergency Reserve Fund (051) balance. Combined with the available fund balance in the General Fund (001), this meets the minimum General Fund Emergency Reserve policy of 33% of General Fund and Measure E operating budgets and falls just short of the target of 50%.
Reserves are particularly critical for cities like Morro Bay, which have relatively small budgets and volatile revenue sources like sales tax and TOT, which comprise a large share of the general fund budget. The City relied on its reserves during the COVID-19 pandemic and again to respond to the winter storms of 2023. However, the City must strike a responsible balance to ensure optimal use of funds to achieve near-term objectives while preserving long-term sustainability. The Administrative
Services Department proposes an FY 2024-25 objective of completing a risk-based reserve analysis to provide quality assurance to Council’s existing reserve policies. Staff does not recommend a change in reserves at this time.
Fiscal Forecasts for Major Funds
While the City has over 40 active funds, just five of those funds account for over 90 percent of the City’s financial activity. The Proposed Budget includes five-year forecasts for those five major funds.
As in the prior year budget, the five-year forecasts demonstrate that expenditure growth is currently outpacing revenue growth and may continue to do so during the forecast period. The economy is cooling and the rapid post-pandemic revenue growth has ended. Despite flat revenues, inflation persists, and it is costing the City more to continue to deliver the same level of services. If expenditure growth does continue to outpace revenue growth in future years, this will leave the City with less funds available for growing capital needs and pension liabilities.
The City’s major funds, which include the General Fund, Measure E Fund, and the City’s primary enterprise funds (Water, Sewer, and Harbor) may be unable to meet capital needs with current revenue streams. Ongoing revenue increases will be needed to ensure the City has both the financial resources and staffing to complete capital projects, tackle unfunded liabilities, and deliver core city services.
CONCLUSION
The City's financial situation has improved in recent years but still faces challenges. Inflation has increased operating costs and capital expenses, while revenue growth has slowed. This puts the city at risk of falling behind in areas like competitive compensation, infrastructure maintenance, and pension funding. However, the city has strong reserve policies to help navigate short-term uncertainty.
To ensure long-term financial stability, the city needs to focus on increasing revenue generation.
Guided by established Council goals, the draft budget aims to maintain the current level of services while balancing the needs of competitive compensation, infrastructure projects, and healthy reserves.
Council has the ultimate authority to make all appropriations in this budget. Upon Council review and direction at these budget study sessions, adjustments will be made by staff prior to the final budget approval which is scheduled for Tuesday June 11, 2024.
ATTACHMENTS
1. FY 2024-25 Proposed Capital and Operating Budget
a. Web-Based Version: https://city-morro-bay-ca-budgetbook.cleargov.com/16900/fund-summaries/citywide-operating-budget-summary-allfunds b. Printable PDF Version:
https://www.morrobayca.gov/DocumentCenter/View/19238/FY-2024-25-ProposedBudget_Draft