Morro Bay City Council
February 25, 2025

CITY OF MORRO BAY
City Council Regular Meeting Agenda

Tuesday, February 25, 2025, 5:30 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
•
• 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. MOMENT OF SILENCE

3. PLEDGE OF ALLEGIANCE

4. REPORTS

4.a Closed Session Report

4.b Mayor and Councilmembers' Reports, Announcements and Presentations

4.c City Manager Reports, Announcements and Presentations

4.d Subcommittee Reports - Verbal Update of Current Subcommittee Activities

1. Water Reclamation Facility & Morro Bay / Cayucos Sanitary District JPA

2. Morro Bay Power Plant (Vistra)

3. Offshore Wind Energy

4. Downtown Design District

5. RECOGNITION AND PRESENTATIONS

5.a Measure Q/E Report by CFAC Chair Stephen Peck 6

6. PUBLIC COMMENT
Members of the audience wishing to address the Council on City business matters not on the agenda may do so at this time. For those desiring to speak on items on the agenda, but unable to stay for the item, may also address the Council at this time.

Public comment is an opportunity for members of the public to provide input to the governing body. To increase the effectiveness of the Public Comment Period, the City respectfully requests the following guidelines and expectations be followed:
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Those desiring to speak are asked to complete a speaker slip, which are located at the entrance, and submit it to the City Clerk. However, speaker slips are not required to provide public comment. •
When recognized by the Mayor, please come forward to the podium to speak. Though not required, it is helpful if you state your name, city of residence and whether you represent a business or group. Unless otherwise established by the Mayor, comments are to be limited to three minutes.
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All remarks should be addressed to Council, as a whole, and not to any individual member thereof.
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The Council respectfully requests that you refrain from making slanderous, profane or personal remarks against any elected official, commission and/or staff.
•
Please refrain from public displays or outbursts such as unsolicited applause, comments or cheering.
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Any disruptive activities that substantially interfere with the ability of the City Council to carry out its meeting will not be permitted and offenders will be requested to leave the meeting.
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Your participation in City Council meetings is welcome and your courtesy will be appreciated.
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The Council in turn agrees to abide by its best practices of civility and civil discourse according to Resolution No. 07-19.
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7. CONSENT AGENDA

Unless an item is pulled for separate action by the City Council, the following actions are approved without discussion. The public will also be provided an opportunity to comment on consent agenda items.

Recommended Action
Approve consent agenda items 7.a through 7.d as submitted.

7.a Approval of Minutes
(City Clerk)
Recommended Action
Approve as submitted.

1. February 11, 2025 - Regular Council Meeting 13

7.b Declaring the Vessel Aquafen Abandoned Property 20
(Harbor Department)
Recommended Action
Adopt Resolution No. 07-25 Declaring the Vessel Aquafen Abandoned Property Pursuant to Harbors and Navigation Code Section 522 for the purposes of abatement.

7.c Adoption of Resolution No. 08-25 Approving a New Lease Agreement with California Coastal Investments, LLC, Eric Newton for Lease Site 86/86W, Libertine located at 801 Embarcadero
27 (Harbor Department)
Recommended Action
Adopt Resolution No. 08-25, approving 40-year Master Lease Agreement with California Coastal Investments, LLC, Eric Newton for lease site 86/86W, Libertine located at 801 Embarcadero.

7.d Report on attendance at the 2025 C-MANC Washington Week Meetings 78 (City Manager)
Recommended Action
Receive and file.

8. PUBLIC HEARING ITEMS

8.a Consider Adoption of Urgency Ordinance No. 670 extending Urgency Ordinance No. 668 prohibiting applications for grid-scale Battery Energy Storage Systems (BESS) facilities
90 (Community Development Department)
Recommended Action
Consider the attached written report that describes the measures taken to alleviate the conditions which led to the adoption of Ordinance No. 668, as required by Government Code Section 65858(d).

1.

Adopt Urgency Ordinance No. 670, entitled “An Urgency
Ordinance of the City Council of the City of Morro Bay, California, Extending Urgency Ordinance No. 668 Imposing a Prohibition on the Application Acceptance, Approval,
Commencement, Establishment, Operation, Relocation, or
Expansion of Grid-Scale Battery Energy Storage Systems
(BESS) within the City Limits During the Pendency of the City’s Review and Adoption of Regulations of Such Uses; and Finding the Action to be Exempt from CEQA.”

2. Provide further direction to Staff to initiate public meetings that address whether a permanent BESS ordinance shall set
development standards for future projects or prohibit them outright.

3. 9. BUSINESS ITEMS

9.a Fiscal Year 2024-25 Midyear Report 100
(City Manager/Administrative Services Department)
Recommended Action
Receive the Fiscal Year (FY) 2024-25 Midyear Budget Report; and

1. Adopt Resolution No. 09-25 authorizing the attached Budget Amendments.

2. 9.b Review of Capital Project Prioritization 134
(Public Works Department)
Recommended Action
Review and provide feedback to staff on the current priorities regarding capital projects.

10. COUNCIL DECLARATION OF FUTURE AGENDA ITEMS

11. ADJOURNMENT
The next Regular Meeting will be held on March 11, 2025.

This agenda is subject to amendment up to 72 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.

Materials related to an item on this agenda submitted to the City Council after distribution of the agenda packet are available for public inspection upon request by calling the City Clerk's office at (805) 772-6205.

In compliance with the Americans Disability Act, if you need special assistance to participate in a City meeting, please contact the Clerk's office 24 hours prior to the meeting to insure reasonable arrangements can be made to provide accessibility to the meeting.

2/20/2025
1 Citizens Oversight Committee/Citizens
Finance Advisory Committee (CFAC)
Annual Report to Council
February 25, 2025
Summary of 2023/2024 CFAC Activities
What We Did
• CFAC reviewed and commented on measure Q/E transactions for Fiscal Year 2022-2023. • Joint meeting with City Council on Council expectations of CFAC; CFAC special work program items. • Joint meeting with PWAB re: capital projects and capital project priorities. • Review of required semi annual reports on Q/E revenues and expenditures. • Reviewed and commented on FY 2024/25 budget proposals. • Reviewed and commented on FY 2024/25 budget amendments for Police and Fire. • Review Public Information Strategies to Enhance Access and Transparency. • Initiated review of potential new or augmented revenue sources; formed a subcommittee to execute work program. • Information and training on sales tax sources and trends. • Grants Task Force 1 2

2/20/2025
2 CFAC Functions and Duties
Our Responsibilities
• Citizens Oversight Committee • Review annual revenue/expenditure report for Measures Q and E relative to activities funded by the measures. • Review semi-annual revenue and expenditure report relative to activities funded by Measure Q and E. • Report on conformance of Q/E expenditures with voter measures and council priorities. • Citizens Finance Advisory Committeed • Provide citizen input on projects, City budget and other Items. • Promote citizen participation and understanding of financial information. • Review and comment on the city budget prior to presentation to the City Council. • Undertake special financial projects as directed by City Council, City Manager or City Treasurer. • 10-Year Financial Forecast (former duty) • Review Quarterly Financial Reports (former duty) • Review of Audit (former duty) • City Revenues • Joint Meeting with Council • PERS/OPEB Liabilities
• City Council Compensation
• Mid-Year Budget Adjustments
• City Council Goals
• Harbor Lease Policy (w/HAB) • Joint Meeting with PWAB re: Capital Projects
CFAC Functions and Duties
• As the Citizens Oversight Committee, report on the conformity of usage of Measure Q and Measure E revenues with adopted policy (April 13, 2021) and the “requirements of the ordinance”. Legislative Intent (See Next Slide). Current Council Policy: • Fund Police, Fire and Harbor Public Safety Positions • Maintain and Enhance Community Cleanliness and Safety • Invest in Infrastructure Such As Street Paving, Storm Drains, and Vehicle Replacements. • Fund Positions to Address the Backlog of Funded Capital Projects • Maintaining Appropriate Reserves
• As the CFAC, report on budget review, with particular emphasis on the budget for Measures Q and E. • Make recommendations to the City Council on how to improve transparency, maintain compliance, promote citizen participation, and increase effectiveness. 3 4

2/20/2025
3 Legislative Purposes of Q/E Ordinances as Approved by The Voters
Measure
Purpose and Use of Funds Q (2006) E (2020)
Maintain Police Department Services x x Maintain Fire Department Services x Maintain 24/7 Paramedic Services x Maintain 911 Emergency Response x Upgrading Fire/Paramedic Equipment x Fire Stations x Health Emergency/Disaster Preparedness x Keeping Beaches and Public Areas Safe and Clean x Retaining/Attracting Businesses x General City Services x x Street Maintenance and Pothole Repairs x Improve Storm Drains to Protect the Bay x “Public Oversight” “Semi-Annually Review Revenues and Expenditures”
“Review Annual Expenditures
to Ensure That They Were Made in Accordance with the Requirements of the Ordinance. CFAC Role Budgeted 2020/21 2021/22 2022/23 2023/24 2024/25 Revenue (Growth @ 2.5%) 2,044,970 $ 4,710,089 $ 4,578,570 $ 4,519,482 $ 4,313,735 $ Police Personnel Services $ 401,879 82,668 $ 719,235 $ 723,834 $ 789,861 $ Supplies $ - 20,297 $ 15,731 $ 17,658 $ - $ Services $ 102,350 113,823 $ 40,323 $ 47,073 $ Captial Outlay $ 12,605 - $ 75,938 $ 30,000 $ Other Expense $ 8,794 29,162 $ 18,176 $ 20,960 $ 36,720 $ Debt Services Total Q/E 132,127 $ 524,496 $ 868,097 $ 878,713 $ 903,654 $ Total Department Budget 4,184,902 $ 4,198,770 $ 5,239,977 $ 5,671,123 $ 5,800,262 $ Q/E Pcnt of Dept Budget 3.2% 12.5% 16.6% 15.5% 15.6% Pct of Q/E Departmental 26.8% 32.1% 35.0% 30.3% 27.6%
Fire Personnel Services $ 716,741 200,723 $ 896,565 $ 854,660 $ 925,146 $ Supplies $ 17,876 Other Expense $ - Services $ 1,900 - $ 1,300 $ Captial Outlay $ 64,823 Debt Service $ 82,888 67,712 $ Total Q/E 351,134 $ 716,741 $ 898,465 $ 855,960 $ 925,146 $ Total Department Budget 3,570,443 $ 3,563,730 $ 4,197,337 $ 4,285,813 $ 4,083,994 $ Q/E Pcnt of Dept Budget 9.8% 20.1% 21.4% 20.0% 22.7% Pct of Q/E Departmental 71.1% 43.9% 36.2% 29.5% 28.3%
Harbor Personnel Services $ 138,560 48,360 $ 124,941 $ 187,397 $ Supplies $ 3,300 1,057 $ 6,300 $ Other Expense Services $ 79,856 80,232 $ 122,030 $ 120,000 $ Captial Outlay $ 72,000 48,564 $ Debt Service Total Q/E - $ 177,156 $ 219,473 $ 322,271 $ 313,697 $ Total Department Budget 1,520,466 $ 1,740,564 $ 1,983,349 $ 2,290,606 $ 2,613,403 $ Q/E Pcnt of Dept Budget 0.0% 10.2% 11.1% 14.1% 12.0% Pct of Q/E Departmental 0.0% 10.8% 8.8% 11.1% 9.6%
Public Works Personnel Services $ 436,657 173,856 $ 427,390 $ 707,769 $ Supplies $ 4 10,400 $ - $ - $ Other Expense Services $ 57,725 42,235 $ 335,725 $ 420,000 $ Captial Outlay $ 81,215 Debt Service Total Q/E 10,400 $ 216,095 $ 494,382 $ 844,330 $ 1,127,769 $ Total Department Budget 2,287,481 $ 2,824,062 $ 4,138,601 $ 4,137,776 $ 4,508,751 $ Q/E Pcnt of Dept Budget 0.5% 7.7% 11.9% 20.4% 25.0% Pct of Q/E Departmental 2.1% 13.2% 19.9% 29.1% 34.5%
Q/E Departmental 493,661 $ 1,634,488 $ 2,480,417 $ 2,901,274 $ 3,270,266 $ Percent of Total Q/E 24.1% 34.7% 54.2% 64.2% 75.8% Actuals QE Departmental Expenditures Budgeted
2020/21 2021/22 2022/23 2023/24 2024/25 Revenue (Growth @ 2.5%) 2,044,970 $ 4,710,089 $ 4,578,570 $ 4,519,482 $ 4,313,735 $ Police Personnel Services $ 401,879 82,668 $ 719,235 $ 723,834 $ 789,861 $ Supplies $ - 20,297 $ 15,731 $ 17,658 $ - $ Services $ 102,350 113,823 $ 40,323 $ 47,073 $ Captial Outlay $ 12,605 - $ 75,938 $ 30,000 $ Other Expense $ 8,794 29,162 $ 18,176 $ 20,960 $ 36,720 $ Debt Services Total Q/E 132,127 $ 524,496 $ 868,097 $ 878,713 $ 903,654 $ Total Department Budget 4,184,902 $ 4,198,770 $ 5,239,977 $ 5,671,123 $ 5,800,262 $ Q/E Pcnt of Dept Budget 3.2% 12.5% 16.6% 15.5% 15.6% Pct of Q/E Departmental 26.8% 32.1% 35.0% 30.3% 27.6%
Fire Personnel Services $ 716,741 200,723 $ 896,565 $ 854,660 $ 925,146 $ Supplies $ 17,876 Other Expense $ - Services $ 1,900 - $ 1,300 $ Captial Outlay $ 64,823 Debt Service $ 82,888 67,712 $ Total Q/E 351,134 $ 716,741 $ 898,465 $ 855,960 $ 925,146 $ Total Department Budget 3,570,443 $ 3,563,730 $ 4,197,337 $ 4,285,813 $ 4,083,994 $ Q/E Pcnt of Dept Budget 9.8% 20.1% 21.4% 20.0% 22.7% Pct of Q/E Departmental 71.1% 43.9% 36.2% 29.5% 28.3%
Harbor Personnel Services $ 138,560 48,360 $ 124,941 $ 187,397 $ Supplies $ 3,300 1,057 $ 6,300 $ Other Expense Services $ 79,856 80,232 $ 122,030 $ 120,000 $ Captial Outlay $ 72,000 48,564 $ Debt Service Total Q/E - $ 177,156 $ 219,473 $ 322,271 $ 313,697 $ Total Department Budget 1,520,466 $ 1,740,564 $ 1,983,349 $ 2,290,606 $ 2,613,403 $ Q/E Pcnt of Dept Budget 0.0% 10.2% 11.1% 14.1% 12.0% Pct of Q/E Departmental 0.0% 10.8% 8.8% 11.1% 9.6%
Public Works Personnel Services $ 436,657 173,856 $ 427,390 $ 707,769 $ Supplies $ 4 10,400 $ - $ - $ Other Expense Services $ 57,725 42,235 $ 335,725 $ 420,000 $ Captial Outlay $ 81,215 Debt Service Total Q/E 10,400 $ 216,095 $ 494,382 $ 844,330 $ 1,127,769 $ Total Department Budget 2,287,481 $ 2,824,062 $ 4,138,601 $ 4,137,776 $ 4,508,751 $ Q/E Pcnt of Dept Budget 0.5% 7.7% 11.9% 20.4% 25.0% Pct of Q/E Departmental 2.1% 13.2% 19.9% 29.1% 34.5%
Q/E Departmental 493,661 $ 1,634,488 $ 2,480,417 $ 2,901,274 $ 3,270,266 $ Percent of Total Q/E 24.1% 34.7% 54.2% 64.2% 75.8% Actuals QE Departmental Expenditures
• Q/E revenues have increased from $2M in 2020/21 (pre
E-20) to $4.5M in 2023/24. • Revenue has been flat for two consecutive years and are expected to go down in 2024/25. • Police, Fire and streets were the primary (98%) expenditures pre-E-20. They now represent a little more than half (56.1%). • In 2020/21 24% of revenue was spent on departmental services (personnel, services, supplies and minor capital), with 76% spent on capital. • As of the 2024/25 budget, that pattern has reversed with 76% spent on departmental services and 24% spent on
capital. • By 2030, 90% of Q/E will be necessary to support the same level of services, with less than $625,000 available that year and beyond for major capital like road paving. • Over the past five years $_____ M of Q/E has been transferred to capital, with $____M unspent or
uncommitted.
5 6

2/20/2025
4 Measure Q/E Overview Findings and Recommendations
• Overall Findings Re: Conformity of Expenditures: • Expenditures were in generally in conformance with adopted budgets, although there were some areas that were underspent or there were no expenditures. • Some re-allocation of funds for purposes not reviewed by CFAC. • Reporting of Capital expenditures from Q/E funds should improve so that CFAC can track all of the actual expenditures and activities funded, not for just the most recent fiscal year. • Generally in conformance with the Council’s priorities. • Other Findings • 2024/25 Budget projects a 5.2% decline in Q/E revenues. • Sales tax/QE revenues are projected to stay flat and/or lose purchasing power. There is no real fund balance to work from anymore. • Completing the Citywide Capital & Facilities Planning Project as started in 2022 is essential to enable the Council, CFAC and the community to make informed decisions going forward. • Significant back-log of funded capital projects.

Nominal Q/E Revenues (Not Inflation Adjusted)
2015-2024
• Q/E Revenues have
grown. • Rapid growth during
COVID and after
Measure E approved. • Note flat growth from
2015 to 2020. Measure
Q only. • Fall off in 2023, 2023
and 2024 as visitors had
other choices for travel. • Is “post COVID” pattern
the new normal.
7 8

2/20/2025
5 Inflation Adjusted Revenues
• Inflation adjustment 2015-2024 measures volume of
taxable goods and services. • 28.4% CPI increase from
2015-2024; “real” growth
in local retail economy has
been 1.08% per year since
2025. • 16.9% CPI increase post
COVID; 3% decline in Q/E
revenue for a net “real”
decline of 12.5%
• Note flat growth from 2015
to 2020. Measure Q only. • Compounded fall off in
2023, 2023 and 2024 as
visitors had other choices
for travel.

Nominal and Inflation Adjusted Q/E Revenues
2015-2024
• Q/E Revenues
historically flat, now
declining
9 10

2/20/2025
6 Q/E Revenue Projections
2022-2030
• Nominal Q/E revenues
projected to $4 million
by 2030. • Q/E revenues will lose
an additional 15%-20%
of purchasing power. • Compounded fall off in
2023, 2023 and 2024 as
visitors had other
choices for travel.

Q/E Revenue vs Q/E Operating and
Personnel Expense Projections
• City continues to make 2022-2030
commitment to personnel and
operating from Q/E. • Currently at $3.3M of $4.4M
revenue (74%). • Personnel and operating
projected at 6.25% against
declining nominal and real Q/E
revenues. • Amount available for capital (road
repair, major equipment, etc.) will
be $0 by 2029/30; several years
later if HdL forecasts are correct. • Choices need to be made now about services funded from Q/E
going forward. • Corrective action is possible to
reverse decline in revenue.
11 12

2/20/2025
7 Measure Q/E Overview Findings and Recommendations
• Transparency, Compliance Maintenance, Citizen Participation, and Effectiveness • Review and establish new expenditure policy and priorities for Q/E Funds, especially given recent revenue decline and projected declining purchasing power. • Continue to involve the CFAC in joint meetings and special projects. • Earlier involvement in the review of existing QE funded capital projects and the selection of projects for funding in each budget cycle. • Early CFAC review of funding and activity changes. • Review 10-Year revenue projections and 10-Year projections of commitments. • Semi-Annual review of expenditures. • Regular joint meetings with PWAB for capital projects. • Improve video and audio quality of broadcasts. • Provide historic, proposed and projected expenditures by legislative intent categories. • Better explanation of changes and variances in a budget year. 13

1 MINUTES - MORRO BAY CITY COUNCIL

REGULAR MEETING
February 11, 2025, 5:30 p.m.

Veterans Memorial Hall, 209 Surf St., Morro Bay, CA
Members Present: Mayor Carla Wixom
Council Member Cyndee Edwards
Council Member Jeff Eckles
Council Member Zara Landrum
Council Member Bill Luffee
Staff Present: City Manager Yvonne Kimball
Interim City Attorney Robert Schultz
City Clerk Dana Swanson
Finance Director Emily Conrad
Public Works Director Greg Kwolek
Community Development Director Airlin Singewald
Fire Chief Dan McCrain
Harbor Vitality Director Chris Munson
Police Commander Tony Mosqueda
Accounting Manager Megan Schotborgh
_____________________________________________________________________

1. ESTABLISH QUORUM AND CALL TO ORDER
Mayor Wixom announced she was participating via teleconference while traveling to Washington D.C. on City business. The meeting was called to order at 5:30 p.m. with all members present.

The Mayor announced Agenda Item 9.a. was being continued to a future meeting.

2. MOMENT OF SILENCE
In remembrance of Morro Bay resident, Terry Simons, who recently passed.

3. PLEDGE OF ALLEGIANCE

4. REPORTS

4.a Closed Session Report
Mayor Wixom announced no closed session meeting was held.

2 4.b Mayor and Councilmembers' Reports, Announcements and Presentations
https://youtu.be/SccdHqjw4oU?si=VF0SByJkwMORfT3X&t=147

4.c City Manager Reports, Announcements and Presentations https://youtu.be/SccdHqjw4oU?si=FarWM2W6861968tq&t=871

4.d Subcommittee Reports - Verbal Update of Current Subcommittee Activities
https://youtu.be/SccdHqjw4oU?si=buCu8oC9sIOYczs0&t=1261 a. Water Reclamation Facility & Morro Bay / Cayucos Sanitary District JPA
b. Morro Bay Power Plant (Vistra)
c. Offshore Wind Energy
d. Downtown Design District

5. RECOGNITION AND PRESENTATIONS

5.a Morro Bay Chamber of Commerce Quarterly Update
https://youtu.be/SccdHqjw4oU?si=fuWleK-3N170nNpd&t=1336 Presented by Morro Bay Chamber of Commerce CEO, Dina Lundquist.

6. PUBLIC COMMENT
https://youtu.be/SccdHqjw4oU?si=4GgrFb-T_EiFYatN&t=2487 Mayor Wixom announced this is the time for members of the audience to address the Council on matters not on the agenda that are within the jurisdiction of the City. This means that comments must be limited to City business. Those desiring to speak on items on the agenda but unable to stay for the item may also address the Council at this time.

The Council requests that you refrain from making slanderous, profane, or personal remarks.
 Shaun Farmer, Morro Bay, requested City and community assistance to continue hosting the annual Kite Festival and hoped something could be done to improve traffic flow.
 Cherise Hansson, Morro Bay resident and business owner, suggested the City modify the Waterfront Master Plan Advisory Committee to ensure local businesses and fishermen are represented.
 Kiernan Cottle, Morro Bay, offered comments.

3  Margaret Carman, Morro Bay, opposed approval of the contract presented in Item 7.d and hoped the City would seek more bids. Regarding Item

7.g., she urged the City to reconsider support for AB 303 letter as currently written.
 Betty Winholtz, Morro Bay, expressed concern for residents along Panorama who may be affected by the coming storm and thanked the City for funding street improvements.
 Michelle Leicester-Cadaret, Morro Bay, commented on the contamination caused by the Moss Landing Fire, expressed concern regarding potential landslides along Panorama, and urged the City to curtail spending on Vets Hall A/V improvements.
 Assemblymember Dawn Addis appreciated the City and community's support of AB 303.
 Linda Winters, Morro Bay, thanked members of Council and City staff for their letters of encouragement and Morro Bay Fire Department for delivering storm preparedness flyers.

End of public comment.

7. CONSENT AGENDA
https://youtu.be/SccdHqjw4oU?si=RqES_-7xHXt_10IF&t=3812 Unless an item is pulled for separate action by the City Council, the following actions are approved without discussion. The public will also be provided an opportunity to comment on consent agenda items.

Mayor Wixom opened public comment for the Consent Agenda.  Betty Winholtz, Morro Bay, commented on Items 7b, 7c and 7d.

End of public comment.

Mayor Wixom pulled Item 7.d, Council Member Landrum pulled Item 7.c, and Council Member Edwards pulled item 7.g.

Motion by Council Member Eckles
Seconded by Council Member Luffee
Approve consent agenda items 7.a, 7.b, 7.e and 7.f as submitted.

Ayes (5): Mayor Wixom, Council Member Edwards, Council Member Eckles, Council Member Landrum, and Council Member Luffee
CARRIED (5 to 0)

7.a Approval of Minutes
Approve as submitted.

4 a. January 28, 2025 - Regular Council Meeting
b. January 28, 2025 - Special Council Meeting

7.b Review and Adopt Final Funding Recommendations for the 2025 Community Development Block Grant (CDBG) Program
Adopt Resolution No. 06-25 approving final recommendations for the City’s share of 2025 Community Development Block Grant (CDBG) funds to 5 Cities Homeless Coalition ($3,000) for homelessness prevention services and the City of Morro Bay Public Works Department for ADA sidewalk repairs ($48,255) and forward recommendations to the San Luis Obispo County Board of Supervisors. Additionally, staff recommends the City Council authorize the City Manager to make pro rata adjustments to the allocation based on the final funding amount from HUD’s final grant amount to the County. The recommended action is consistent with action taken by the Council on November 12, 2024, and will formalize and affirm the draft recommendations approved on that date.

7.c Receive and File Fiscal Year 2024 Quarter 4 WRF Quarterly Report https://youtu.be/SccdHqjw4oU?si=cx9tGOjOQ7PxYnzP&t=4353 Public Works Director Kwolek responded to Council inquiries and committed to posting all WRF quarterly reports on the WRF and City websites.

Motion by Council Member Landrum
Seconded by Council Member Luffee
Review and file the Fiscal Year 2024 4th Quarter WRF Quarterly Report and have staff bring back reports quarterly rather than twice a year.

Ayes (5): Mayor Wixom, Council Member Edwards, Council Member Eckles, Council Member Landrum, and Council Member Luffee CARRIED (5 to 0)

7.d Approval of Agreement with Bill Gaines Audio, Inc., for Design and Installation Services for the Vets Hall Audio Visual Upgrades Project https://youtu.be/SccdHqjw4oU?si=dQmHIIwFpbRGT5QD&t=5322 Public Works Director Kwolek announced upon further negotiations, the cost for the design portion had been reduced to $15,000 for a revised total not to exceed contract amount of $285,500.

Council Members Landrum and Eckles expressed interest in limiting project costs to the available PEG funding amount of $227,000 by coming to agreement on the project design. Council Member Luffee and Mayor

5 Wixom wished to review design alternatives to better understand how the higher end alternative would potentially reduce long-term operator costs.

Motion by Mayor Wixom
Seconded by Council Member Edwards
Authorize the City Manager to execute an agreement in the not-to-exceed amount of $285,500.00 with Bill Gaines Audio, Inc., (BGA) to perform design and installation services for the Vets Hall Audio Visual Upgrades Project and see this come back to us.

Ayes (3): Mayor Wixom, Council Member Edwards, and Council Member Luffee
Noes (2): Council Member Eckles, and Council Member Landrum CARRIED (3 to 2)

7.e Authorize FY 2024/25 Community Grant Funds Awarded to Morro Bay Maritime Museum to be used for a Revised Project
Review request received from the Morro Bay Maritime Museum and, pursuant to the City’s Community Grant Policy adopted by Resolution No. 73-19, authorize the Morro Bay Maritime Museum to direct the $5,000 Grant Award previously approved by City Council for paving the Kid’s Cove area, rather than the original stated purpose of building a walkway.

7.f First and Second Quarter Investment Reports (periods ending September 30, 2024 and December 31, 2024) for Fiscal Year (FY) 2024-25
Receive the attached First Quarter and Second Quarter Investment Reports (periods ending September 30, 2024 and December 31, 2024) for FY 2024-25.

7.g Receive and file letter of support for Assembly Bill 303 (Addis) https://youtu.be/SccdHqjw4oU?si=huz7xxwT9TFYbsJY&t=4973 Council Member Edwards appreciated the City's effort to prepare this letter and Assemblymember Addis's efforts to bring forward this proposed legislation, noting this aligns with the recently adopted urgency ordinance.

Council Member Landrum agreed with public comment the 3,200 ft. buffer was insufficient.

Motion by Council Member Edwards
Seconded by Council Member Luffee
Receive and file letter of support for proposed legislation Assembly Bill (AB) 303, the Battery Energy Safety and Accountability Act (Addis).

6 Ayes (5): Mayor Wixom, Council Member Edwards, Council Member Eckles, Council Member Landrum, and Council Member Luffee CARRIED (5 to 0)

8. PUBLIC HEARING ITEMS
None

9. BUSINESS ITEMS

9.a Introduce an Ordinance Amending Title 7 (Animals) of the Morro Bay Municipal Code
This item was continued to a future meeting.

9.b Presentation and Discussion of the Fiscal Year (FY) 2023-24 Annual Comprehensive Financial Report
https://youtu.be/SccdHqjw4oU?si=-C86ELV3oRfEJHR_&t=6214 Finance Director Conrad introduced Lindsay Zimmerman from Brown Armstrong, who presented the ACFR and responded to Council inquiries.

Mayor Wixom opened public comment for Item 9.b; seeing none, the public comment period was closed.

Motion by Council Member Eckles
Seconded by Council Member Edwards
Receive the the FY 2023-24 Annual Comprehensive Financial Report (ACFR), FY 2023-24 Annual Street Report, FY 2023-24 Transit Operator Financial Transactions Report, and FY 2024-25 Prop 172 Maintenance of Effort Certification.

Ayes (5): Mayor Wixom, Council Member Edwards, Council Member Eckles, Council Member Landrum, and Council Member Luffee CARRIED (5 to 0)

10. COUNCIL DECLARATION OF FUTURE AGENDA ITEMS
None.

11. ADJOURNMENT
The meeting adjourned at 7:31 p.m.

7 /s/ Dana Swanson, City Clerk

Prepared By: CM Dept Review:

City Manager Review: YK City Attorney Review: RWS
Staff Report
TO: Honorable Mayor and City Council DATE: February 14, 2025 FROM: Chris Munson, Harbor Director
SUBJECT: Declaring the Vessel Aquafen Abandoned Property

RECOMMENDED ACTION
Adopt Resolution No. 07-25 Declaring the Vessel Aquafen Abandoned Property Pursuant to Harbors and Navigation Code Section 522 for the purposes of abatement.

FISCAL IMPACT
The vessel has already accrued $12,591.67 in unpaid fees. Removal and demolition costs unknown at this time, but these costs are recoverable through the Division of Boating and Waterway’s Surrendered and Abandoned Vessel Exchange (SAVE) grant program.

BACKGROUND
In August 2021, the Aquafen began renting a private mooring in Morro Bay. In December 2023, the owner of the mooring evicted the Aquafen for unknown reasons. The Aquafen was then docked at the North T-Pier without pre-payment or permission. It has remained there to this day, for over a year.

After months of non-payment of fees, the Harbor Department staff attempted to lien the boat through DMV using Marine Lien Sale, Inc. The owner of the vessel was given until March 15, 2024 to bring the account current prior to the City assessing a lien against the vessel. The account remained outstanding and Marine Lien Sale, Inc. proceeded with the lien process. The owner disputed the lien and the DMV determined that it could not proceed unless a court judgement awarded the vessel to the City or if the vessel owner signed over the vessel to the City. No further action was taken at this time because a marine attorney would have been cost prohibitive and the owner refused to sign over the vessel.

On December 31, 2024, Harbor Patrol noticed that the Aquafen was sitting abnormally low in the water. Harbor Patrol proceeded as an emergency to pump approximately 3000 gallons of water out of the bilge. The owner was notified, and later came out to replace the pump. Habor Patrol officers and the Harbor Director spoke with the owner about concerns about the vessel’s current condition. If there was a loss of power or if the pump failed, the boat was at risk of sinking and polluting the harbor. The owner was notified that the costs for removal and damage to the environment would be their responsibility. The Harbor Director gave the owner three options to AGENDA NO: 7.b
MEETING DATE: February 25, 2025

resolve the matter: sign the vessel over to the City for demolition through the SAVE program, present a plan to repair the vessel and pay outstanding fees to remain in Morro Bay Harbor, or remove the vessel from Morro Bay and its facilities. Due to the serious risk, the owner was given until January 3 rd to decide.

No response was received by the January 3rd deadline. The owner was notified in writing on January 6 th and given additional time until January 13th to respond. The owner finally responded after the deadline and asked for more time. Additional time was again provided. While the owner eventually responded, the solution provided was unacceptable and did not align with what was requested. They sought a $10,000 loan or grant to make repairs and pilot the Aquafen out of Morro Bay for immediate haul out. Since they are already $12,591.67 delinquent and they are on the ‘no services list’ for the nearest haul out at Port San Luis (also for non-payment and not being responsive for a different vessel), the proposal was not taken seriously. It would also set a bad precedent for vessels in the same position or considering taking the same action.

On January 28, 2025, United States Coast Guard (USCG) issued the owner a Notice of Federal Interest stating that the Aquafen threatens to pollute a United States navigable waterway. On January 23, 2025, a vessel survey for evaluation was conducted. The survey estimated its fair market value as-is where-is as $0, if the hull was sound and basically operational $30,000, and if it was fully operational and cosmetically restored $60,000. It noted that at the time of the survey, the subject vessel was neither operational nor seaworthy for its intended purpose. Further, without frequent pumping the vessel would sink. It was taking on approximately 80 gallons of water an hour.

On February 5, 2025, the owner was sent a letter by certified mail that he had 15 days to remove the vessel Aquafen from Morro Bay and its facilities. On February 10th, a Notice to Remove was placed on the Aquafen.

DISCUSSION
Harbor Department staff have tried for over a year to get the owner of the Aquafen to either pay for dockage or remove the vessel from the North T-Pier. Staff has offered to have his vessel surrendered to the SAVE program at little or no cost to the owner and has offered debt relief in exchange for compliance.

The owner has strong feelings about the boat and believes it is historically significant. It was built by Stephens Company for Leo Fender, the founder of Fender Guitars. However, at least 8 other Aquafens were commissioned. In 2019, a similar Aquafen in much better condition was listed for $38,500. The owner has similarly strong feelings for another boat they own in the Port San Luis Boatyard. The Boatyard has been trying to evict it for years for non-payment and the owner disputed the lien process for it as well.

The Aquafen is now at risk of sinking, which will create a hazard in the federal channel and right next to the North T-Pier. If it sinks it will also cause environmental damage to the harbor since it is still carrying oil, fuel, and other hazardous materials. It will be very expensive to recover it if it sinks and the owner’s history of non-payment suggests that they don’t have the means to pay for it.

The Aquafen is entirely dependent on it being continuously plugged into the dock-side power to maintain afloat. If the power goes out, the pump stops working, or it is simply unplugged; the boat could sink within a day or two. The rate at which it is taking on water could increase slowly or rapidly.

Figure 1: Aquafen Bow Figure 2: Aquafen Stern

CONCLUSION
Staff recommends the Council adopt Resolution No. 07-25 declaring the Vessel Aquafen abandoned property pursuant to Harbors and Navigation Code Section 522.

ATTACHMENTS

1. Resolution No. 07-25

2. Letter to the Owner – January 6, 2025

3. Letter to the Owner – February 5, 2025

RESOLUTION NO. 07-25

RESOLUTION OF THE CITY COUNCIL

OF THE CITY OF MORRO BAY, CALIFORNIA

DECLARING THE VESSEL AQUAFEN ABANDONED PROPERTY
PURSUANT TO HARBORS AND NAVIGATION CODE SECTION 522

T H E C I T Y C O U N C I L
City of Morro Bay, California
WHEREAS, the California Harbors and Navigation Code § 522 provides that “any hulk, derelict, wreck, or parts of any ship, vessel, or other watercraft sunk, beached, or allowed to remain in an unseaworthy or dilapidated condition upon publicly owned submerged lands, salt marsh, or tidelands within the corporate limits of any … public corporation or entity having jurisdiction or control over those lands, without its consent expressed by resolution of its legislative body, for a period longer than 30 days without a watchman or other person being maintained upon or near and in charge of the property, is abandoned property;” and WHEREAS, the vessel Aquafen has been docked on the North T-Pier without payment or permission since December 2023; and
WHEREAS, on December 31st, 2024, the vessel Aquafen was taking on water.

Approximately 3,000 gallons were pumped from its bilge. The United States Coast Guard subsequently declared the vessel a “Threat to Pollute”. The Aquafen remains in an unseaworthy and/or dilapidated condition upon submerged lands within the jurisdiction of the City of Morro Bay; and
WHEREAS, the vessel has been on the North T-Pier for a period longer than 30 days without a watchman or other person being maintained upon or near and in charge of the property; and
WHEREAS, the City of Morro Bay does not consent to the vessel Aquafen being abandoned at Morro Bay Harbor and desires to declare the vessel abandoned property for the purposes of abatement.

NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Morro Bay, California, hereby declares that the vessel Aquafen (USCG Official No. 560034) is abandoned property, pursuant to Harbors and Navigation Code section 522 because the vessel was abandoned on submerged lands in the City’s jurisdiction without the consent of the City for more than 30 days.

PASSED AND ADOPTED by the City Council of the City of Morro Bay at a regular meeting thereof held on this 25th day of February 2025 on the following vote:

AYES:

NOES:

ABSENT:

ABSTAIN:

RECUSE:

CARLA WIXOM, Mayor
ATTEST:

DANA SWANSON, City Clerk

Prepared By: ___CM Dept Review: __ lt _
City Manager Review: ________ City Attorney Review: __RWS____ Staff Report
TO: Honorable Mayor and City Council DATE: February 14, 2025 FROM: Chris Munson, Harbor Director
Lori Thompson, Harbor Business Coordinator
SUBJECT: Adoption of Resolution No. 08-25 Approving a New Lease Agreement with California Coastal Investments, LLC, Eric Newton for Lease Site 86/86W, Libertine located at 801 Embarcadero.

RECOMMENDED ACTION
Adopt Resolution No. 08-25, approving 40-year Master Lease Agreement with California Coastal Investments, LLC, Eric Newton for lease site 86/86W, Libertine located at 801 Embarcadero.

ALTERNATIVES
The City Council can elect to not approve the lease agreement as proposed and/or can propose changes, and direct staff accordingly.

FISCAL IMPACT
Annual Minimum rent is set at the current rate of $45,000 and will continue at this rate until their next appraisal in 2028 at the Commencement Date. There will be the standard CPI increase every July 1st after the Commencement Date.

BACKGROUND
Prior to September 2018, the Libertine lease site (86/86W) was under a Pipkin lease with Burt Caldwell, owner of 801 Embarcadero LLC. The existing building on the site had been pieced together over 40 years. Over the last 15 years, Caldwell proposed multiple redevelopment plans, but none came to fruition. As his lease neared expiration in 2018, and with his involvement in the Market Plaza project, the City entered into a three-year interim ground lease with Caldwell to maintain his position.

However, the site was not included in the Market Plaza project.

In May 2020, Caldwell proposed relinquishing his lease early in exchange for relief from $7,000 in deferred rent from the COVID-19 pandemic. The City Council decided to let the lease expire and assess the building’s condition before considering a default due to lack of maintenance, with the intention of issuing a request for proposals (RFP) for the site's future use. Caldwell confirmed he would vacate the site by the end of September 2020.

Eric Newton, owner of Libertine Brewing Company, expressed interest in staying on the Embarcadero as the master leaseholder and redeveloping the site. Despite pandemic challenges, Newton reaffirmed his commitment to the project and sought the City’s vision for the site. In September 2020, AGENDA NO: 7.c
MEETING DATE: February 25, 2024

the City Council approved an interim master lease with Libertine Brewing, guaranteeing a minimum annual rent of $32,000, a $4,000 increase from the previous lease, and introducing percentage-based rents.

Since October 2020, Newton has been working with City staff to develop a redevelopment proposal.

The Conceptual Review meeting in February 2022 deemed the project ready for City Council approval, which was granted in May 2022. Despite the closure of the Libertine Pub in November 2023, Newton continued paying full rent. On December 19, 2023, the Planning Commission approved the redevelopment project, recognizing its contributions to coastal public access and the Harborwalk system. The City Council granted final approval for the project on January 23, 2024, with a revision requiring the completion of public plaza improvements before final occupancy.

Newton has been negotiating a long-term lease with the City’s Harbor Department. His interim lease expires on July 31, 2025. The Finance Director reviewed Newton's financials and confirmed he can self-finance the $5.2 million redevelopment project. Newton proposed a 50-year lease term with similar concessions to those granted to TLC Enterprises to ensure competitive fairness.

The proposed redevelopment involves demolishing most of the 4,677 sf building and constructing a 5,206 sf mixed-use building with a new 7-unit hotel, restaurant, coffee shop, and expanded brewery space. Site improvements include a new 15’ Harborwalk gap extension, replacement of steel piles, a new dock area, boat slips, public access improvements, and the creation of a public plaza.

DISCUSSION
Lease Site 86/86W is a focal point of the Embarcadero and is in dire need of redevelopment. The developer is providing significant investment in the project with $5.2 million. The redevelopment will rejuvenate the lease site and will provide the city with new businesses and significant public improvements. Most notable of these public improvements is the development of a Public Plaza venue and continuation of the Harborwalk, where public access was previously restricted.

After negotiations with City Council and the developer staff is proposing the attached new Master Lease Agreement containing the following highlights:
 Section 1.01 - 40-year Master Lease Agreement, to commence at occupancy (30 months)  Section 2.01 - $45,000 minimum annual rent (increase from $32,000)  Section 2.04.A.1 – Reduced percentage rents for a period of 24 months  Section 6.01 - Penalties for delays in repairs/maintenance  Section 13.02.1.C – 15’ wide Harborwalk gap extension connecting adjacent lease sites  Section 13.02.1.D – New dock, piles, and gangway
 Section 13.02.1.E – Creation of a Public Plaza
 Section 13.02.3 - A Plaza Improvement Plan must be approved by the CITY concurrent with the public works agreement.
 Section 13.02.4 - Penalties for delays in improvements (liquidated damages) Performance dates have been updated to reflect the delays in adopting the final lease agreement.

The proposed lease follows the Harbor Lease Management policy standards and current lease form, with negotiated language to match their current lease rent calculation format. Annual minimum rent will be set at the new rate which is $45,000. The base rent will remain $45,000 until the next appraisal in 2028 at the completion of improvements. There will be the standard CPI increase every July 1st after the Commencement Date.

CONCLUSION
Eric Newton’s proposal for redevelopment of 801 Embarcadero will provide significant investment, rejuvenation, and public benefit to the lease site. Staff recommends approval of Resolution No. 08- 25 and approving a 40-year Master Lease Agreement with Eric Newton for lease site 86/86W, Libertine located at 801 Embarcadero.

ATTACHMENTS

1. Resolution No. 08-25

2. New Master Lease Agreement for Lease Site 86/86W

RESOLUTION NO. 08-25

RESOLUTION OF THE CITY COUNCIL

OF THE CITY OF MORRO BAY, CALIFORNIA
APPROVING A 40-YEAR MASTER LEASE AGREEMENT FOR
LEASE SITE 86/86W BETWEEN THE CITY OF MORRO BAY AND

CALIFORNIA COASTAL INVESTMENTS, LLC
LOCATED AT 801 EMBARCADERO

T H E C I T Y C O U N C I L
City of Morro Bay, California
WHEREAS, the City of Morro Bay is the lessor of certain properties on the Morro Bay Waterfront described as City Tidelands leases and properties; and WHEREAS, California Coastal Investments, LLC (“Tenants”) have been the lessee of Lease Site 86/86W since 2020, and are tenants in good standing; and WHEREAS, on December 19, 2023, Tenants were approved for a major redevelopment of the lease site which included demolition of the existing building, development of new 7-unit hotel, restaurant, coffee shop, and expanded brewery space; additional public access enhancements and modifications to the approved new Harborwalk public access; demo and reconfigure the dock, and creation of a Public Plaza; and
WHEREAS, the tenant will self-finance the $5.2 million for redevelopment. Upon completion of improvements, the tenant will refinance the mortgage subject to CITY attorney review and approval; and
WHEREAS, Tenants obtained all necessary approvals from the Planning Commission and City Council for their proposed redevelopment project and are ready to obtain their building permit to completed the improvements; and WHEREAS, in accordance with the City’s Master Lease Policy, the City and Tenants have agreed to a new 40-year lease agreement for Lease Site 86/86W located at 801 Embarcadero.

NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Morro Bay, California, as follows:

1. The attached new Master Lease Agreement for Lease Site 86/86W is hereby approved.

2. The Mayor is hereby authorized to execute said Master Lease Agreement.

PASSED AND ADOPTED by the City Council of the City of Morro Bay at a regular meeting thereof held on the 25th day of February 2025 on the following vote:

AYES:

NOES:

ABSENT:

ABSTAIN:

RECUSE:
______________________________
Carla Wixom, Mayor
ATTEST:

Dana Swanson, City Clerk Page 30 of 144
4855-8063-9740 v4
LEASE
This LEASE (“Lease”) is made and entered into by and between the CITY OF MORRO BAY, a municipal corporation of the State of California herein called CITY, and California Coastal Investments, LLC., a California Limited Liability Company, herein called TENANT. CITY and TENANT, at times, are referred to herein individually as Party and collectively as Parties.

WITNESSETH:

WHEREAS, the State of California granted certain tide and submerged lands located within the CITY limits of CITY to the County of San Luis Obispo and to its successors, being Chapter 1076, Statutes of 1947, as amended by Chapter 413, Statutes of 1955, Chapter 1874, Statutes of 1957, and Chapter 70, Statutes of 1960, first extraordinary session; which Statutes may be amended from time to time by the Legislature of the State of California; all of which Statutes are expressly recognized and agreed to be in full force and effect by the Parties; and WHEREAS, the Parties hereto recognize and agree, on July 17, 1964, CITY succeeded to all of the right, title and interest of the County of San Luis Obispo in and to all of the tide and submerged lands conveyed to said County by the State of California pursuant to the above mentioned acts; and
WHEREAS, judgment has been entered on October 14, 1968, in the case of City of Morro Bay, Plaintiff, versus County of San Luis Obispo, and State of California, Defendants, by the Superior Court of the State of California in and for the County of San Luis Obispo, #30417, adjudging and decreeing, among other things, the title to said tide and submerged lands so conveyed by the State of California to the County of San Luis Obispo in trust, as set forth above, passed automatically to CITY upon the date of its incorporation as a city on the 17th day of July, 1964; and
WHEREAS, TENANT accepts the within Lease with full knowledge there is no warranty of title in and to the within described premises by CITY to TENANT; and WHEREAS, in order to develop and improve Morro Bay Harbor and to assist in carrying out the provisions of the tideland grant as aforesaid, and in order to provide facilities for the accommodation of those using Morro Bay Harbor, CITY desires to lease to TENANT the within described property upon the terms and conditions set forth herein; and WHEREAS, TENANT has provided satisfactory evidence to CITY that TENANT has obtained all the financing necessary to commence and complete the improvements to the Premises

4855-8063-9740 v4 -2-
(as defined in Section 13.02); and WHEREAS, this Lease fully restates, supersedes and terminates that prior tenancy previously demised to TENANT pursuant to that “Lease By and Between the City of Morro Bay and Libertine Brewing Company” dated October 1, 2020, as may have been amended from time-to-time (the “Prior Lease”).

NOW, THEREFORE, in consideration of the covenants to be performed and the rental to be paid by TENANT to CITY, CITY leases to TENANT, and TENANT leases from CITY, all of the following premises (herein collectively referred to as the "Premises") in the CITY of Morro Bay, County of San Luis Obispo, State of California, described as follows:

Lease Site 86/86W
This Premises are delineated on Parcel Map of the CITY of Morro Bay No. 68-30, which map was recorded on October 10, 1968, in Book 3, Page 10 of Parcel Maps in the Office of the County Recorder, San Luis Obispo County, California. A copy of said Map is attached hereto as Exhibit A and made a part hereof by reference.

Article 1 FIXED TERM
Section 1.01 Term.

This Lease shall become effective as of the date it is fully executed by all Parties (the “Effective Date”), with the Lease continuing for a period of 40 years from the date set for completion of TENANT’s Improvements, such date being July 1, 2028 (the "Commencement Date"). The term of this Lease will terminate without notice on June 30, 2068, unless sooner terminated as herein provided.

Section 1.02 Extensions.

Per the City of Morro Bay Harbor Department Lease Management Policy, any additional lease term (duration)to a lease must be by lease amendment, and generally only in exchange for additional consideration from the Master Tenant. Full conditions are provided in the Lease Management Policy.

Section 1.03 Hold Over.

If TENANT holds the Premises after the expiration of the term of this Lease with the consent of the CITY, express or implied, then such holding over (in the absence of a written agreement between CITY and TENANT with respect thereto) will be deemed to create a tenancy from month-to-month, terminable on 30-days’ written notice from either Party to the

4855-8063-9740 v4 -3-
other, at a monthly rental equal to two hundred percent (200%) of the average total Rent per month for the twelve (12) months immediately preceding the expiration of this Lease, and otherwise subject to each and every term, covenant and condition of this Lease.

Section 1.04 Replacement.

As of the Commencement Date, this Lease will extinguish, supersede and replace every prior lease between CITY and TENANT respecting the Premises, including without limitation the Prior Lease and any amendments or COLs (i.e., “consents of landowner,” as that term COL is commonly understood in Morro Bay) attendant to such Prior Lease. Any right or interest held by the TENANT pursuant to any existing lease with respect to the Premises, which is not granted pursuant to this Lease, will be extinguished as of the Commencement Date of this Lease.

Article 2 RENT
Section 2.01 Annual Minimum Rent.

From and after the Effective Date, TENANT agrees to pay to CITY a minimum guaranteed annual rental for the use and occupancy of the Premises, in an initial amount of $45,000 per year (the "Minimum Rent"), payable in advance and at the option of TENANT either in equal semiannual installments or equal monthly instalments. If paid in equal semiannual installments, then such installments must be on January 1 and July 1 each year during the term of the Lease. If the Effective Date is other than January 1 or July 1, then TENANT must pay, on the Effective Date, the proportionate amount of the Minimum Rent payable for the period from the Effective Date until the next payment date of January 1 or July 1, as the case may be. If the term of the Lease expires on a date other than December 31 or June 30, then TENANT'S final installment of Minimum Rent must be proportionate to the time remaining in the term. If paid in equal monthly installments, then each\ monthly installment must be paid no later than the tenth day of each applicable month. All Rent, including the Minimum Rent and the Percentage Rent, must be paid in lawful money of the United States of America, without offset or deduction and must be paid to CITY at City Hall located at 595 Harbor Street, Morro Bay, California, or at such other place or places CITY may from time to time designate by written notice delivered to TENANT.

Section 2.02 CPI Adjustment to Annual Minimum Rent.
(1) The Parties agree, as of every July 1 following the Commencement Date (each, a "CPI Adjustment Date"), except as outlined in section 2.03 hereof, the annual Minimum Rent will be adjusted in direct proportion to any upward movement in the Consumer Price Index for January 1, 2024, which is hereby agreed to be 326.640 (Base Index). The percentage adjustment for any

4855-8063-9740 v4 -4-
given year will be based on the monthly average Index for the calendar year immediately preceding the CPI Adjustment Date as compared with the Base Index. The Consumer Price Index referred to herein is the Consumer Price Index (all items indexes, all urban consumers) for Los Angeles – Long Beach – Anaheim, California, compiled and published by the United States Department of Labor, Bureau of Labor Statistics, 1982-84 Base Year = 100 (the "Index") (2) The Annual Minimum Rent will be adjusted as of each CPI Adjustment Date, and will remain in effect as adjusted until the next CPI Adjustment Date. As an illustration only, if the Base Index (Jan. 1, 1999 CPI) is 166.1 and the monthly average CPI for 2000 is 171.6, then the percentage increase is equal to 3.31%. Therefore, the Minimum Rent would be increased by 3.31% as of July 1, 2001, and would continue at that rate through June 30, 2002. (3) If the United States Department of Labor, Bureau of Labor Statistics, ceases to compile and make public the Index as now constituted and issued, but substitutes another index in its place, then said substituted index must be used for the purpose of adjusting the Minimum Rent for the Premises. If the Index is changed so the base year differs from that in effect on the Lease Effective Date, then the Index must be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics.

Section 2.03 Calculation of New Minimum Rent.

A. Starting July 1, 2028 (or such earlier date as appropriate should there be a sufficiently earlier completion of Improvements), and upon each five-year anniversary thereafter, a new Minimum Rent will be calculated for the following five-year period (each, a "Subsequent Rental Period") as follows:

B. The Minimum Rent recalculated pursuant to Section 2.03(A) will be subject to adjustment by appraisal every five years thereafter from the initial reappraisal provided by Section

2.03(A) (each, an "Appraisal Adjustment Date"). CITY, at its own cost and expense, will retain an independent qualified appraiser for determination of the fair market value of the Premises. Not more than nine (9) months prior to each Appraisal Adjustment Date, CITY will provide written notice to TENANT of the pending appraisal and the appraiser selected by the CITY to determine the fair market rental value of the Premises, excluding fixtures and improvements, unless such are expressly included in the description of the leasehold interest created by this Lease. If TENANT does not reject CITY's appraiser in writing and within thirty (30) days after CITY's notice of its determination, then the Minimum Rent for the Subsequent Rental Period will be in the amount determined by CITY as outlined in this Section 2.03. If TENANT rejects CITY's appraiser within thirty (30) days following CITY's notice to TENANT, then within 15 days after such 30-day period, each Party, at its own cost, will select an independent professionally designated appraiser

4855-8063-9740 v4 -5-
who is a member of the American Institute of Real Estate Appraisers, or the Society of Real Estate Appraisers with a designation of MAI (Member of American Institute), SRPA (Senior Real Estate Analysis), to appraise the fair market value of the Premises. CITY may rely on its original appraisal, or select a new appraiser, at its cost. If a Party does not appoint an appraiser within fifteen (15) days after the other Party has given notice of the name of its appraiser, then the single appraiser appointed will be the sole appraiser. Each appraiser will conduct an independent appraisal within thirty (30) days after appointment. If the Parties are unable to agree on the Minimum Rent for the Subsequent Rental Period within 30 days after receiving the appraisal(s), then each Party will select one member of a three-member committee. The two so selected members will select the third member, and this committee will, by majority vote, select one or the other of the appraisals. The Minimum Rent determined on the basis of the selected appraisal will be final and binding and all costs associated with the three-member committee will be paid equally by CITY and TENANT.

C. In the event the appraisal process is not concluded on or before the Appraisal Adjustment Date, the Minimum Rent will be adjusted retroactively to such Appraisal Adjustment Date as set out hereinbelow when said appraisal process is completed.

D. The total Rent payable, including both the Minimum Rent and the Percentage Rent for each year within the applicable previous five (5) year period, will be averaged to produce the average annual total Rent payable for such previous period.

E. The new Minimum Rent for the five-year period commencing on each Appraisal Adjustment Date shall be the greater amount of seventy-five percent (75%) of the average of the total yearly Rent payable during the previous five-year period (as set out in paragraph (C) above) or eight percent (8%) of the fair market value of the Premises (as established in paragraph (B) above.) The new Minimum Rent will be divided by two to determine the semiannual payments and will be paid by TENANT to CITY on the first of each January and July thereafter or paid monthly at the option of TENANT. This new Minimum Rent will be adjusted each following year in proportion to any increase in the Consumer Price Index as set out in Section 2.02 of this Lease.

The Base Index will be adjusted upon each calculation of new Minimum Rent as set out in this section so the Base Index for CPI adjustment will be the Consumer Price Index for January 1 of the year of the calculation of new Minimum Rent.

Section 2.04 Percentage Rent.

A. In addition to the Minimum Rent, TENANT agrees to pay to CITY, at the time and in the manner hereinafter specified, as additional Rent for the use and occupancy of the Premises, a sum equal to the following for all TENANT'S Gross Sales as hereinafter defined:

4855-8063-9740 v4 -6-
(1) Final Certificate of Occupancy: Up-to and until seven hundred and thirty (730) days (i.e., two years) after the Improvements (as defined in Section 13.02) are entitled to be issued a final Certificate of Occupancy, TENANT shall pay (i) Ten percent (10%) for vessel slip and tieup fees, plus (ii) Two percent (2%) for all other Gross Sales, less (iii) the amount of the Minimum Rent paid pursuant to this Lease.
(2) Following Final Certificate of Occupancy: Following the timeframe stated in Section

2.04(A)(1) and thereafter, TENANT shall pay (i) Five percent (5%) for all retail sales, hotel use, and convenience/take-out food sales; plus (ii) three percent (3%) for all restaurant sales and beer and wine sales at the bar; plus (iii) Ten percent (10%) for vessel slip and tie-up fees and liquor sales at the bar, and plus (iv) five percent (5%) for all other sales, less (v) the amount of the Minimum Rent paid pursuant to this Lease.
(3) The Gross Sales percentages specified in this Sections 2.04(A), paragraphs (1) and (2), are referred to as "Percentage Rent". Calculation of the Percentage Rent shall in no event result in an amount less than the Minimum Rent—e.g., if deduction of Minimum Rent amount from the Percentage Rent amounts would result in less than Minimum Rent, the Minimum Rent shall apply.

B. Notwithstanding the other provisions of Section 2.04, the term "Gross Sales" does not include the following items, and such items may be deducted from Gross Sales to the extent they have been included therein or have been included in a prior computation of Gross Sales or for which a Percentage Rent has been paid under this Lease to CITY:
(1) Credits and refunds made to customers for merchandise returned or exchanged; (2) Any sales or excise taxes otherwise includable in Gross Sales as defined in this Section because such taxes are part of the total selling price of merchandise or services rendered in, from, or on the Premises, where TENANT must account for and remit the taxes to the government entity or entities by which they are imposed; and
(3) With respect to credit card sales, fees retained or withheld by the issuer and/or merchant bank pursuant to TENANT'S credit card acceptance agreement, and (4) Rental payments to TENANT from sublessees whose total gross sales are included in Gross Sales computations.

C. TENANT must keep or cause to be kept full, complete, and accurate records, and books of account in accordance with accepted accounting practices showing the total amount of Gross Sales, as defined herein, made each calendar month in, on or from the Premises. TENANT must keep said records and books of account within San Luis Obispo County and will notify CITY in advance of their location at all times. Furthermore, TENANT must, at the time of sale and in the presence of the customer, cause the full selling price of each piece of merchandise, each rental received and each service rendered in, on or from the Premises to be recorded in a cash register or cash registers that have cumulative totals and are sealed in accordance with standard commercial

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practices. Said records, books of account and cash register tapes, including any sales tax reports or income tax returns TENANT may be required to furnish any government or governmental agency, and income and bank statements must, at all reasonable times, be open to the inspection of CITY, CITY'S auditor, or other authorized representative or agent of CITY, if necessary. TENANT consents to the release of sales tax information to CITY and on demand will furnish to CITY a copy of the sales tax reports, quarterly reports and any audit reports of sales for confidential internal use of the CITY in determining Gross Sales for TENANT. TENANT consents and authorizes CITY to request such information directly from the State Board of Equalization or other state agency with which sales tax information is filed.

D. By July 31 of each year, TENANT must furnish CITY with a statement, to be certified by TENANT as current, true and accurate, which must set forth the Gross Sales of each department, sublessee, licensee and concession operating in, on or from the Premises for the previous 12 calendar months, ending June 30, just concluded, and the authorized deductions, if any, therefrom; and with it TENANT must pay to CITY the amount of the Percentage Rent, which is due to CITY as shown thereby. If TENANT, at any time, causes an audit of sales of TENANT'S business to be made by a public accountant, then TENANT must furnish CITY with a copy of said audit without cost or expense to CITY. CITY may, once in any twelve-month period, cause an audit of the business of TENANT to be made by a certified public accountant or CITY personnel of CITY'S own selection. TENANT must, upon receiving written notice of CITY'S desire for such an audit, deliver and make available all such books, records and cash register tapes to the certified public accountant or CITY personnel selected by CITY. Furthermore, TENANT must promptly, on demand, reimburse CITY for the full cost and expense of said audit, if the audit discloses the questioned statement or statements understated Gross Sales by five percent (5%) or more but less than ten percent (10%). In the event an audit performed at CITY'S request discloses TENANT understated Gross Sales by less than five percent (5%), the cost of such audit will be paid by CITY.

In the event any audit or other review of records discloses the amounts reported as Gross Sales were understated by TENANT by ten percent (10%) or more, CITY will not only be entitled to recover from TENANT all costs of audit and review, but will also be entitled to recover from TENANT a penalty equal to two times the Percentage Rent due pursuant to this Lease on such unreported amounts. Whenever any audit discloses that Gross Sales were understated by any amount, TENANT must immediately pay the additional Percentage Rent therein shown to be payable by TENANT to CITY, together with interest at the Default Rate thereon, from the date the Percentage Rent was payable until the date paid.

E. CITY will be entitled at any time within five (5) years after the receipt of any such Percentage Rent payment, to question the sufficiency of the amount thereof or the accuracy of the statement or statements furnished by TENANT to justify the same. For the purpose of enabling

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CITY to check the accuracy of any such statement or statements, TENANT must, for said period of five years after submission to CITY of any such statement, keep all of TENANT'S records, including sales tax returns, all cash register tapes, income tax returns and income and bank statements and other data which in any way bear upon or are required to establish in detail TENANT'S Gross Sales and any authorized deductions therefrom as shown by any such statements and must, upon request, make the same available to CITY for examination.

Section 2.05 Reimbursements.

If TENANT fails to perform any term or covenant of this Lease, then CITY may, but is not obligated to, perform such term or covenant, and TENANT must reimburse CITY therefore as additional Rent hereunder. As an illustration and not as a limitation, if TENANT fails to procure the insurance required by this Lease, then CITY may, but is not obligated to, obtain such insurance, with the cost of the premiums being due to CITY upon demand as additional Rent.

Section 2.06 Penalty and Interest.
(1) If any Rent is not received within ten (10) days following the date on which the Rent first became due, then TENANT must pay a late penalty of ten percent (10%) of the amount of the Rent in addition to the Rent.
(2) In addition to the penalty, TENANT must pay interest at the rate of one percent (1%) per month or fraction thereof or the maximum amount permitted by law as of the date this Lease is signed, whichever is greater (the "Default Rate"), on the amount of the Rent, exclusive of the penalty, from the date on which Rent first became delinquent until paid. The term "Rent" includes any sums advanced by the CITY and any unpaid amounts due from TENANT to the CITY.

Article 3 USE OF PREMISES
Section 3.01 Permitted Uses.

The Premises must, from the Effective Date and during the term of this Lease, be used for the purpose of constructing, operating and conducting thereon and therein the uses permitted by, and in compliance with, Conditional Use Permit No. CUP22-09, or any other use permits approved by CITY in its governmental capacity, as they may be amended from time to time, and for no other purpose. Such uses include mixed-used retail, bar & restaurant, brewery, coffee shop, transient occupancy (hotel), events/concerts, and vessel tie-up.

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Section 3.02 Unauthorized Use.

TENANT agrees to allow only those uses authorized in Section 3.01, hereinabove and any unauthorized use thereof constitutes a breach of this Lease and may, at the option of CITY, terminate this Lease.

Section 3.03 Operation of Business - Hours of Operation.

Failure to actively and diligently conduct the business authorized herein constitutes a breach of this Lease and may, at the option of CITY, terminate this Lease. (1) TENANT must, during the term of this Lease, conduct business of the nature specified in Section 3.01 of this Lease on the Premises in an efficient and diligent manner and keep the Premises open for the conduct of business continuously and without interruption for at least six hours each day of the year, except one day each week and legal holidays. This provision does not apply if the Premises is closed and the business of TENANT is temporarily shut down for a period not to exceed 14 calendar days in any calendar year to make necessary repairs, maintenance or other construction deemed necessary by TENANT. This provision does not apply if the Premises is closed and the business of TENANT is temporarily shut down as authorized or required by the City Manager or on account of strikes, walkouts, or causes beyond the control of TENANT or for not more than three days out of respect to the memory of an officer, employee, or close relative of any officer or employee of TENANT.
(2) TENANT must operate TENANT'S business on the Premises with due diligence and efficiency and in like manner as comparable businesses operated in CITY or the coastal area of San Luis Obispo County, so as to produce the maximum amount of Gross Sales and gross receipts from services, which may be produced from TENANT'S business; and TENANT at all times must carry on Premises, a stock or merchandise of such size, character, and quality as is reasonable, designed to produce the maximum return to TENANT, when the sale of merchandise is a permitted use under this Lease.

Section 3.04 Competition.

During the term of this Lease, TENANT must not directly nor indirectly acquire or establish any similar or competing business within a radius of five miles from the location of the Premises; provided, however, that TENANT may, with prior written approval from CITY, own or operate more than one business, whether or not competing and similar, along the Embarcadero upon one or more CITY lease sites. The purpose of this section is to prevent and prohibit TENANT from reducing revenue to CITY by diverting business from the operation at the Premises to another

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similar business owned by TENANT within the CITY, but not upon a CITY lease site from which CITY is paid rent based on Gross Sales.

Section 3.05 Environmental Considerations and Hazardous Materials. (1) TENANT must, at all times, comply with applicable environmental regulations, including, where applicable and practical, government- and industry-adopted environmental best management practices and programs.
(2) TENANT must not transport, use, store, maintain, generate, dispose, release, treat or discharge any "Hazardous Material" (as defined below) upon or about the Premises (such activities being hereafter referred to as "Hazardous Materials Activities"), nor permit TENANT'S employees, agents, or contractors to engage in Hazardous Materials Activities upon or about the Premises, except as allowed by applicable law. The term "Hazardous Material" for purposes hereof means any chemical, substance, material or waste or component thereof which is now or hereafter listed, defined or regulated as a hazardous or toxic chemical, substance, material or waste or component thereof by any federal, state or local governing or regulatory body having jurisdiction, or which would trigger any employee or community "right-to-know" requirements adopted by any such body. All Hazardous Materials Activities at the Premises must be conducted strictly in accordance with all applicable laws and regulations. If TENANT transports, or has transported, any hazardous waste from the Premises, then such transportation must be done only by a contractor duly licensed to haul hazardous waste and only a duly licensed site approved by TENANT'S liability insurer must be used for disposal of that hazardous waste. (3) TENANT must promptly notify CITY of: (i) any enforcement, cleanup or other regulatory action taken or threatened by any governmental or regulatory authority with respect to the presence of any Hazardous Material on the Premises or the migration thereof from or to other property, (ii) any demands or claims made or threatened by any party against TENANT or the Premises relating to any loss or injury resulting from any Hazardous Material on or from the Premises, and (iii) any matters where TENANT is required by applicable law to give a notice to any governmental or regulatory authority respecting any Hazardous Material on the Premises.

CITY has the right (but not the obligation) to inspect the Premises, to take such remedial action on the Premises, as CITY may deem appropriate, and to join and participate, as a party, in any legal proceedings or actions affecting the Premises initiated in connection with any environmental, health or safety law.
(4) If any Hazardous Material is released, discharged or disposed of by TENANT or its employees, agents or contractors, on or about the Premises in violation of the foregoing provisions,

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TENANT must immediately notify CITY. CITY may elect either to take such remedial action as CITY deems appropriate, in which event TENANT must reimburse CITY for all costs thereof within ten days after demand, or direct TENANT to perform such remediation. If CITY directs TENANT to perform the remediation, then TENANT must immediately take such remedial action, as CITY directs. TENANT must, properly and in compliance with applicable laws, clean up and remove the Hazardous Material from the Premises and any other affected property at TENANT'S expense. If CITY directs TENANT to perform remediation hereunder and if TENANT fails to comply with the provisions of this Section within five days after written notice by CITY, or such shorter time as may be required by applicable law or in order to minimize any hazard to persons or property, then CITY may (but is not be obligated to) arrange for such compliance directly or as TENANT'S agent through contractors or other parties selected by CITY at TENANT'S expense (without limiting CITY'S other remedies under this Lease or applicable law).

Section 3.06 Tidelands Trust.

In addition to the obligations set forth in this Article, TENANT must use and occupy the Premises in strict compliance with the Tidelands Trust purposes, as established by law or interpretation of the California State Lands Commission.

Section 3.07 Compliance with Law.

TENANT must, at no cost to CITY, comply with all of the requirements of all local, municipal, county, state and federal authorities now in force, or which may hereafter be in force, pertaining to the Premises, and faithfully observe in the use of the Premises all local, municipal and county rules, regulations and ordinances and state and federal statutes, rules, regulations and orders now in force or which may hereafter be in force (collectively, "Legal Requirements"); provided, that TENANT will not be required to comply with any Legal Requirement imposed by CITY that would substantially deprive TENANT of a material benefit under this Lease, unless such Legal Requirement has been imposed or required (i) by a county, state or federal authority or (ii) to preserve public health and safety and applied to similar businesses within CITY’S jurisdiction. The judgment of any court of competent jurisdiction, or the admission of TENANT in any action or proceeding against TENANT, whether CITY be a party thereto or not, that TENANT has violated any such Legal Requirement in the use of the Premises will be conclusive of that fact as between CITY and TENANT.

Section 3.08 Waste or Nuisance.

TENANT must not commit or permit the commission by others of any waste on the Premises; TENANT must not maintain, commit, or permit the maintenance or commission of any

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nuisance as defined by law on the Premises; and TENANT must not use or permit the use of the Premises for any unlawful purpose.

Section 3.09 Use by CITY.
(1) Subject to TENANT's rights hereunder to possession of the Premises, CITY may grant licenses to, or otherwise authorize, other persons and entities permitting uses of the Morro Bay Harbor.
(2) CITY also retains and reserves for itself, its successors and assigns, all oil, gas, petroleum and other mineral or hydrocarbon substances in and under the lands leased hereby together with right to prospect and extract all such substances.

Article 4 CONSTRUCTION, ALTERATION AND REPAIRS
Section 4.01 Construction Approval.
(1) TENANT must not make or permit any other person to make any alterations or structural additions or structural modifications to the Premises or to any structure thereon or facility appurtenant thereto if the cost thereof exceeds Ten Thousand Dollars ($10,000), without the prior written consent of CITY. The consent to be obtained pursuant to this Section 4.01(1) must be requested from the Harbor Director, or the City’s designee, for CITY. If the Harbor Director or any future successor to the duties of the City’s Harbor Director, or the City’s designee, gives such consent to proceed, then it is understood such consent is given by CITY only in its capacity as the landlord under this Lease and not as the permit-issuing authority. TENANT remains obligated to obtain any needed building permits and comply with all applicable land use entitlement processes.
(2) Where required by the Morro Bay Municipal Code, California Coastal Act, Corps of Engineers or any other state or federal agency having authority over any proposed project upon the Premises, then all Conditional Use Permits, Concept Plans, Precise Plans, Coastal Development Plans, and any other required plans or permits must be applied for and approved prior to any construction, alteration or repairs.

Section 4.02 Construction Bond.
(1) Prior to the commencement of any construction the cost of which is greater than the amount of One Hundred Thousand Dollars ($100,000), TENANT must file, with CITY’S City Clerk, a final detailed Civil Engineer's, Registered Architect's or Licensed and Bonded General Contractor's estimate of the cost of construction and installation of improvements on the Premises.

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Said estimate must be submitted to CITY’S City Engineer for approval. TENANT must file with the City Clerk a faithful performance bond, in a form and issued by a corporate surety company satisfactory to CITY, in an amount satisfactory to CITY, but not in excess of 100% of the final detailed cost estimate, securing the faithful performance of TENANT or its contractor in the completion of said construction.
(2) TENANT must also file with the City Clerk a labor and materials bond, in a form and issued by a corporate surety company satisfactory to CITY, in an amount satisfactory to CITY, but not in excess of 100% of the final detailed cost estimate, securing the payment of all claims for the performance of labor or services on, or the furnishing of materials for, the performance of said construction.
(3) In lieu of the above referenced bonds, TENANT may post cash deposits or may make other mutually satisfactory arrangements to guarantee the completion of construction projects. In the event the contractor bonds the project, CITY may be named as additional indemnitee to comply with these requirements.

Section 4.03 Mechanics' Liens.

At all times during the term of this Lease, TENANT must keep the Premises and all buildings, installations and other improvements now or hereafter located on the Premises free and clear of all liens and claims of liens for labor, services, materials, supplies, or equipment performed on or furnished to the Premises. TENANT further agrees to, at all times, save CITY free and harmless and indemnify and defend CITY against all claims for labor or materials in connection with any improvement, repairs, or alterations on the Premises, and the cost of defending against such claims, including reasonable attorneys' fees. If TENANT fails to pay and discharge or cause the Premises to be released from such liens or claim of liens within 10 days after the filing of such lien or levy, then TENANT must, upon written notification, immediately deposit with CITY a bond conditioned for payment in full of all claims on which said lien or levy has been filed. Such bond must be acknowledged by TENANT as principal and by a company or corporation, licensed by the Insurance Commissioner of the State of California to transact the business of a fidelity and surety insurance company as surety. The beneficiary of any security instrument, which instrument is on record with CITY, must have the right to file a claim for payment from such a bond on behalf of TENANT. CITY has the right to post and keep posted on the Premises notices of nonresponsibility and any other notices that may be provided by law or which CITY may deem proper for the protection of CITY and Premises from such liens. TENANT must give CITY notice at least 20 days prior to commencement of any work on the Premises to afford CITY the opportunity to post such notices.

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Section 4.04 Ownership of Improvements.

The Parties agree CITY has the option and right to require TENANT to remove all buildings, structures, installations, improvements of any kind or other property belonging to or placed upon the Premises by TENANT at the termination of this Lease, however occurring, providing CITY gives notice, in writing, no later than thirty (30) days prior to the termination of this Lease, of its decision to require such improvements be removed. The Parties agree, if CITY exercises its option, then at the termination of this Lease, however occurring, TENANT will have sixty (60) days thereafter to remove all buildings, structures, facilities, installations, improvements and other property belonging to TENANT from the Premises. If CITY exercises such option and TENANT fails to remove all such improvements and other property within sixty days after the termination of this Lease, then CITY has the right to have any or all such improvements and other property removed at the expense of TENANT. If CITY does not exercise its option to remove (or require the removal of) the improvements and other property, then title to such improvements and other property vests in CITY and TENANT must not remove same.

Article 5 LEASEHOLD MORTGAGES
TENANT must not mortgage, securitize or hypothecate the leasehold interest created by this Lease, in whole or any part, without the prior written approval of CITY, as evidenced by a resolution of the City Council of CITY.

CITY will not approve financing related to or using that leasehold interest created by this Lease as collateral, unless such financing is (i) to install or construct capital improvements on the Premises, (ii) to install or construct CITY-requested public improvements or provide other benefits in the Tidelands Trust area, the latter as approved by the Harbor Director or (iii) to reduce the interest rate of existing, approved debt secured by leasehold interest created by this Lease without redeeming any equity in the leasehold interest. CITY shall not agree to subordinate any of its interests in the Premises themselves or other direct interests held by the CITY as may result in a forfeiture, foreclosure upon, or subordination of any CITY interests other than the leasehold interest created by this Lease.

Article 6 REPAIRS, MAINTENANCE AND RESTORATION
Section 6.01 Maintenance by TENANT.
(1) At all times during the term of this Lease, TENANT must, at TENANT'S own cost and expense, keep and maintain, in good order and repair and in a safe and “broom clean” condition,

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all improvements now or hereafter on the Premises, including any public spaces, common areas, rights-of-way, sidewalks and other areas or spaces, even if not on the Premises but utilized as part of TENANT’S business operations. Furthermore, TENANT must, at TENANT'S own cost and expense, maintain at all times during the term of this Lease the whole of the Premises and other areas utilized for TENANT’S business operations as described above in a clean, sanitary, neat and orderly “broom clean” condition. CITY may, at the sole option of CITY, but not obligation,, clean, clear, maintain or repair the Premises, any improvements thereon or areas used by TENANT, as described above, at TENANT'S cost and expense, in the event TENANT fails to clean, clear maintain or make repairs, in accordance with this Section to the satisfaction of CITY, after 15- days' written notice to TENANT from CITY of CITY'S intent to exercise this option. Maintenance and repairs shall be in conformance with the City Council adopted Master Lease Management Policy, Exhibit H Inspection check list.
(2) In addition to, and not exclusive of, any other remedies available to CITY under law or equity, the parties agree that in the event TENANT fails to comply with any terms of maintenance or repair requirements under this Section 6.01 or Section 6.04, CITY’s damages would be uncertain and difficult (if not impossible) to accurately estimate because of the parties’ inability to predict impacts to environment, CITY sales tax or Rent revenues, health or safety matters, and other relevant factors. Within the (15) days following written notice as described in this section, TENANT will either correct the deficiencies or have a schedule for repairs approved by the Habor Director in writing. It is therefore agreed that the TENANT may be required by CITY to pay to the CITY, in accordance with the following schedule for each and every calendar day of delay beyond fifteen (15) days following written notice from CITY or exceedance of the schedule for repair of such maintenance or repair deficiencies, the following sums due for each day’s delay:
 The sum of two hundred dollars ($200.00) per day for the first sixty (60) days.  The sum of four hundred dollars ($400.00) per day for the following sixty (60) days.
 The sum of six hundred dollars ($600.00) per day for the following sixty (60) days.

If maintenance and repair deficiencies are not corrected within one hundred and eighty days (180), TENANT may be declared in default of this Lease. Nothing in this Section shall limit or waive any legal rights or remedies available to the CITY; the remedies available to CITY in this Section are not exclusive, but are cumulative with and in addition to all remedies now or hereafter allowed by law or elsewhere provided in this Lease.

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Section 6.02 Seawalls and Revetment.

At all times during the term of this Lease, TENANT must, at TENANT'S own cost and expense, repair, maintain, replace and rebuild, as necessary, the improvements, pilings, bulkheads, seawalls, revetment, piers, posts and any structures or other improvements located in the water portion of the Premises. Further, TENANT must, at TENANT'S own cost and expense, conduct maintenance and structural inspections, evaluations or surveys, by a qualified individual or firm, at reasonable intervals not to exceed ten years, to locate and determine needed maintenance, repairs or replacements of these improvements.

Section 6.03 Legal Requirements.

At all times during the term of this Lease, TENANT, at no cost to CITY, must:
(1) Make all alterations, additions, or repairs to the Premises or the improvements or facilities on the Premises required by any Legal Requirements (as defined in Section 3.07, above);
(2) Observe and comply with all Legal Requirements respecting the Premises or the improvements or facilities located thereon;
(3) Obtain all required permits pursuant to the Morro Bay Municipal Code or State law prior to the initiation of any repair or maintenance activity; and (4) Indemnify, defend and hold harmless CITY and the property of CITY, including the Premises, from any and all liability, loss, damages, fines, penalties, claims and actions resulting from TENANT'S failure to comply with and perform the requirements of this section.

Section 6.04 Failure to Repair.

In the event failure to repair results in a hazardous or unsafe condition, CITY has the right and option, but not the obligation, to close and prohibit access to the unsafe portion of the Premises until such repairs are completed and accomplished and the Premises rendered safe for public use.

In addition, if TENANT fails to repair any hazardous or unsafe condition within ten (10) days after written notice thereof from CITY, then CITY has the right, but not the obligation, to perform such repair at TENANT'S expense. TENANT must reimburse CITY for any such repair undertaken by CITY, promptly upon CITY'S demand, as additional Rent. Failure by CITY to enforce any of the provisions of this Article does not constitute a waiver of these provisions and CITY may, at any time, enforce all of the provisions of this Article, requiring all necessary repairs, rebuilding or replacement.

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Section 6.05 Inspection by CITY.

CITY or CITY'S agents, representatives, or employees may enter the Premises at all reasonable times for the purpose of inspecting the Premises to determine whether TENANT is complying with the terms of this Lease and for the purpose of doing other lawful acts that may be necessary to protect CITY'S interest in the Premises under this Lease or to perform CITY'S duties under this Lease or in its governmental capacity.

Section 6.06 TENANT'S Duty to Restore Premises.
(1) Except as provided in Section 6.07 below, if at any time during this Lease, any improvements now or hereafter on the Premises are destroyed in whole or in part by the elements, or any other cause not the fault of TENANT or CITY, then this Lease will continue in full force and effect and TENANT, at TENANT'S own cost and expense, must repair and restore the damaged or destroyed improvement(s) according to the original plan thereof or according to such modified plans therefor as are approved in writing by CITY. The work of permitting, repair and restoration must be (i) commenced by TENANT within 180 days after the damage or destruction occurs, (ii) pursued with due diligence, and (iii) completed not later than 12 full calendar months after the work is commenced, unless the Parties mutually agree, in writing, to an extension. In all other respects, the work of repair and restoration must be done in accordance with the requirements for construction work on the Premises set forth in Article 4 of this Lease. Any failure by TENANT either to commence or to complete repair and restoration as required by this Section 6.06 constitutes a material default under this Lease.
(2) Any and all insurance proceeds that become payable at any time during the term of this Lease because of damage to or destruction of any improvements on the Premises will be paid to TENANT and applied by TENANT toward the cost of repairing and restoring the damaged or destroyed improvements in the manner required by this Section 6.06, or, if this Lease is terminated, then applied as provided in Section 6.07. Except as set forth in Section 6.08 below, TENANT'S obligation to restore pursuant to this Section exist whether or not funds are available from insurance proceeds.

Section 6.07 Termination of Lease for Destruction.
(1) Notwithstanding the provisions of Section 6.06 of this Lease, TENANT has the option of terminating this Lease as provided in this Section 6.07 if:
(a) During the last 15 years of the term of this Lease, any improvement now or hereafter on the Premises are so damaged or destroyed by the elements or any cause, not the fault of TENANT or CITY, the improvement cannot be repaired and restored as required by

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Section 6.06 of this Lease at a cost not exceeding 35 percent of the cost of replacing all improvements if they had been totally destroyed at the time of such damage; or (b) During the last 10 years of the term of this Lease, any improvement now or hereafter on the Premises are so damaged or destroyed by the elements or any cause, not the fault of TENANT or CITY, the improvement cannot be repaired and restored as required by Section 6.06 of this Lease at a cost not exceeding 15 percent) of the cost of replacing all improvements if they had been totally destroyed at the time of such damage. (2) TENANT may exercise its right to terminate pursuant to this Section 6.07 by providing written notice to CITY within 180 days following damage or destruction as described herein. Such termination is effective on the last day of the calendar month following the month in which TENANT provides its notice.
(3) If TENANT fails to commence or complete repair and restoration as required by Section 6.06, then CITY has all rights and remedies with respect to TENANT’S default, including, but not limited to, termination of this Lease pursuant to Article 11. (4) If this Lease is terminated as a result of damage or destruction, then any insurance proceeds received with respect to the improvements will be applied or distributed in the following order:
(a) first, to the demolition of the improvements and removal of all demolition debris; then
(b) to any accrued and unpaid Rent as of the effective date of the termination; then
(c) to each Lender under a Leasehold Encumbrance, in order of lien priority, an amount not to exceed the amount due under such Leasehold Encumbrance; then (d) to CITY, an amount equal to the present value, as of the date of termination, of the total Minimum Rent for the remainder of the Term; then (e) the remaining proceeds, if any, to TENANT.

Section 6.08 Destruction Due to Risk Not Covered by Insurance.

Notwithstanding anything to the contrary in Section 6.06 of this Lease, TENANT has the right to terminate this Lease, at any time, if the improvements on the Premises are damaged or destroyed by a casualty for which TENANT is not required under this Lease to carry insurance

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and the cost to repair or restore such improvements exceeds 50 percent of the fair market value of all the improvements on the Premises immediately prior to the damage or destruction.

Article 7 INDEMNITY AND INSURANCE
Section 7.01 Indemnity Agreement.
(1) TENANT hereby agrees to indemnify, defend and hold harmless CITY, and the property of CITY (including the Premises and any improvements now or hereafter on the Premises), and CITY'S officers, officials, employees and volunteers from any and all liability, claims, loss, damages, and expenses, including reasonable attorney’s fees and litigation expenses, resulting from TENANT'S occupation and use of the Premises or any negligent act or omission of the TENANT or any of its officers, subtenants, employees, contractors, invitees or anyone for whom TENANT may be liable, specifically including, without limitation, any liability, claim, loss, damage, or expense arising by reason of:
(a) The death or injury of any person, including TENANT or any person who is an officer, employee, contractor, subtenant, invitee or agent of TENANT, or by reason of the damage to or destruction of any property, including property owned by TENANT or by any person who is an employee or agent of TENANT, from any cause whatever while such person or property is in or on the Premises or in any way connected with the Premises or with any of the improvements or personal property on the Premises;
(b) The death or injury of any person, including TENANT or any person who is an officer, employee, contractor, subtenant, invitee or agent of TENANT, or by reason of the damage to or destruction of any property, including property owned by TENANT or any person who is an officer, employee, contractor, subtenant, invitee or agent of TENANT, caused or allegedly caused by either (i) the condition of the Premises or any improvement placed on the Premises by TENANT, or (ii) any act or omission on the Premises by TENANT or any person in, on, or about the Premises with or without the permission and consent of TENANT; (c) Any work performed on the Premises or materials furnished to the Premises at the insistence or request of TENANT or any person or entity acting for or on behalf of TENANT; (d) TENANT'S failure to perform any provision of this Lease or to comply with any Legal Requirement imposed on TENANT or the Premises.

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(2) TENANT'S obligations pursuant to this Section to indemnify and hold harmless do not extend to any liability, claim, loss, damage or expense arising from CITY'S active negligence or willful misconduct.

Section 7.02 Liability Insurance.

During the term of this Lease, TENANT must maintain at its cost Commercial General Liability insurance with coverages as described in CITY’s HARBOR DEPARTMENT LEASE MANAGEMENT POLICY, as may be updated or changed from time to time at the sole discretion of the CITY. Such coverages must insure against claims for bodily injury (including death), property damage, contractual liability, personal injury and advertising injury occurring on the Premises or from operations located in any part of the Premises. Such insurance must afford protection in amounts no less than One Million Dollars ($1,000,000) per occurrence for bodily injury, personal injury and property damage; provided, that if insurance with a general aggregate limit is used, then either the general aggregate limit will apply separately to the Premises or the general aggregate limit will be twice the occurrence limit stated in this Section. All liability insurance carried by TENANT hereunder will name CITY, its officers, officials, employees and volunteers as additional insureds, and be primary insurance with respect to such additional insureds. TENANT must include all its subtenants as insureds under TENANT's liability policies or furnish separate certificates and endorsements for each subtenant. All coverages for subtenants must comply with all requirements of this Article Seven.

Section 7.03 Worker's Compensation.

TENANT must maintain at TENANT'S own expense and keep in full force and effect during the term of this Lease, Worker's Compensation Insurance as provided by law. Said insurance must contain a waiver of subrogation rights against CITY. TENANT must also maintain employer's liability insurance with minimum coverage of $1,000,000 per accident for bodily injury or disease.

Section 7.04 Property Insurance.

TENANT must, at its cost, at all times during the term of this Lease keep all improvements and other structures on the Premises, as well as any and all additions, improvements and betterments thereto, insured for 100 percent) of their full replacement cost with no co-insurance provision against loss or destruction by the perils covered by "all risk" (excluding earthquake) property damage insurance policies. Any loss coverage under such insurance must be payable to TENANT, CITY, and any Lender under a Leasehold Encumbrance approved pursuant to Article 5 of

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this Lease, as their interests may appear, and such proceeds must be used and applied in the manner required by Article 6 of this Lease.

Section 7.05 Additional Coverage.

TENANT must also maintain, at its sole expense, the insurance described in this Section 7.05.
(1) If TENANT has (or is required by any Legal Requirement to have) a liquor license and is selling or distributing alcoholic beverages on the Premises, then TENANT must maintain liquor liability coverage in appropriate amounts. TENANT must require any subtenant who has (or is required by any Legal Requirement to have) a liquor license and who is selling or distributing alcoholic beverages on the Premises, to maintain such coverage. (2) TENANT must maintain "all risk" (excluding earthquake) property damage insurance covering TENANT's personal property located at the Premises, in amounts not less than the full replacement value of such personal property. CITY has no interest in the proceeds of such insurance.
(3) TENANT must obtain and maintain any additional insurance coverages CITY may reasonably require. As illustration only and not as a limitation, in appropriate circumstances such additional insurance may include increased general liability limits, business interruption coverage, business automobile liability, boiler and machinery insurance or builder's risk insurance.

TENANT, however, is not required to maintain additional coverages that are in excess of those typically maintained by similarly situated tenants in the Morro Bay area.

Section 7.06 General Requirements.

Except as specifically provided to the contrary, all the insurance required pursuant to this Article Seven is subject to the requirements of this Section 7.06. (1) Maintenance of proper insurance coverage is a material element of this Lease and failure to maintain or renew coverage or to provide evidence of coverage and/or renewal may be treated by the CITY as a material breach of contract. TENANT must forward CITY”S specifications and forms to TENANT’S insurance agent for compliance. (2) CITY may, at any time, require TENANT to increase the minimum coverage limits for insurance required by this Lease, but every such increase must be reasonable under the circumstances.

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(3) All policies must be issued by insurance companies authorized to issue such insurance in California, with an A.M. Best's rating of no less than A:VII. (4) Any deductibles or self-insured retentions must be declared to and approved by CITY.

At the option of CITY, either: (i) the insurer must reduce or eliminate such deductibles or selfinsured retentions as respects CITY, its officers, officials, employees and volunteers or (ii) TENANT must provide a financial guarantee satisfactory to CITY guaranteeing payment of losses and related investigations, claim administration and defense expenses. (5) Each insurance policy required by this Lease must be endorsed to state coverage will not be cancelled or reduced, except after 30-days' prior written notice by certified mail, return receipt requested, has been given to CITY.
(6) TENANT must furnish CITY with certificates and amendatory endorsements effecting the coverage required by this Lease. The endorsements must be on forms provided by CITY or on other than CITY's forms; provided, that those endorsements or policies conform to the requirements. All certificates and endorsements are to be received and approved by CITY before use of the Premises, and promptly following any renewal or replacement. CITY reserves the right, at any time, to require complete, certified copies of all required insurance policies, including endorsements effecting the coverage required by these specifications. (7) TENANT'S insurance coverage must be primary insurance as respects CITY, its officers, officials, employees, and volunteers. Any insurance or self-insurance maintained by CITY, its officers, officials, employees, or volunteers will be excess of TENANT'S insurance and will not contribute with it.

Section 7.07 No Subrogation.

TENANT agrees, in the event of loss due to any of the perils for which it has agreed to provide insurance, TENANT will look solely to its insurance for recovery. TENANT hereby grants to the CITY, on behalf of any insurer providing insurance to either TENANT or CITY with respect to TENANT'S occupancy of the Premises, a waiver of any rights to subrogation, which any such insurer of TENANT may acquire against CITY by virtue of the payment of any loss under such insurance. Each insurance policy required under this Lease, including those insuring TENANT against claims, expense, or liability for injury to persons or property, must provide the insurer will not acquire by subrogation any right to recovery.

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Section 7.08 TENANT'S Waiver.

TENANT hereby waives any right of recovery against CITY for each claim, expense, liability, or business interruption, or other loss, except where caused by CITY'S active negligence or willful misconduct. TENANT agrees, to the extent TENANT fails to acquire insurance, TENANT will not have any claim against CITY for any loss that results from a risk or peril that would have been included in such insurance.

Section 7.09 Insurance Not a Limit.

The insurance requirements of this Article 7 are independent of, and do not limit or modify, TENANT'S indemnification, defense, hold harmless and other obligations pursuant to this Lease.

Article 8 TAXES AND FEES
Section 8.01 TENANT to Pay Taxes.

TENANT must pay, before delinquency, all taxes and assessments levied upon or assessed to TENANT on the Premises by reason of this Lease or of any equipment, appliances, improvement, or other development of any nature whatsoever, erected, installed, or maintained by TENANT or by reason of the business or other activity of TENANT upon or in connection with the Premises. TENANT must pay all possessory interest taxes applicable to the Premises.

Section 8.02 TENANT to Pay License and Permit Fees.

TENANT must pay any fees imposed by Legal Requirements for licenses or permits for any business or activities including construction by TENANT upon the Premises.

Section 8.03 Utilities.

TENANT must (i) pay, or cause to be paid and (ii) hold harmless CITY and the property of CITY, including the Premises, from all charges for the furnishing of gas, water, electricity, telecommunication service, and for other public utilities to the Premises during the term of this Lease and for the removal of garbage and rubbish from the Premises during the term of this Lease.

Article 9 CONDEMNATION
Section 9.01 Total Condemnation.

If title and possession to all of the Premises is permanently taken for any public or quasipublic use under any statute, or by the right of eminent domain, then this Lease will be considered terminated on the date that possession of the Premises is taken; and both CITY and TENANT will

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thereafter be released from all obligations, including Rent, all of which will be prorated to the date of termination, except those specified in Section 9.02 of this Lease.

Section 9.02 Condemnation Award.

Any compensation or damages awarded or payable because of the permanent taking of all or any portion of the Premises by eminent domain will be allocated between CITY and TENANT as follows:
(1) All compensation or damages awarded or payable for the taking by eminent domain of any land that is part of the Premises will be paid to and be the sole property of CITY free and clear of any claim of TENANT or any person claiming rights to the Premises through or under TENANT.
(2) All compensation or damages awarded or payable which is specifically attributed by the taking party to the "good will" of TENANT'S business will be paid to and be the sole property of TENANT.
(3) All compensation or damages awarded or payable because of any improvements constructed or located on the portion of the Premises taken by eminent domain where only a portion of the Premises is taken by eminent domain, and TENANT is not entitled to or does not terminate this Lease, will be applied in the manner specified in Section 9.04 toward the replacement of such improvements with equivalent new improvements on the remaining portions of the Premises.
(4) All compensation or damages awarded or payable because of any improvements constructed or located on the portion of the Premises taken by eminent domain where this Lease is terminated because of the taking by eminent domain, whether all or only a portion of the Premises is taken by eminent domain, will be allocated between CITY and TENANT as follows:
(a) That percentage of the compensation or damages awarded or payable because of the improvements that equals the percentage of the full term of this Lease that has, at the time of the taking, not expired will belong to and be the sole property of TENANT. (b) That percentage of the compensation or damages awarded or payable because of the improvements that equals the percentage of the full term of this Lease that has, at the time of the taking, expired will belong to and be the sole property of CITY. (c) The term "time of taking," as used in this Section, means 12:01 a.m. of the date the agency or entity exercising the eminent domain power, takes title to or the date it takes physical possession of the portion of the Premises, whichever first occurs.

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(5) Any severance damages awarded or payable because only a portion of the Premises is taken by eminent domain will be the sole and separate property of CITY.

Section 9.03 Termination for Partial Taking.

If, during the term of this Lease, title and possession of only a portion of the Premises is taken for any public or quasi-public use under any statute, or by right of eminent domain, then TENANT may, at TENANT'S option, terminate this Lease by serving written notice of termination on CITY within 90 days after TENANT has been deprived of actual physical possession of the portion of the Premises taken for such public use. This Lease will terminate on the first day of the calendar month following the calendar month in which the notice of termination described in this section is served on CITY. On termination of this Lease, pursuant to this Article, all subleases and subtenancies in or on the Premises or any portion of the Premises created by TENANT under this Lease will also terminate and the Premises must be delivered to CITY free and clear of all such subleases and subtenancies; provided, however, that CITY may, at CITY'S option, by mailing written notice to a subtenant allow any subtenant to attorn to CITY and continue such subtenant's occupancy on the Premises as a TENANT of CITY. On termination of this Lease pursuant to this section, however, both CITY and TENANT will be released from all obligations under this Lease, except those specified in Section 9.02 of this Lease.

Section 9.04 Rent Abatement for Partial Taking.

If, during the term of this Lease, title and possession of only a portion of the Premises is taken under the power of eminent domain by any public or quasi-public agency or entity and TENANT does not terminate this Lease, then this Lease will terminate as to the portion of the Premises taken under eminent domain on the date actual physical possession of the portion taken by eminent domain is taken by the agency or entity exercising the eminent domain power.

Furthermore, the Rent payable under this Lease will, as of that time be reduced in the same proportion of the Premises taken by eminent domain bears to the full value of the Premises at that time; provided however, that TENANT will make a good faith effort to replace any improvements or facilities with equivalent new facilities on the remaining portion of the Premises and do all other acts at TENANT'S own cost and expense required by the eminent domain taking to make the remaining portion of the Premises fit for the use specified in this Lease.

Section 9.05 Conveyance in Lieu of Eminent Domain.

A voluntary conveyance by CITY, with the consent of TENANT, of title to all or a portion of the Premises to a public or quasi-public agency or entity in lieu of and under threat by such agency or entity to take the same by eminent domain proceedings will be considered a taking of

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title to all or such portion of the Premises under the power of eminent domain subject to the provisions of this Article.

Section 9.06 Temporary Taking.

If the possession of the Premises or any portion thereof are taken under the power of eminent domain by any public or quasi-public agency or entity for a limited period not extending beyond the term of this Lease, then this Lease will not terminate (except as provided in this Section

9.06) and TENANT must continue to perform all its obligations hereunder, except only to the extent TENANT is prevented from performing such obligations by reason of such taking.

TENANT will be entitled to receive the entire amount of compensation or damages awarded because of such temporary taking. If a temporary taking extends for more than 36 months, then TENANT will have the right to terminate this Lease, and TENANT will be entitled to receive, out of the compensation or damages awarded because of such temporary taking, the amount that is attributable to the period of time up until the effective date of TENANT'S termination of this Lease.

Article 10 ASSIGNMENT AND SUBLEASING
Section 10.01 No Assignment Without CITY'S Consent.

Except as provided in this Article 10, TENANT must not assign or otherwise transfer this Lease, any right or interest in this Lease, or any right or interest in the Premises or any of the improvements that may now or hereafter be constructed or installed on the Premises without the express written consent of CITY first had and obtained. Any assignment or transfer by TENANT without the prior written consent of CITY, as evidenced by a resolution of the City Council, whether it be voluntary or involuntary, by operation of law or otherwise, is void and may, at the option of CITY, terminate this Lease. A consent by CITY to one assignment will not be deemed to be a consent to any subsequent assignment of this Lease by TENANT. CITY will not unreasonably nor arbitrarily withhold its approval to the assignment or transfer of this Lease to an assignee who is financially reliable and qualified to conduct the business for which this Lease was granted. It is mutually agreed TENANT'S qualifications are a part of the consideration for granting of this Lease and said party does hereby agree to maintain active control and supervision of the operation conducted on the Premises.

Section 10.02 Change of Ownership as Assignment.

For purposes of this Article 10, the following transactions will be deemed to be assignments or transfers:
(1) If TENANT is a partnership or limited liability company:

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(a) A change in ownership effected voluntarily, involuntarily, or by operation of law, within a 12-month period, of 25 percent or more of the partners or members or 25 percent or more of the partnership or membership interests; or
(b) The dissolution of the partnership or limited liability company without its immediate reconstitution.
(2) If TENANT is a closely held corporation (i.e., one whose stock is not publicly held and not traded through an exchange or over the counter):
(a) The sale or other transfer, within a 12-month period, of more than an aggregate of 25 percent of the voting shares of TENANT (other than to immediate family members by reason of gift or death); or
(b) The dissolution, merger, consolidation, or other reorganization of TENANT.

Section 10.03 Application for Assignment.

A condition of an assignment is TENANT must file with CITY an application to assign its leasehold interest prepared by the prospective assignee. Concurrently with filing the application, TENANT must pay a reasonable fee associated with the cost of processing said application, in cash or certified or cashier's check to enable CITY adequately to investigate the proposed assignee's qualifications, financial reliability and suitability as a permitted assignee. CITY is not be required to account for the use of the sum paid. If the proposed assignee's net worth, financial reliability and qualifications on the date of assignment are not sufficient to reasonably guarantee successful operation of the Premises in compliance with all applicable CITY, County, State and federal requirements, then CITY may withhold approval of the assignment or condition it upon TENANT'S guarantee of such assignee's obligations hereunder for such period as CITY deems advisable. Net worth means the amount by which the total of all assets exceed the total of all liabilities as determined in accordance with general accepted accounting principles as approved by CITY'S auditor, or other authorized representative or agent.

Section 10.04 Probate Transfer of Assignment.

If TENANT is an individual, nothing herein contained will prevent the transfer of this Lease by trust, will, or by operation of law under the intestacy provisions of the California Probate Code as it may be amended from time to time. Probate sale of the leasehold interest will not be permitted without the consent of the CITY, evidenced by a City Council resolution, first had and obtained.

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Section 10.05 No Sublease Without CITY'S Consent.

TENANT must not sublease the whole nor any part of the Premises, or license, permit, or otherwise allow any other person (the employees of TENANT excepted) to occupy or use the Premises, or any portion thereof, without the prior written consent of CITY’s Harbor Director, or any future successor to the duties of the City’s Harbor Director. The process for obtaining that consent will not begin until TENANT has filed an application to sublease and paid a reasonable fee, as determined by CITY, associated with the cost of processing the application. A consent to one subletting, occupation, licensing or use will not be deemed to be a consent to any subsequent subletting, occupation, licensing or use by another person. Any sublease or license without CITY'S written consent is void, and may, at CITY'S option, terminate this Lease. CITY will not unreasonably nor arbitrarily withhold its consent to sublet to one who is qualified and financially reliable. CITY'S consent to any occupation, use, or licensing will be in CITY'S sole and absolute discretion. Notwithstanding any provisions herein to the contrary, the terms "assignment," "subletting," "occupation," or "use," are not to be construed or interpreted to mean or include the temporary, short-term renting or leasing of boat slips, motel, hotel, or apartment accommodations, if any, on the Premises.

Section 10.06 Subtenant Subject to Lease Terms.

Any and all subleases must be expressly made subject to all the terms, covenants, and conditions of this Lease. In no event will the term of any sublease extend beyond the term of this Lease. Subject to Section 10.09, termination of this Lease prior to the expiration of this Lease term also terminates any and all subleases. A breach of the terms of this Lease by a subtenant constitutes a breach on the part of TENANT and subjects both the subtenant and TENANT to all the remedies provided to CITY herein and by law. Failure by any subtenant to report Gross Sales or to pay Percentage Rent due from subtenant constitutes a breach of this Lease. TENANT hereby agrees to and does guarantee payment of such Percentage Rent due by a subtenant under the terms of this lease.

Section 10.07 Consent to Sublease Agreement.

Prior to any consent by CITY to any sublease hereof, TENANT, CITY and any subtenant must have executed the CITY’S Consent to Sublease Agreement making CITY a third party beneficiary, whereby the subtenant agrees to be bound by all of the terms, covenants and conditions of this Lease. Further, it is agreed by TENANT any default by the subtenant of any of the terms, covenants and conditions of this Lease will be a violations by TENANT of this Lease and all remedies of CITY for such violation, including termination of this Lease, may immediately be

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enforceable by CITY against TENANT. TENANT must apply any and all monies received from any subtenant first to the payment of obligations of the subtenant to CITY.

Section 10.08 TENANT and Guarantor Remain Liable.

Prior to approval by CITY to any sublease hereof, TENANT must agree to be primarily and jointly and severally liable to CITY for all obligations due CITY by any subtenant, including the payment of rents; and TENANT must agree CITY may proceed directly against TENANT for any obligation owed to CITY by the subtenant. If this Lease is guaranteed, then neither the sublease nor CITY'S approval thereof will release the guarantor from its obligations pursuant to the guaranty.

Section 10.09 Nondisturbance.

On the terms set forth below, CITY may enter into agreements with subtenants establishing, in the event of any termination of this Lease prior to the expiration date, CITY will not terminate or otherwise disturb the rights of the subtenant under such sublease, but will instead honor such sublease as if that sublease had been entered into directly between CITY and such subtenant, conditioned upon such subtenant's agreement to attorn to CITY and full performance of all obligations under the sublease in question ("Non-Disturbance Agreement"). CITY agrees to execute a Non-Disturbance Agreement in connection with a particular sublease; provided, that Tenant provides CITY with a copy of the sublease, and the Non-Disturbance Agreement is customary in form and substance and otherwise reasonably acceptable to CITY.

Article 11 DEFAULT AND TERMINATION
Section 11.01 Abandonment by TENANT.

If TENANT breaches this Lease and abandon all or any part of the Premises prior to the scheduled expiration of the term of this Lease, then CITY may continue this Lease in effect by not terminating TENANT'S right to possession of the Premises, in which event CITY may, at its option, enforce all CITY'S rights and remedies under this Lease including the right to recover the Rent specified in this Lease as it becomes due under this Lease.

Section 11.02 Termination for Breach by TENANT.

All covenants and agreements contained in this Lease are declared to be conditions to this Lease and to the term hereby demised to TENANT. If TENANT fails to perform any covenant, condition, or agreement contained in this Lease, except for payment of any Rent or other monetary amount due, and such failure is not cured within thirty (30) days after written notice thereof is

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served on TENANT, then CITY may terminate this Lease immediately, and in the event of such termination, TENANT will have no further rights hereunder and TENANT must thereupon forthwith remove from the Premises and will have no further right or claim thereto and CITY will immediately thereupon have the right to re-enter and take possession of the Premises, subject only to appropriate legal process.

Section 11.03 Termination for Failure to Pay Rent.

If any payment of Rent is not made as herein provided and such failure to pay is not cured within three (3) days after written notice thereof is served on the TENANT, then CITY will have the option to immediately terminate this Lease; and in the event of such termination, TENANT will have no further right or claim thereto and CITY will immediately thereupon have the right to re-enter and take possession of the Premises, subject only to appropriate legal process.

Section 11.04 Lender May Cure Default.

CITY hereby affords the lender under any Leasehold Encumbrance of record with CITY the right to cure any default by TENANT of the covenants, conditions, or agreements hereof, as provided in Article 5 of this Lease.

Section 11.05 Damages for Breach.

If TENANT defaults in the performance of any covenant, condition or agreement contained in this Lease and the default be incurable or not be cured within the time period set forth hereinabove, then CITY may terminate this Lease and:
(1) Bring an action to recover from TENANT:
(a) The worth at the time of award of the unpaid Rent which had been earned at the time of termination of the Lease;
(b) The worth at the time of award of the amount by which the unpaid Rent, which would have been earned after termination of the Lease until the time of award exceeds the amount of rental loss that TENANT proves could have been reasonably avoided; (c) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss that TENANT proves could be reasonably avoided; and
(d) Any other amount necessary to compensate CITY for all detriment proximately caused by TENANT'S failure to perform its obligations under this Lease; and

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(2) Bring an action, in addition to or in lieu of the action described in subparagraph (1) of this Section, to re-enter and regain possession of the Premises in the manner provided by the laws of unlawful detainer of the State of California then in effect.

Section 11.06 Cumulative Remedies.

The remedies available to CITY in this Article are not exclusive, but are cumulative with and in addition to all remedies now or hereafter allowed by law or elsewhere provided in this Lease.

Section 11.07 Waiver of Breach.

The waiver by CITY of any breach by TENANT of any of the provisions of this Lease does not constitute a continuing waiver or a waiver of any subsequent breach by TENANT either of the same or a different provision of this Lease.

Section 11.08 Surrender of Premises.

On expiration or sooner termination of this Lease, TENANT must surrender the Premises, and, subject to Section 4.04, all improvements in or on the Premises, and all facilities in any way appertaining to the Premises, to CITY in good, safe, and clean condition, reasonable wear and tear excepted.

Section 11.09 Cross-Defaults.

The Improvements to the Premises attendant to this Lease are described in Conditional Use Permit CUP22-09. However, Conditional Use Permit CUP22-09 includes project construction and conditions for improvements located outside the Premises. Nonetheless, the project as a whole described in Conditional Use Permit CUP22-09 is intended and designed to harmonize with TENANT’S use of the Premises and Improvements thereto. A default under the terms and conditions of any of Conditional Use Permit CUP22-09 shall be a default under this Lease.

Article 12 MISCELLANEOUS
Section 12.01 Notices.

Any and all notice or demands by or from CITY to TENANT, or TENANT to CITY, must be in writing. They must be served either personally, or by registered or certified mail. Any notice or demand to CITY must be given to:

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Harbor Business Office
1275 Embarcadero
Morro Bay, CA 93442
with a copy to:

City Manager of the City of Morro Bay
City Hall
595 Harbor Street
Morro Bay, CA 93442
Any notice or demand to TENANT must be given at:

California Coastal Investments, LLC
PO Box 3260
San Luis Obispo, CA 93403
Such addresses may be changed by written notice by either Party to the other Party.

Section 12.02 Governing Law and Jurisdiction.

This Lease, and all matters relating to this Lease, are governed by the laws of the State of California in force at the time any need for interpretation of this Lease or any decision concerning this Lease arises. CITY and TENANT consent to exclusive personal and subject matter jurisdiction in the Superior Court of the State of California in and for the county where the Premises are located, and each Party waives any claim such court is not a convenient forum. Each Party hereby specifically waives the provisions of California Code of Civil Procedure Section 394, and any successor statute thereto.

Section 12.03 Binding on Successors.

Subject to the provisions herein relating to assignment and subletting, each and all of the terms, conditions, and agreements herein contained will be binding upon and inure to the benefit of the successors and assigns of any and all of the Parties; and all of the Parties hereto are jointly and severally liable hereunder.

Section 12.04 Partial Invalidity.

If any provision of this Lease is held by a court of competent jurisdiction to be either invalid, void, or unenforceable, then the remaining provisions of this Lease will remain in full force and effect unimpaired by the holding.

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Section 12.05 Reserved.

Section 12.06 Modification.

This Lease can only be modified, amended or altered pursuant to a written amendment executed by the Mayor and attested to by City Clerk, pursuant to prior City Council approval.

Notwithstanding City Council approval, no amendment will become effective until it is in fact executed by the Mayor and attested to by City Clerk and approved as to form by the City Attorney (or designee). TENANT understands this Lease cannot be modified, amended or altered by oral statements by any person representing CITY, including the Mayor and City Clerk. TENANT specifically agrees not to rely on oral statements, purported oral waivers, or purported oral modifications and agrees not to rely upon purported written modifications unless they meet the requirements of this Section. If the title of any person authorized to act for CITY under this Lease is changed during the term of this Lease, then the person who succeeds to substantially the same responsibilities with respect to CITY will have the authority to act for CITY under this Lease.

Section 12.07 Time of Essence.

Time is expressly declared to be the essence of this Lease.

Section 12.08 Memorandum of Lease for Recording.

CITY and TENANT agree, at the request of either at any time during the term of this Lease, to execute a Memorandum of Lease or "short form" of this Lease, which shall describe the Parties, set forth a description of the Premises, specify the term of this Lease, and incorporate this Lease by reference.

Section 12.09 Force Majeure.

If either Party hereto is delayed or hindered in or prevented from the performance of any act required hereunder by reason of a strike, lock-out, labor trouble, inability to procure materials, failure of power, governmental moratorium, riot, insurrection, war, pandemic or other reason of a like nature not the fault of the Party delaying in performing work or doing any act required under the terms of this Lease, then performance and doing of such act will be excused for the period of such delay. The Parties understand and agree, the foregoing will not extend any period of time for the payment of Rent or other sums payable by either Party or any period of time for the written exercise of an option or right by either Party.

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Article 13 SPECIAL PROVISIONS PECULIAR TO THIS LEASE SITE The following provisions apply to the Lease Premises only:

Section 13.01 Public Restrooms
Restrooms completed in conformance with Conditional Use Permit CUP22-09 shall be made available to the public during business hours and TENANT shall maintain signage in prominent locations which clearly identifies that the restrooms are available to the general public.

In the case of a dispute over location and design of signage, the CITY’s Harbor Staff may designate two locations for “public restroom” signs of a type and size to be determined by the CITY.

Section 13.02 TENANT’S Obligation to Redevelop Site.
(1) CITY and TENANT agree TENANT will construct improvements to the Premises as outlined in the approved Conditional Use Permit No. #CUP22-09 and consisting of the following (the “Improvements”). Improvements specific to the Lease Premises include:

A. Demolition/reconstruction of the Libertine building at 801 Embarcadero B. Redevelopment to consist of first floor restaurant/brewery/coffee shop with 7- unit hotel on the second floor with public viewing deck C. Public coastal access with new 15’ wide Harborwalk gap extension connecting to adjacent lease sites
D. 7 steel piles, sleeving of 3 existing piles, new dock area with gangway ramp and space for vessel tie-up
E. Removal of street end public parking to create a public plaza F. Master sign program participation and approval
(2) TENANT shall perform the Improvements specific to the Premises in accordance with the following milestones:

A. TENANT to submit for Building Permits for the Improvements no later than August 1, 2025.

B. Commence construction of the Improvements within 1 month of receipt of building permit, (Estimated 3-4 month for plan check) on or before January 1, 2026.

C. Completion of construction of all components of the Improvements no later than within 30 months of receipt of building permit, on or before July 1, 2028.

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Completion shall mean when the Improvements are entitled to be issued a final Certificate of Occupancy, including any and all Certificates of Occupancy required for any sub-tenant of TENANT, as well as all Certificates of Occupancy required of TENANT. TENANT shall provide evidence TENANT has incurred at least $5,200,000.00 in costs to satisfactorily complete the Improvements on the Premises pursuant of issuance of final Certificate of Occupancy.

D. Master lease construction and occupancy deadlines shall supersede the consent of landowner deadlines approved by City Council on September 12, 2023, whereas, if master lease deadlines are not met due to any reason within or outside the control of TENANT, an extension of up to 180-days may be granted as reasonably determined by the City Manager. Additional extensions to any or all of these dates may be granted by the City Council in its sole discretion. During construction of the Improvements, TENANT shall take all measures to:
a. Avoid any pollution of the atmosphere or littering of land or water by or originating in or about the Premises or caused by TENANT’S construction activities.
b. Keep the noise level on the Premises to a minimum so that persons in the neighborhood will be able to comfortably enjoy business and facilities in the area.
c. Prevent any pollutants, including but not limited to petroleum products, from entering Morro Bay waters.
d. Reasonably avoid negative impacts on surrounding businesses. e. Prohibit storage of materials or equipment on public property and avoid parking or traffic delays or impairment without prior consent of CITY. f. Keep the construction site in a sightly, orderly, and safe manner at all times.
(3) TENANT shall perform all other project work as set forth in Conditional Use Permit CUP22-09, which includes certain “public plaza” improvements located outside the Premises, and as such work may proceed pursuant to a separate Special Encroachment Permit or other such appropriate instrument or entitlement. The terms of such separate Special Encroachment Permit or other entitlement are hereby incorporated by this reference into the terms of this Lease as though set forth fully herein. A Plaza Improvement Plan must be approved by the CITY concurrent with the public works agreement.

4855-8063-9740 v4 -36-
(4) Liquidated Damages: If work is not completed in strict compliance with Sections 13.02 (1) (2) (3) of this Lease or in strict accordance with the schedule of performance provided by any Improvement entitlements, it is understood, acknowledged and agreed that the CITY will suffer damage. It is therefore agreed that the TENANT and its sureties shall pay to the CITY the sum of $100.00 for each and every calendar day of delay beyond the completion date set in this Lease, or beyond any completion schedule, construction schedule or Improvement milestones established in or pursuant to related Improvement entitlements. TENANT expressly understands, acknowledges and agrees that such liquidated damages can and shall be imposed if the TENANT does not meet each and every aspect of any activity schedule, completion schedule, construction schedule or Improvement milestones. If the CITY accepts work or makes any payment under this Lease after a default by reason of delays, the acceptance of such work and/or payment(s) shall in no respect constitute a waiver or modification of any provisions regarding Improvement deadlines, a completion schedule, or the accrual of liquidated damages. This Section does not exclude recovery of damages under the default provisions of this Lease, Improvement entitlements (including without limitation Conditional Use Permit No.#CUP22-09), and is expressly in addition to the City’s ability to seek other legal or equitable damages. To the extent required by Government Code section 4215, TENANT shall not be assessed liquidated damages for delay in completion of the work when such delay was caused by the failure of the CITY or owner of a utility to provide for removal or relocation of utility facilities.
[SIGNATURE PAGE FOLLOWS]

4855-8063-9740 v4 -37-
EXECUTED on ________________, 20___, at San Luis Obispo County, California.

CITY OF MORRO BAY TENANT
_________________________________
Carla Wixom, MAYOR
By: ________________________________
Its: ________________________________
By: ________________________________
Its: ________________________________
ATTEST:
_________________________________
Dana Swanson, CITY CLERK
APPROVED AS TO FORM:
_____________________________________
____________________, CITY ATTORNEY

4855-8063-9740 v4 A-1

EXHIBIT A

COPY OF PARCEL MAP

4855-8063-9740 v4

L E A S E
by and between
the CITY OF MORRO BAY
("CITY")
and
Central Coastal Investments, LLC
("TENANT")

4855-8063-9740 v4 -iTABLE OF CONTENTS
Article 1 FIXED TERM.............................................................................................................2 Section 1.01 Term..............................................................................................2 Section 1.02 Extensions.....................................................................................2 Section 1.03 Hold Over......................................................................................2 Section 1.04 Replacement..................................................................................3 Article 2 RENT..........................................................................................................................3 Section 2.01 Annual Minimum Rent. ................................................................3 Section 2.02 CPI Adjustment to Annual Minimum Rent. .................................3 Section 2.03 Calculation of New Minimum Rent..............................................4 Section 2.04 Percentage Rent. ...........................................................................5 Section 2.05 Reimbursements............................................................................8 Section 2.06 Penalty and Interest.......................................................................8 Article 3 USE OF PREMISES...................................................................................................8 Section 3.01 Permitted Uses. .............................................................................8 Section 3.02 Unauthorized Use..........................................................................9 Section 3.03 Operation of Business - Hours of Operation.................................9 Section 3.04 Competition...................................................................................9 Section 3.05 Environmental Considerations and Hazardous Materials...........10 Section 3.06 Tidelands Trust. ..........................................................................11 Section 3.07 Compliance with Law.................................................................11 Section 3.08 Waste or Nuisance. .....................................................................11 Section 3.09 Use by CITY...............................................................................12 Article 4 CONSTRUCTION, ALTERATION AND REPAIRS .............................................12 Section 4.01 Construction Approval................................................................12 Section 4.02 Construction Bond. .....................................................................12

4855-8063-9740 v4 -iiSection 4.03 Mechanics' Liens.........................................................................13 Section 4.04 Ownership of Improvements.......................................................14 Article 5 LEASEHOLD MORTGAGES .................................................................................14 Article 6 REPAIRS, MAINTENANCE AND RESTORATION ............................................14 Section 6.01 Maintenance by TENANT..........................................................14 Section 6.02 Seawalls and Revetment. ............................................................16 Section 6.03 Legal Requirements. ...................................................................16 Section 6.04 Failure to Repair. ........................................................................16 Section 6.05 Inspection by CITY.....................................................................17 Section 6.06 TENANT'S Duty to Restore Premises........................................17 Section 6.07 Termination of Lease for Destruction.........................................17 Section 6.08 Destruction Due to Risk Not Covered by Insurance...................18 Article 7 INDEMNITY AND INSURANCE ..........................................................................19 Section 7.01 Indemnity Agreement. ................................................................19 Section 7.02 Liability Insurance. .....................................................................20 Section 7.03 Worker's Compensation..............................................................20 Section 7.04 Property Insurance. .....................................................................20 Section 7.05 Additional Coverage. ..................................................................21 Section 7.06 General Requirements.................................................................21 Section 7.07 No Subrogation. ..........................................................................22 Section 7.08 TENANT'S Waiver.....................................................................23 Section 7.09 Insurance Not a Limit. ................................................................23 Article 8 TAXES AND FEES..................................................................................................23 Section 8.01 TENANT to Pay Taxes...............................................................23 Section 8.02 TENANT to Pay License and Permit Fees. ................................23 Section 8.03 Utilities........................................................................................23

4855-8063-9740 v4 -iiiArticle 9 CONDEMNATION..................................................................................................23 Section 9.01 Total Condemnation....................................................................23 Section 9.02 Condemnation Award. ................................................................24 Section 9.03 Termination for Partial Taking. ..................................................25 Section 9.04 Rent Abatement for Partial Taking. ............................................25 Section 9.05 Conveyance in Lieu of Eminent Domain....................................25 Section 9.06 Temporary Taking. .....................................................................26 Article 10 ASSIGNMENT AND SUBLEASING .....................................................................26 Section 10.01 No Assignment Without CITY'S Consent. .................................26 Section 10.02 Change of Ownership as Assignment. ........................................26 Section 10.03 Application for Assignment........................................................27 Section 10.04 Probate Transfer of Assignment. ................................................27 Section 10.05 No Sublease Without CITY'S Consent.......................................28 Section 10.06 Subtenant Subject to Lease Terms..............................................28 Section 10.07 Consent to Sublease Agreement. ................................................28 Section 10.08 TENANT and Guarantor Remain Liable....................................29 Section 10.09 Nondisturbance. ..........................................................................29 Article 11 DEFAULT AND TERMINATION..........................................................................29 Section 11.01 Abandonment by TENANT........................................................29 Section 11.02 Termination for Breach by TENANT.........................................29 Section 11.03 Termination for Failure to Pay Rent. ..........................................30 Section 11.04 Lender May Cure Default. ..........................................................30 Section 11.05 Damages for Breach....................................................................30 Section 11.06 Cumulative Remedies. ................................................................31 Section 11.07 Waiver of Breach. .......................................................................31 Section 11.08 Surrender of Premises. ................................................................31 Section 11.09 Cross-Defaults.............................................................................31

4855-8063-9740 v4 -ivArticle 12 MISCELLANEOUS .................................................................................................31 Section 12.01 Notices. .......................................................................................31 Section 12.02 Governing Law and Jurisdiction.................................................32 Section 12.03 Binding on Successors. ...............................................................32 Section 12.04 Partial Invalidity..........................................................................32 Section 12.05 Reserved......................................................................................33 Section 12.06 Modification................................................................................33 Section 12.07 Time of Essence..........................................................................33 Section 12.08 Memorandum of Lease for Recording........................................33 Section 12.09 Force Majeure. ............................................................................33 Article 13 SPECIAL PROVISIONS PECULIAR TO THIS LEASE SITE.................................34 Section 13.01 Public Restrooms........................................................................34 Section 13.02 TENANT’S Obligation to Redevelop Site. ................................34

4855
-8063-9740 v4

EXHIBIT A

Prepared By: _YK _______ Dept Review: ______
City Manager Review: __ YK______ City Attorney Review: ______ Staff Report
TO: Honorable Mayor and City Council DATE: February 19, 2025 FROM: Yvonne Kimball, City Manager
SUBJECT: Report on attendance at the 2025 C-MANC Washington Week Meetings

RECOMMENDED ACTION
Receive and file.

ALTERNATIVES
None

FISCAL IMPACT
None.

BACKGROUND/DISCUSSION
At the December 10, 2024 Regular Meeting, the Council authorized a 3-person delegation to attend the 2025 C-MANC Washington Week meetings, a trip which is largely funded by the Central Coast Joint Cable Fisheries Liaison Committee.

C-MANC annually hosts Washington Week meetings, where representatives of California Ports and Harbors have the opportunity to remind Congress and various other agencies of the importance of dredging projects, commercial fishing, ocean and coastal management and other coastal-related issues in California. The City of Morro Bay is a long-standing member of C-MANC, and for over 25 years has sent representatives to the “Washington Week” meetings.

While in DC, city representatives usually engage with city’s federal lobbyist to advocate the city’s distinct interests. This includes addressing critical concerns such as harbor dredging, seawall repair, pier maintenance, along with other infrastructure needs.. Additionally, discussions often extend to broader Morro Bay interests with national implications including the protection of marine lives, the perseverance of the Morro Bay National Estuary, and our partnership with local tribes.

Mayor Wixom, City Manager Kimball, and Harbor Vitality Director Munson represented the City in 2025’s DC week. Enclosed includes:
 a post meeting report outlining three days filled with meetings and actions,  C-MANC Agenda
 Briefing Paper (which were used in every meeting attended) This delegation would like to express appreciation to the Joint Cable Fisheries Liaison Committee for the grant funding, to Harbor and City Hall administrative staff for applying for the grant and AGENDA NO: 7.d
MEETING DATE: February 25, 2025

coordinating travel details, and to the Public Works Director and Harbor Vitality Director for compiling the briefing paper, and follow-ups to ensure funding. The Delegation would have not been able to have a productive trip without these dedicated staff do what they do.

ATTACHMENT(S)

1. Post Meeting Report

2. C-MANC Agenda

3. Briefing Paper

DC Meetings Report
City of Morro Bay, CA
Congressional and Agency Meetings – Washington, DC
February 10-13, 2025
Tuesday, February 11th
Rep. Salud Carbajal (CA-24)
Johanna Montiel, Deputy Chief of Staff
 Discussed offshore wind status and challenges generally in light of new Administration priorities and other factors.
 T-Pier: City/TFG will share background information and needs to facilitate Rep.

Carbajal’s efforts engage the Coast Guard.
 Community Project Funding (CPF)1.
o FY26 CPF process pending. TFG will track and continue communications with Rep. Carbajal’s office.
o Morro Bay discussed potential CPF requests.
o Johanna and TFG will check prior year’s appropriations regarding fire engine eligibility.

Bureau of Ocean Energy Management (BOEM)
Walter Cruickshank, Acting Director
 Discussed Sanctuary Advisory Committee membership.
 BOEM clarified the Trump Administration Executive Orders o No planning for new offshore wind leases.
o Rights of existing lessees remain intact; Administration reviewing associated legal/environmental matters.
o Multi-agency review will take place on permitting; stand by for BOEM guidance. o BOEM recommends “weighing in” as opportunities arise on policy and projects.

Staff of Rep. Jimmy Panetta
Krista Wunsche, Legislative Director; Liz Jacobson, Legislative Assistant  Discussed fishing industry, offshore wind, health care reimbursement issues.

1 CPF formerly known as congressional earmarks.

Morro Bay - Congressional/Agency Meetings – February 2024 2 Wednesday, February 12th
Senator Alex Padilla
Nate Bentham, Policy Advisor; Pedro De Anda, Legislative Correspondent  City/TFG to provide talking points and/or draft letter supporting Corps Continuing Authorizations Program (CAP) and other possible funding.  City/TFG to keep office informed regarding T-Pier status and needs.  Senator has prioritized port electrification.
 Updated on offshore wind matters.

Meeting with Staff of Senator Adam Schiff
Olivia Oo, Policy Advisor; Jamie Thompson, Legislative Assistant  Familiarized staff with Morro Bay legislative priorities.  Shared plans to submit projects to earmark process.

Thursday, February 13th
FEMA Intergovernmental, Public Assistance and Hazard Mitigation Teams Derrick Hiebert, Assistant Administrator for Hazard Mitigation Directorate and Team; Robert Pesapane, Division Director of the Public Assistance Division; and Region 9 officials.
 Hazard Mitigation: FEMA has existing project scoping and advanced assistance funding which is highly recommended
o Building Resilient Infrastructure and Communities (BRIC)  Provides design, environmental, engineering and other technical assistance funding
o FEMA’s Hazard Mitigation Grant Program (HMGP)
 Useful for developing plans to reduce future disaster losses. Can apply for retrofit to housing infrastructure, including on behalf of mobile home communities affected by flooding
o FEMA Region 9 urged the connection to state level technical assistance webinars and other resources
 Public Assistance: FEMA will coordinate with Region 9 to provide a timeline of reimbursement for the following three projects:
o Harbor Slip Repairs (#727691): In final review phase. o Seawalls (#)7246944: Maintenance records are required for reimbursement. o Culverts repairs (#729191): FEMA will provide timeline for reimbursement.

1 DRAFT Washington, DC Agenda
February 2025
*as of 2/10/2025 at 5:30 pm EST
AGENCY DAY Tuesday, February 11th
9:00 am Travel to US Army Corps of Engineers (USACE)
441 G Street, NW (15-minute walk from the Yotel to USACE) 9:30 am Arrive at USACE for security clearance
10:00 am Annual Meeting and Lunch with USACE Civil Works 441 G Street NW
Contact: Veronica Botts Bell (202)761-4814
USACE Attendees:
 TAB Brown, Chief Programs Integration Division
 Tiffany Burroughs, Chief of Navigation
 Greg Miller, Policy Advisor, Principles, Requirements, and Guidelines Agency
 Julia Harvey, South Pacific Division Regional Integration Team (SPD RIT)
 Anne Baker, NEPA Regional Technical Specialist, SPD RIT 1:00 pm Depart USACE HQ for OMB (not walking distance)
Direct ride share or cabs to the White House Historical Society at 740 Jackson Place, NW and proceed to 726 Jackson Place, NW
1:30 pm Arrive at White House Conference Center for security clearance to OMB meeting

2 Note: All participants must complete and submit security link prior to travel to DC, only cleared attendees will be admitted
2:00 pm Meeting with Kelly Colyar, Chief, Water and Power Branch Office of Management and Budget
New Executive Office Building Room 8001
Enter at 726 Jackson Place, NW
Contact: Sherron White (202) 395-3634
5:30 pm CMANC Reception
Yotel Private Dining Room 3
 Updates and new agenda for Day 2
 Group assignments
 Appetizers and hosted bar
Evening & Dinner on your own
Option 1: BOEM Option 2: Capitol Hill
3:00 pm Depart OMB for Department of
the Interior (15 minute walk)
1849 C Street NW
3:00 pm Depart OMB for Rayburn HOB
Direct ride share or cabs to
Rayburn House Office Building
3:30 pm Meeting with Dr. Walter
Cruickshank, Acting Director of
the Bureau of Ocean Energy
Management (BOEM)
1849 C Street NW
Kiowa Conference Room
3:30 pm Arrive at Rayburn HOB for
security
4:30 pm Depart DOI for Yotel 4:30 pm Meeting with Olivia Speno, Legislative Assistant, Office of
Rep. David Valadao (CA-22)
2465 Rayburn HOB

3 HILL DAY Wednesday, February 12th
7:45 am Depart Yotel for Group Briefings
Public entrances open at 7:30 am
BLUE Group GOLD Group
8:15 am Pre-Meet at Longworth House
Cafeteria
Basement Level of Longworth
9:15 am Pre-Meet at Dirksen Senate
Cafeteria
Basement Level of Dirksen
9:15 am Meeting with Eric Henshall,
Deputy Chief of Staff, Office of
Rep. Sam Liccardo (CA-16)
1117 Longworth
CMANC Member: San Mateo
County Harbor District
10:00 am Meeting with Katie Williams (R)
& Laura Powell (D)
Senate Energy & Water
Appropriations Subcommittee
124 Dirksen SOB
10:00 am Meeting with Richie O’Connell
(R) & Scott McKee (D)
House Energy & Water
Appropriations Subcommittee
2362-B Rayburn HOB
10:30 am Meeting with Jamie Thompson,
Legislative Assistant, Office of
Sen. Schiff
112 Hart SOB
10:30 am Meeting with Elise Sugarman,
Legislative Director, Office of
Rep. Pete Aguilar (CA-33)
108 Cannon HOB
11:00 am Walk from Hart SOB to Cannon
HOB (about 15 mins)
11:00 am Meeting with Jack Lincoln,
Deputy Chief of Staff, Office of
Rep. Ken Calvert (CA-1)
2205 Rayburn HOB
11:30 am TBD 11:30 am Meeting with Nic Jordan,
Senior Advisor, Office of Rep.

Gil Cisneros (CA-31)
Note: returning member newly
elected
12:00 pm TENT – Quick Lunch/Break
Longworth House Cafeteria
Basement Level
12:15 pm Meeting with Diala Jadallah,
Chief of Staff, Office of Rep.

Lateefah Simon (CA-12)
1023 Longworth HOB

4 CMANC Member: Port of
Oakland
12:45 pm SUBGROUP A
Meeting with Rep. Josh Harder
(CA-9)
209 Cannon HOB
CMANC Member: Port of
Stockton
12:30 pm TENT – Quick Lunch/Break
Longworth House Cafeteria
Basement Level
1:00 pm SUBGROUP B
Meeting with Eric Lukoff,
Legislative Director, Office of
Rep. Kevin Mullin (CA-14)
1404 Longworth HOB
CMANC Members: San Mateo
County Harbor District and Port
of Redwood City
1:00 pm Meeting with Devin Kolb,
Deputy Chief of Staff, Office of
Rep. Adam Gray (CA-13)
1230 Longworth HOB
1:30 pm TBD 1:30 pm Meeting with Rep. Dave Min
(CA-47)
1034 Longworth HOB
CMANC Member: Newport
Beach
2:30 pm Meeting with Felix Wu,
Legislative Assistant, Office of
Rep. Ted Lieu (CA-36)
2454 Rayburn HOB
Vice Chair of House Democrats
CMANC Member: LA County
Beaches & Harbors
2:30 pm Walk from Longworth HOB to
Hart SOB (15 minute walk)
3:00 pm SUBGROUP A
Meeting with Rep. Robert
Garcia (CA-42)
109 Cannon HOB
PORTS Caucus Co-Chair
CMANC Member: Port of Long
Beach
3:00 pm Nate Bentham, Policy Advisor
Office of Sen. Padilla
Senator to drop by if available
331 Hart SOB

SUBGROUP B
Meeting with Rep. John
Garamendi (CA-8)
2428 Rayburn HOB

5 3:30 pm SUBGROUP A
Meeting with Rep. Jimmy
Panetta (CA-19) * 3:35 pm start
200 Cannon HOB
CMANC Member: Santa Cruz
Harbor
3:30 pm Return to Rayburn HOB from
Hart SOB (15 minute walk)

SUBGROUP B
Meeting with Rep. Doug
LaMalfa (CA-1)
408 Cannon HOB
4:30 pm TBD 4:30 pm Meeting with Joe Sheehy,
Transportation & Infrastructure
Water Resources
Subcommittee Shared Staff for
Ranking Member Rep. Jared
Huffman (CA-2)
2330 Rayburn House Office
Building
5:30 pm 66th Golden State Reception
House Transportation & Infrastructure Committee Room
2167 Rayburn HOB
LEGEND
indicates Appropriations Committee
indicates Authorizing Committee
indicates Freshman Member

6 New California Delegation Members
 CA-12: Rep. Lateefah Simon – succeeded former Rep. Barbara Lee (retired to run for Senate)  CA-13: Rep. Adam Gray – defeated former Rep. John Duarte in the general election  CA-16: Rep. Sam Liccardo – succeeded former Rep. Anna Eshoo (retired)  CA-27: Rep. George Whitesides – defeated former Rep. Mike Garcia in the general election  CA-29: Rep. Luz Rivas – succeeded former Rep. Tony Cárdenas (retired)  CA-30: Rep. Laura Friedman – succeeded Sen. Adam Schiff (retired to run for Senate)  CA-31: Rep. Gil Cisneros – former Rep., succeeded former Rep. Grace Napolitano (retired)  CA-45: Rep. Derek Tran – defeated former Rep. Michelle Steel in the general election  CA-47: Rep. Dave Min – succeeded former Rep. Katie Porter (retired to run for Senate)  Junior Senate Seat: Sen. Adam Schiff – succeeded former Sen. Laphonza Butler (retired)

Mayor: Carla Wixom
City Manager: Yvonne Kimball
Harbor Vitality Director: Chris Munson
February 2025
Morro Bay Harbor Needs

ARMY CORPS OF ENGINEERS
Dredging: The City is requesting $4,000,000 for annual dredging to ensure the entrance remains open to navigation.

Contact: Julie Minerva, Carpi & Clay, 202.822.8300
Harbor Infrastructure Repair & Improvement Project: The revetments and jetties of Morro Bay were built by the US Army Corps of Engineers during World War II. The USACE has maintained the jetties and the federal channel, the revetments and seawalls have fallen into disrepair, which has been accelerated by recent storms.

The City is seeking $4,000,000 to $5,000,000 for repairs and improvements to this critical Harbor infrastructure.

Contact: Mike Miller, The Ferguson Group, 707.287.0023

OTHER FEDERAL ASSISTANCE NEEDS
Storm Damage and High Surf/ King Tide Damage:

The high surf and storm events of 2023 worsened the existing extensive damage to our Harbor infrastructure (docks, seawalls, revetments, etc.) and other City infrastructure (storm drains, vehicles, equipment, roads, City facilities, etc.). This damage was not eligible for FEMA reimbursement.

The City is seeking $1,000,000 to evaluate alternative improvements and $5,000,000 to repair infrastructure related to the storm and surf damage.

Contact: Mike Miller, The Ferguson Group, 707.287.0023
Offshore Wind: The City is requesting a minimum of $500,000 annually to support City efforts to research, conduct analysis, training, outreach, legal and environmental reviews as related to the Offshore Wind Development.

Contact: Mike Miller, The Ferguson Group, 707.287.0023
North T-Pier Project: The City is requesting $7,000,000 in CPF/CDS funding to complete funding of the full North T-Pier project.

Contact: Mike Miller, The Ferguson Group, 707.287.0023

Mayor: Carla Wixom
City Manager: Yvonne Kimball
Harbor Vitality Director: Chris Munson
February 2025
National Estuary Program: Morro Bay is home to one of the 28 National Estuary Programs in the US. Morro Bay Estuary encompasses 2,300 acres. Continued federal funding of our nation’s National Estuary Programs is always a priority.

Fisheries and the Chumash Heritage National Marine Sanctuary (CHNMS):

The City of Morro Bay has identified the following concerns with the proposed CHNMS:
 While it appears the Chumash Heritage Marine Sanctuary does not have any direct jurisdiction on fishing regulations, they can recommend regulations that have direct or indirect influence on commercial fishing.  The Sanctuary adds another layer of governance over the activities in coastal areas such as dredging. While existing maintenance dredging areas and disposal sites may be exempt, any request to increase the size of the dredge disposal site or any new dredge site location will likely require the additional approval of the Sanctuary. This is concerning since additional dredging is needed to keep Morro Bay’s harbor viable long term.
 The City of Morro Bay requested to be included in the NOAA implemented Advisory Council for the NMS.

Contact: Mike Miller, The Ferguson Group, 707.287.0023

AGENDA NO: 8.a
MEETING DATE: February 25, 2025
Staff Report
TO: Honorable Mayor and City Council DATE: February 25, 2025 FROM: Airlin Singewald, Community Development Director
SUBJECT: Consider Adoption of Urgency Ordinance No. 670 extending Urgency Ordinance No. 668 prohibiting applications for grid-scale Battery Energy Storage Systems (BESS) facilities

RECOMMENDED ACTION

1. Consider the attached written report that describes the measures taken to alleviate the conditions which led to the adoption of Ordinance No. 668, as required by Government Code Section 65858(d).

2. Adopt Urgency Ordinance No. 670, entitled “An Urgency Ordinance of the City Council of the City of Morro Bay, California, Extending Urgency Ordinance No. 668 Imposing a Prohibition on the Application Acceptance, Approval, Commencement, Establishment, Operation, Relocation, or Expansion of Grid-Scale Battery Energy Storage Systems (BESS) within the City Limits During the Pendency of the City’s Review and Adoption of Regulations of Such Uses; and Finding the Action to be Exempt from CEQA.”

3. Provide further direction to Staff to initiate public meetings that address whether a permanent BESS ordinance shall set development standards for future projects or prohibit them outright.

ALTERNATIVES

1. Direct staff to amend the attached written report and/or urgency ordinance, including proposed findings, before adopting by a 4/5 vote.

2. Do not adopt the urgency ordinance extending Ordinance No. 668, and instead provide staff with alternative direction. Under this alternative, the urgency ordinance would expire on March 14, 2025.

FISCAL IMPACT
Staff prepared the attached written report, urgency ordinance, and this staff report with assistance from the interim City Attorney. The Community Development Department completed this work effort with its existing FY 2024-25 budget.

BACKGROUND
On January 28, 2025, the City Council adopted an interim ordinance (Ordinance No. 668) imposing as an urgency measure a prohibition on the application acceptance, approval, commencement, establishment, operation, relocation, or expansion of grid-scale battery energy storage systems (BESS) within the City limits. The City Council found that the potential for development of new grid-scale BESS facilities in Morro Bay without adequate land use policies Prepared By: EV____ Dept Review: __AMS__
City Manager Review: ______ City Attorney Review:
___RWS___

and standards in place presents a current and immediate threat to the public’s safety and welfare, especially in light of a major fire that broke out on January 16th at an existing BESS facility in the unincorporated community of Moss Landing in Monterey County. The BESS facility at Moss Landing is owned and operated by the same applicant for a BESS facility in Morro Bay. The purpose of the interim ordinance is to temporarily prohibit a land use that the City has deemed potentially harmful to the public while staff further studies the identified land use and contemplates permanent regulations to protect public health and safety.

Under Government Code Section 65858, the initial term of an interim urgency ordinance is 45- days. Ordinance No. 668 is therefore set to expire on March 14, 2025. After notice pursuant to Government Code Section 65090 and a public hearing, the City Council may extend the interim urgency ordinance for up to 22 months and 15 days. The item before the Council on this date, February 25th, was noticed as a public hearing to extend the initial urgency ordinance, which the Council can do by adopting the attached Ordinance No. 670 by a 4/5 vote.

DISCUSSION
Government Code Section 65858 requires that 10 days prior to the expiration of an urgency ordinance, the legislative body issue a written report describing the measures being taken to alleviate the condition which led to the adoption of the urgency ordinance. Because this staff report and the attached written report (Attachment A) will be published with the agenda materials for the City Council meeting on February 25, 2025, which is more than 10 days in advance of Ordinance No. 668’s expiration, the City will comply with Government Code Section 65858(d).

Summary of Ordinance No. 668 10-Day Written Report
Since Ordinance No. 668 was enacted on January 28, 2025, staff has identified and analyzed data related to BESS discussion topics raised at the November 12, 2024 City Council meeting.

This includes, but is not limited to, researching what other jurisdictions in California have done to address and regulate BESS applications, collecting research articles and case studies of BESS land use regulations from across the country, and beginning to identify and organize the next tasks required for the development of a permanent ordinance. Some of these steps are listed below:
 Research SB 38 further and collaborate with City emergency response personnel (Police, Fire, and Harbor) to understand what will be required to develop an effective emergency response and emergency action plan for BESS facilities.  Continue collaborative efforts with California Coastal Commission staff to fully understand how the City’s Local Coastal Program would need to be amended to reflect future BESS regulations, and how the Coastal Act might play a role.  Develop public information materials that encourage community involvement and input on BESS health and safety topics.

Permanent Ordinance
The proposed extension ordinance would provide time for staff to research and develop for Council consideration permanent regulations to address the impacts of BESS facilities. The attached ordinance would extend the urgency ordinance to January 28, 2027. A permanent ordinance may require Coastal Commission approval of a Local Coastal Program (LCP) amendment. To provide sufficient time for Coastal Commission approval, staff recommends a target completion date for a permanent ordinance of May 2025.

There are two main options for a permanent ordinance. These include: 1) a permanent prohibition on BESS facilities; or 2) a permanent ordinance that includes specific use standards regulating the location, design, and permit requirements for BESS facilities. In either scenario, a BESS developer could ask the State to override local zoning as part of the AB 205 Opt-in Certification program. The California Energy Commission would have to make findings of public convenience and necessity to override local zoning regulations.

A permanent BESS prohibition would add a use definition to the zoning code for a grid-scale BESS facilities, which would be prohibited in all zoning districts citywide. A permanent BESS ordinance would allow for BESS facilities in certain zoning districts subject to setbacks from sensitive receptors, permitting requirements, and other standards to protect public health and safety.

CONCLUSION
The attached written report details the actions staff has taken since the adoption of Ordinance No. 668 on January 28, 2025, to alleviate the conditions that led to its adoption. By issuing this report the City will comply with Government Code Section 65858(d), which mandates the City Council to issue such a report at least 10 days prior to the expiration of an urgency ordinance.

Urgency ordinances have an initial term of 45 days, meaning that Ordinance No. 668 will expire on March 14, 2025, unless extended by the City Council. Because Ordinance No. 668 was issued with the necessary public notice, it may be extended for up to 22 months and 15 days (2 years total). The adoption of Ordinance No. 670 (Attachment B) by a 4/5 vote of the Council will extend the urgency ordinance prohibiting BESS applications within Morro Bay until January 28, 2027. In that time, staff will work under Council direction and with public involvement to draft a permanent BESS ordinance.

Neither this urgency ordinance nor a permanent City ordinance would prevent a BESS facility from obtaining State approval to locate in Morro Bay through the California Energy Commission’s AB 205 Opt-in Certification Program, which allows for an override of local zoning.

ATTACHMENTS

1. Ordinance No. 668 10-Day Written Report

2. Ordinance No. 670, extending Ordinance No. 668 for 22 months and 15 days

ATTACHMENT A
ORDINANCE NO. 668
10-DAY WRITTEN REPORT
Introduction
Government Code Section 65858 requires that 10 days prior to the expiration of an interim ordinance, the legislative body issue a written report describing the measures being taken to alleviate the condition which led to the adoption of the interim ordinance. This document serves as that written report describing the actions taken to address the need for the interim prohibition on new grid-scale “Front-of-the-Meter” BESS facilities within the City limits since Ordinance No. 668 was adopted on January 28, 2025 and February 25, 2025, the date of issuance of this Report.

Background
At its January 28, 2025, meeting, the City Council of the City of Morro Bay (“City”) adopted an urgency ordinance establishing a temporary prohibition on new commercial battery energy storage systems (“BESS”) within the City’s boundaries (“Ordinance No. 668”). More specifically, Ordinance No. 668 prohibits the application acceptance, approval, commencement, establishment, operation, relocation, or expansion of grid-scale BESS for any property or location within the City limits.

An interim ordinance takes immediate effect upon adoption and expires forty-five (45) days after adoption, unless extended at a later date after notice and a public hearing for an additional 22 months and 15 days (Government Code Section 65858(b)).

Ordinance No. 668 took effect on January 28, 2025, and will expire on March 14, 2025.

Government Code Section 65858(d) requires that at least 10 days prior to the expiration of an interim ordinance or any extension, the City Council must issue a written report describing the measures taken to alleviate the conditions which led to the adoption of the ordinance.

Ongoing Measures to Alleviate Conditions
Since Ordinance No. 668 was enacted on January 28, 2025, staff have identified and analyzed data related to BESS discussion topics that were first raised at the November 12, 2024 City Council meeting. Further, staff have begun to discuss and organize the next potential steps to prepare a permanent ordinance. These steps include the following:
 Research what other local jurisdictions in California have done to navigate the land use challenges associated with BESS projects.
 Take a broader approach and research national approaches to BESS ordinances, development standards, and other regulations.
 Research SB 38 further and collaborate with City emergency response personnel (Police, Fire, and Harbor) to understand what will be required to develop an effective emergency response and emergency action plan for BESS facilities.

 Continue collaborative efforts with California Coastal Commission staff to fully understand how the City’s Local Coastal Plan would need to be amended to reflect future BESS regulations, and how the Coastal Act might play a role.  Develop public information materials that encourage community involvement and input on BESS health and safety topics.
 After research and collaboration with the residents, decide what sections should be included in a permanent ordinance, such as:
o Purpose
o Applicability
o Definitions
o Procedures
o Development Regulations (if applicable)
o Supplemental Regulations (if applicable)
o Required Findings (if applicable)
o Vacation and Removal of Facilities (if applicable)
o Enforcement
o Severability
 Analyze other State laws that impact future City standards and policies, including the California Fire Code.
 Attend training programs on best practices related to BESS facilities.  Collaborate with other jurisdictions, agencies, and industry specialists to share knowledge and develop “best practice” standards that will inform the development of permanent land use development policies and standards, if applicable.

This list is by no means exhaustive and is subject to change as more information is made available. Conditions surrounding BESS projects are constantly changing as technology continues to advance and regulations are explored.

Conclusion
The City has not concluded its research and thus has not yet taken any action to implement any permanent regulations pertaining to the establishment or use of commercial BESS facilities. As a result, an extension of Ordinance No. 668 is recommended to allow the City more time to effectively study and consider land use development policies and standards related to commercial BESS facilities that should be added to the City’s General Plan, Zoning Code, and Local Coastal Plan.

ORDINANCE NO. 670

AN URGENCY ORDINANCE OF THE CITY COUNCIL
OF THE CITY OF MORRO BAY, CALIFORNIA, EXTENDING ORDINANCE NO. 668

IMPOSING A PROHIBITION ON THE APPLICATION ACCEPTANCE, APPROVAL,

COMMENCEMENT, ESTABLISHMENT, OPERATION, RELOCATION OR EXPANSION

OF GRID-SCALE BATTERY ENERGY STORAGE SYSTEMS (BESS) WITHIN THE CITY LIMITS DURING THE PENDENCY OF THE CITY’S REVIEW AND ADOPTION OF REGULATIONS OF SUCH USES; AND FINDING THE ACTION TO BE EXEMPT FROM CEQA

T H E C I T Y C O U N C I L
City of Morro Bay, California
WHEREAS, the City of Morro Bay, California (“City”) is a municipal corporation, duly organized under the constitution and laws of the State of California; and
WHEREAS, in general, a Battery Energy Storage Systems (“BESS”) facility collects energy from the grid, stores it, and then discharges that energy later to provide electricity or other grid services when needed, typically at times of high demand; and
WHEREAS, there is a growing demand for BESS facilities in the state of California due to increased demand for renewable electricity to reach the State’s clean energy goals and mechanisms to ensure reliability of the State’s electric system, among other things; and
WHEREAS, the City does not have land use policies or standards in place to regulate the location and operation of BESS facilities within the City limits which would address compatibility with surrounding uses and safety among other issues; and
WHEREAS, the City has previously received one specific request to locate a grid-scale BESS facility on the waterfront of the City limits, which resulted in the City and the applicant spending significant time and financial resources processing the permit application; and
WHEREAS, during the application review process for the proposed BESS facility within the City limits, residents from the community expressed significant concerns regarding the safety of BESS facilities in general, and specifically in proximity to residential and visitor serving commercial uses; and WHEREAS, on January 16, 2025, a major fire broke out at an existing BESS facility in the unincorporated community of Moss Landing, prompting evacuations and highway closures in Monterey County. The Moss Landing BESS facility is owned and operated by the applicant for a BESS facility in Morro Bay; and WHEREAS, there have been several recent fires at BESS facilities both in California and nationwide. BESS facilities that use lithium-ion batteries create particularly unique fire and explosion hazards. Information suggests that lithium-ion batteries are potentially safe and stable when installed properly, however certain conditions elevate the risk of fire and thermal runaways, such as impact, puncture, or mechanical damage, overcharging, overheating, and/or short circuits; and
WHEREAS, the City of Morro Bay’s compact urban form, relatively dense residential neighborhoods and small lots in close proximity to one another, and sensitive environmental resources make it uniquely vulnerable to hazards from major fires, explosions, and toxic smoke plumes from a BESS facility; and WHEREAS, the City’s waterfront area is a major tourist attraction and revenue generator for the City; and WHEREAS, a catastrophic event at a BESS facility in the City limits would threaten the City’s budget and local economy, which depend significantly on Morro Bay as a tourist destination; and WHEREAS, on October 7, 2023, the Governor of California signed into law Senate Bill 38 (“SB 38”), which amends California Public Utilities Code Section 761.3 to address safety concerns with BESS projects. SB 38 requires every BESS facility in California to establish an emergency response and emergency action plan for the facility to protect surrounding residents, neighboring properties, emergency responders, and the environment. Furthermore, the BESS facility owner or operator must coordinate with local emergency management agencies, unified program agencies, and local first responders to develop the Page 95 of 144 plan, and submit the plan to the county where the facility is located.

Currently, the City of Morro Bay does not have procedures or standards to facilitate interagency coordination with the County of San Luis Obispo and other response agencies; and WHEREAS, SB 38 recognizes the many hazards that BESS facilities can create, providing that the mandated emergency response and action plan may consider responses to potential offsite impacts such as poor air quality, threats to municipal water supplies, water runoff, and threats to municipal waterways. The plan may also include procedures related to shelter-in-place orders and road closure notifications. The City does not currently have any procedures or standards for addressing potential offsite impacts associated with BESS facilities; and WHEREAS, on June 30, 2022, the Governor of California signed into law Assembly Bill 205 (“AB 205”), which expands the California Energy Commission’s (“CEC”) powerplant siting authority to certain renewable energy facilities, including energy storage systems defined in California Public Utilities Code Section 2835 capable of storing 200 megawatt-hours or more of electrical energy; and
WHEREAS, pursuant to AB 205, as codified in California Public Resources Code Division 15, Chapter 6.2, an applicant proposing to build a qualifying energy facility may file an “opt-in application for certification,” with the CEC, and the CEC’s permitting authority over the proposed project is “in lieu of any permit, certificate, or similar document required by a state, local, or regional agency, or federal agency, to the extent permitted by federal law, and for those facilities;” and
WHEREAS, in reviewing opt-in projects, the CEC functions as the Lead Agency for the purposes of California Environmental Quality Act (“CEQA”) review. In certifying an opt-in project, the CEC must make certain findings; and WHEREAS, in the fall of 2024, the previously mentioned applicant informed the City that it intends to opt into the CEC certification process set forth in AB 205, and requested to pause its application for municipal consideration of local entitlements by the City of Morro Bay; and
WHEREAS, while this particular project may no longer require local entitlement approvals, if the applicant withdraws its application with the City and applies for opt-in certification with the CEC, there remain significant public safety concerns that must be analyzed prior to any BESS proposal moving forward within the City limits, whether at the power plant property site or elsewhere in the community; and WHEREAS, the potential for the development of new grid-scale BESS facilities in the City limits without adequate land use policies and standards in place to implement SB 38 presents a current and immediate threat to the public’s safety and welfare, and the approval of land use entitlements for such a use would result in that threat to public safety and welfare because BESS facilities could result in potentially catastrophic environmental, safety, and economic impacts; and
WHEREAS, California Government Code Section 65858 provides that, without following the procedures otherwise required prior to the adoption of a zoning ordinance, an urgency measure in the form of an interim ordinance may be adopted by a four-fifths vote of the City Council to protect the public from a current and immediate threat to the public health, safety, or welfare resulting from a contemplated zoning proposal. Government Code Section 65858 further provides that such an urgency measure shall be effective for only 45 days following its adoption, but may be extended beyond the initial 45-day period, following compliance with that Section, for an additional 22 months and 15 days; and
WHEREAS, at the January 28, 2025, City Council meeting, staff’s findings demonstrated that the potential for development of new commercial BESS facilities within the City limits without adequate land use policies and standards in place to implement SB 38 and to prevent potentially catastrophic interference with nearby communities presents a current and immediate threat to the public’s safety and welfare, and approval of such use permits, building permits, or other applicable entitlements for such uses would threaten public safety and welfare; and WHEREAS, at its January 28, 2025, meeting, the City Council voted to approve an interim ordinance prohibiting new commercial battery energy storage systems within the City limits based upon a need for the immediate preservation of the public health, safety, and welfare as set forth herein, for an initial period of forty-five days while staff researched and selected the best recommended course of action to address the safety related concerns regarding BESS facilities (“Ordinance No. 668”); and WHEREAS, the temporary prohibition on BESS facilities is scheduled to expire on March 14, 2025; and WHEREAS, staff has issued a written report to the City Council on the progress of its study along with the measures taken to alleviate the condition that led to the adoption of Ordinance No. 668; and WHEREAS, with the issuance of a written report 10 days prior to the expiration of Ordinance No. 668 and Page 96 of 144 with a duly noticed public hearing taking place on February 25, 2025, the City is eligible to extend the urgency ordinance prohibiting BESS facilities within City limits for an additional 22 months and 15 days pursuant to Government Code Section 65858(d); and
WHEREAS, City staff is still in the process of conducting research to understand the impacts of BESS facilities and uses on community welfare and exploring potential amendments to the City’s Municipal Code, General Plan, and Local Coastal Plan is relation to BESS facilities; and WHEREAS, staff remains concerned that the absence of adequate land use policies and standards to address BESS facilities, including those necessary to implement SB 38 and prevent potentially catastrophic impacts to nearby residents and environmental resources, poses a current and immediate threat to the public’s safety and welfare; and
WHEREAS, in light of the significant safety risks associated with BESS facilities, City staff seeks additional time to further investigate these issues, formulate recommendations for City Council consideration, and explore adjustments to the City’s General Plan, Zoning Code, and Local Coastal Plan to mitigate the safety risks associated with BESS facilities; and
WHEREAS, while this interim ordinance is in effect, the City intends to study and consider land use development policies and standards related to BESS facilities that should be added to the City’s General Plan and Zoning Regulations; and
WHEREAS, the City Council has conducted a public hearing during a regularly scheduled City Council meeting on February 25, 2025, and considered all written and verbal comments, as well as the report and presentation from staff.

NOW, THEREFORE, BE IT ORDAINED by the City Council of the City of Morro Bay, California:

Section 1: Incorporation of Recitals. The City Council of the City of Morro Bay finds that all Recitals are true and correct and incorporated herein by reference.

Section 2: Urgency Findings. The City Council of Morro Bay hereby finds that there is a current and immediate threat to the public health, safety, and/or welfare and a need for immediate preservation of the public peace, health, or safety that warrants this urgency measure, which finding is based upon the facts stated in the Recitals above, and in the staff report dated January 28, 2025, as well as any oral and written testimony at the January 28, 2025 or February 25, 2025 City Council meeting.

Section 3: Interim Moratorium on Grid-Scale Battery Energy Storage Systems.

A. Definition of Battery Energy Storage System:

For purposes of this interim ordinance, a Battery Energy Storage System (BESS) facility is an electrochemical device that charges or collects energy from the grid or a distributed generation system (e.g., power plant) and then discharges that energy at a later time to provide electricity or other grid services when needed. BESS facilities can be small-scale “Behind-the-Meter” facilities that are customer-sited stationary storage systems that are connected to the distribution system on the customer’s side of the utility’s service meter. In contrast, larger grid-scale “Front-of-the-Meter” facilities are on the utility side of the meter. “Front-of-the-Meter” facilities typically include large-scale energy generation and storage facilities like power plants, wind farms, solar parks, and large-scale energy storage systems. The proposed interim ordinance prohibits grid-scale “Front-of-the-Meter” BESS facilities.

B. From and after the date of enactment of the interim ordinance, the establishment, construction, and operation of new grid-scale “Front-of-the-Meter” Battery Energy Storage Systems is prohibited within the city limits of the City of Morro Bay, and no use permit, variance, building permit, business license, or any other entitlement for this type of use shall be approved or issued for the establishment, construction, or operation of a BESS facility for any location or property, public or private, within the city limits of the City of Morro Bay.

Section 4: Exclusions. The provisions of this interim ordinance shall not apply to individually owned singlefamily residential battery storage, multifamily residential battery storage, or otherwise ancillary battery storage uses that are “Behind-the-Meter” primarily used to meet single customer onsite energy storage needs.

Section 5: Compliance with the California Environmental Quality Act (CEQA). This interim ordinance is not subject to CEQA (Public Resources Code Section 21000 et seq.) Page 97 of 144pursuant to CEQA Guidelines (California Code of Regulations, Title 14, Section 15000 et seq.) Section 15060(c)(2) [activity will not result in a direct or reasonably foreseeable indirect physical change in the environment]. Additionally or alternatively, this interim ordinance is exempt from CEQA under CEQA Guidelines Sections 15061(b)(3) [it can be seen with certainty that there is no possibility the activity in question may have a significant effect on the environment], 15307 [Class 7, categorical exemption for regulatory activity to assure the protection of natural resources], and 15308 [Class 8, categorical exemption for regulatory activity to assure the protection of natural resources]. Further, this interim ordinance is exempt from CEQA pursuant to Public Resources Code Section 21080(b)(4) and CEQA Guidelines Section 15269(c) because it prevents a clear and imminent danger that requires immediate action to prevent or mitigate the loss of, or damage to, life, health, property, and essential public services.

Section 6: Severability. If any sections, subsections, sentences, clauses, phrases, or portions of this Ordinance are for any reason held invalid or unconstitutional, such decision shall not affect the validity of the remaining portions of this Ordinance. The City Council hereby declares that it would have passed this and each section, subsection, phrase, or clause of this Ordinance whether or not any one or more sections, subsections, phrases, or clauses may be declared invalid or unconstitutional on their face as applied. ///
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Section 7: Term and Effect. This interim Ordinance is urgently needed for the immediate preservation of the public health, safety or welfare, and shall become effective immediately upon its adoption pursuant to California Government Code Section 36937, and shall be of no further force and effect twenty-two (22) months and fifteen (15) days following the date of its adoption unless earlier repealed by the City Council in accordance with the provisions set forth in California Government Code Section 65858.

I HEREBY CERTIFY THAT the foregoing ordinance was INTRODUCED, ADOPTED, and PASSED as an urgency measure by a four-fifths vote and ORDERED published at a regular meeting of the City Council held on February 25, 2025, and passed by the following vote:

AYES:

NOES:

ABSENT:

ABSTAIN
RECUSE
______________________________
CARLA WIXOM, Mayor
ATTEST:
_____________________________
DANA SWANSON, City Clerk
APPROVED AS TO FORM:
_____________________________
ROBERT SCHULTZ, Interim City Attorney

AGENDA NO: 9.a
MEETING DATE: February 25, 2025
Prepared By: MAG Dept Review: EAC
City Manager Review: _YK___ City Attorney Review: ___RWS Staff Report
TO: Honorable Mayor and City Council DATE: February 13, 2025 FROM: Yvonne Kimball, City Manager
Emily Conrad, Finance Director
Melissa Green, Administrative Programs Manager
SUBJECT: Fiscal Year 2024-25 Midyear Report

RECOMMENDED ACTION

1. Receive the Fiscal Year (FY) 2024-25 Midyear Budget Report; and

2. Adopt Resolution No. 09-25 authorizing the attached Budget Amendments.

FISCAL IMPACT
Several budget amendments are recommended to maintain core city services and recognize new grant and reimbursement revenues and associated expenditures. These recommended budget amendments include approximately $1.25 million in increased revenues and $1.1 million in increased expenses for a total net revenue increase of $169,933 citywide across all funds.

Each recommended change is detailed by fund in the attached Midyear Budget Report (Attachment 1).

BACKGROUND
The City traditionally evaluates its primary revenues and expenditures in its major funds at the middle of the fiscal year and recommends any necessary budget amendments. The Midyear Budget Report covers the first seven months of the fiscal year, beginning July 1, 2024, and ending January 31, 2025. The report analyzes the key General Fund revenues and expenditures by category and the City’s other major funds.

On February 18, 2025, the midyear report was submitted to the Citizens’ Finance Advisory Committee (CFAC) for input. An oral update on CFAC recommendations will be provided as part of this regular business item.

Staff has traditionally presented the City Council with a fiscal update at or around midyear as well, which also serves as the precursor to the subsequent fiscal year budget development cycle.

DISCUSSION
Midyear Budget Report
The Midyear Budget Report provides a high level of detail regarding fiscal year-to-date revenues and expenditures in the City’s major funds and a detailed breakout of recommended budget amendments by fund.

Fiscal-Year-to-Date Update - Overall, this year’s midyear report demonstrates that operating revenues and expenditures are on track. Citywide, across all funds, the City has received approximately 61% of revenues as of January 31, 2025, and expended approximately 58% of all budgeted operating expenditures. This indicates that revenues are consistent with projections.

General Fund Recommended Budget Amendments
Most of the recommended budget amendments are within the General Fund. The Fire Department requested all recommended revenue budget amendments, largely related to Fire Mutual Aid activities. Mutual aid reimbursement is provided to cover actual costs incurred by the Fire Department due to mutual aid response. This includes wear-and-tear on vehicles and equipment, personnel costs for those firefighters responding to mutual aid assignments, personnel costs to cover firefighters on assignment, and administrative costs to facilitate the mutual aid program.

Unlike in previous years, staff deferred budgeting all mutual aid activity to the midyear budget review, when costs are usually entirely incurred. This provides enhanced transparency, separately recognizing mutual aid-related personnel, equipment, administrative costs, and CalOES reimbursement.

Other General Fund amendments are recommended to cover increased Human Resources expenditures, adjust the police department's regular and overtime budgets, recognize the actual cost of maintaining the police department’s pursuit-rated fleet vehicles, and provide the necessary personnel for the Finance Department to bring business license and Transient Occupancy Tax administration back in-house. Staff is recommending converting the two existing Administrative Services part-time positions into two full-time positions. The existing duties of the two part-time positions would be consolidated into one of the full-time positions. The second full-time position would take on the duties of business license application and renewal processing, including coordination with all City departments, transient occupancy tax filings, monthly reporting, and related customer support. More detail on this recommendation is provided in the report, and staff looks forward to reconnecting with the business community through providing these services.

The net impact of all General Fund amendments is a revenue increase of approximately $319,000. After accounting for restricted mutual aid reimbursements, the effect is a reduction in the General Fund operating surplus of roughly $105,000.

Measure Q/E Fund Recommended Budget Amendments
The only recommended midyear amendment to the Measure Q/E fund is a $10,000 expenditure budget increase for Harbor Patrol part-time personnel. This is recommended to account for the increase to the California minimum wage and in response to increased harbor patrol reserve coverage requirements. Measure Q/E revenues are projected to come above budget estimates but below FY 2023-24 actuals, continuing the recent gradual decline in post-pandemic economic growth and indicating that consumer spending is returning to normal levels.

Enterprise and Other Funds Recommended Budget Amendments Staff recommends a few minor amendments to the Harbor Operating Fund, increasing the expenditure budget by approximately $57,000. The bulk of this increase covers one-time, grantfunded spending on boat demolition and other deferred maintenance. The current year’s projected operating surplus would cover both amendments.

Other minor amendments are recommended in the Special Safety Grants and Risk Management funds. The available fund balance, an appropriate source for these expenditures, will cover these costs.

Long-Term Fiscal Forecasts
Staff has included updates to the long-term fiscal forecasts for each major fund that has recommended midyear amendments, including the General Fund, Measure Q/E fund, and the

Harbor Operating Fund. Except where activity has already occurred, such as with mutual aid reimbursement, midyear requests are not modeled in the forecasts.

As in prior years, the city’s long-term financial forecast is somewhat sobering. While operating budgets remain tenuously favorable, the City’s ability to fund critical capital improvements remains severely limited. Staff recommends that Council direct staff to develop a new Long Term Financial Plan to generate strategic options to address the capital improvement funding shortage.

ATTACHMENTS

1. Fiscal Year 2024-25 Midyear Budget Report

2. Budget Performance Report through January 31, 2025

3. Resolution No. 09-25 authorizing the attached Midyear Budget Amendments

Midyear Budget Report FY 2024-25
- 1 -
FEBRUARY 2025
City of Morro Bay
Authored by: Administrative Services
Version Date: 2/20/2025
Midyear
Budget Report
FISCAL YEAR 2024-25
This Report covers the sevenmonth period of July 1, 2024 through January 31, 2025. It
provides an update on the
City’s primary revenues and
expenditures in its major funds
and outlines recommended
budget amendments.

Midyear Budget Report FY 2024-25
- 2 -
Table of Contents
Executive Summary.................................................................................................3 Introduction............................................................................................................4 Fiscal Outlook .........................................................................................................4 Major Revenue Sources .................................................................................................................................. 4 Major Expenditures......................................................................................................................................... 5 Near-Term Actions.......................................................................................................................................... 6 General Fund ..........................................................................................................7 Key General Fund Revenue Sources Analysis.................................................................................................. 7 Recommended General Fund Revenue Budget Amendments....................................................................... 9 General Fund Expenditures Analysis............................................................................................................. 10 Recommended General Fund Expenditure Budget Amendments................................................................ 10 Recommended General Fund Vehicle Replacement Fund Budget Amendments........................................ 12 Measure Q/E Fund................................................................................................14 Measure Q/E Fund Revenues........................................................................................................................ 15 Measure Q/E Fund Expenditures.................................................................................................................. 15 Recommended Measure Q/E Fund Budget Amendments............................................................................ 16 Enterprise Funds...................................................................................................16 Harbor Enterprise Fund................................................................................................................................. 16 Water Enterprise Fund.................................................................................................................................. 17 Sewer Enterprise Fund.................................................................................................................................. 17 Transit Enterprise Fund................................................................................................................................. 18 Other Funds..........................................................................................................18 Recommended Other Funds Budget Amendments...................................................................................... 18 Summary Current Year and Ten-Year Fiscal Forecasts...........................................19 Assumptions.................................................................................................................................................. 19 General Fund Forecast.................................................................................................................................. 20 Measure Q/E Forecast................................................................................................................................... 22 Harbor Operating Forecast ........................................................................................................................... 22

Midyear Budget Report FY 2024-25
- 3 -
Executive Summary
This year’s midyear report indicates that the City’s revenues and expenditures are on track. As of January 31, 2025, the City has received approximately 67% of its projected revenues and has spent around 48% of its budgeted expenditures across all funds. After accounting for one-time transfers and capital spending, revenues and expenditures are tracking at 61% and 58%, respectively, consistent with seven months of fiscal year activity behind us. This report includes amendments already approved by City Council, which may be viewed in the City’s online repository of adopted resolutions1. Only new midyear requests not previously considered by Council are presented here for consideration.

Table 1 Summary of Citywide Operating Budget Revenues and Expenditures, net of transfers Amended Budget 1/31/25 Actuals % Rec'd/ Used
Total Revenues 46,673,427 28,533,046 61%
Total Expenditures 41,674,497 24,091,932 58%
Totals $4,998,930 $4,441,114
Table 2 Summary of Citywide Capital Budget Revenues and Expenditures Amended Budget 1/31/25 Actuals % Rec'd/ Used
Total Revenues 19,818,645 15,726,592 79%
Total Expenditures 51,903,902 2,510,154 5%
Totals ($32,085,257) $13,216,438
Budgeted capital expenditures exceed revenues because unused capital budgets are carried forward each year, per the Council-approved budget resolution. Revenues for these projects were received in prior years, causing some current- and future-year spending to come from accumulated fund balance. To view the FY 2023-24 capital budget carryforward amounts, refer to staff’s FY 2023-24 Year-End Budget Report.

Several budget amendments are recommended to maintain core city services and recognize new grant and reimbursement revenues and associated expenditures. These recommended budget amendments include approximately $1.25 million in increased revenues and $1.1 million in increased expenses for a total net revenue increase of $169,933 citywide across all funds. Each recommended change is detailed by fund herein. 1 See Resolution 54-24, 55-24, and 64-24.

After accounting for one-time transfers, both revenues and expenditures are tracking at 61% and 58%, respectively, which is on track with seven months of fiscal year activity behind us.

Midyear Budget Report FY 2024-25
- 4 -
Introduction
This report covers the seven months ending January 31, 2025. This report provides an update on the City's primary revenues and expenditures in the City’s five major funds and outlines recommended budget amendments. If no significant change is anticipated, no budget amendment will be recommended.

The City’s five major funds are General Fund (001), Measure E Fund (003), Harbor Operating Fund (331), Water Operating Fund (311), and Sewer Operating Fund (321). Minor amendments are recommended in a few of the City’s smaller special purpose funds, outlined under this report's “Other Funds” section.

This report contains the most accurate and updated information available at the time of publication and represents a snapshot of City revenues and expenditures as of January 31, 2025. It may not represent pending payments and revenues, irregular payments, or revenue timing. As this is not an audited financial statement, the figures are preliminary and will change as the fiscal year progresses.

Fiscal Outlook
The City’s fiscal outlook remains cautious. Major tax revenues have plateaued, and while cost inflation has moderated, it persists. Some revenue sources have exceeded conservative budget estimates in recent years while fluctuating staffing levels have resulted in citywide expenditure savings. These savings are expected to decline significantly as the City’s costs increase at a greater rate than revenue and staff enhance productivity.

Currently, the City is in a very fortunate position to have substantial reserves to manage any downturns.

However, these funds may also be needed to support essential capital improvements, such as the ongoing pavement management program. Looking forward several years, the reserve in the General Fund will have to be drawn down to support capital projects, and, absent a supplemental revenue source, it will be insufficient to support the level of investment necessary to maintain existing City infrastructure. It is crucial to explore new revenue sources, maximize existing revenues, and implement operational efficiencies to address rising costs, deferred maintenance, and plateaued revenues.

One ongoing initiative is updating the City’s Master Fee Schedule to ensure optimal cost recovery for City services. Currently, fee revenue from these services accounts for approximately 43% of the citywide revenue budget but only about 10% of General Fund revenues. This small yet significant step is part of a broader effort to enhance the City’s financial stability.

Major Revenue Sources
Revenues have leveled off following the surge in economic activity experienced after the pandemic. The following is a summary of the City’s major revenue sources and some explanation regarding the methodologies used to forecast future growth.

Property Tax
The San Luis Obispo County Assessor’s Office and State Board of Equalization levies property tax at 1% of a property’s assessed value, of which the City receives approximately 13.7 cents per dollar paid on property located within the municipal limits of Morro Bay. The County Tax Collector’s Office provides property tax estimates annually, with reports in January and again in the fall. According to the County Assessor’s 2024 Annual Report, middling increases in property values are attributed mainly to Proposition 19, which has led to a

Midyear Budget Report FY 2024-25
- 5 -
significant number of property owners transferring low base values to San Luis Obispo County. In 2024, the county-wide assessed value rose 5.03% compared to the previous year. Specifically, in Morro Bay, the assessed value increased by 5.04%. The County Assessor’s Office is projecting a growth rate of 4% for FY 2024-25.

Sales Tax
The City contracts with HdL to forecast sales tax revenue for both the General Fund Bradley Burns sales tax revenue and the Measure Q/E local sales and use tax revenues. While the City experienced sales tax growth in the 10-15% range in the immediate post-pandemic period, FY 2023-24 sales tax revenues were flat over the prior year. For 2024-25, HdL forecasts 0.5% growth over prior year actuals.

Transient Occupancy Tax (TOT)
Budget estimates were developed in coordination with Visit Morro Bay and are based on a review of occupancy rates, average daily room rates, and regional trends. Hotels have seen steady growth from November 2024 to January 2025. Visit Morro Bay plans to increase its marketing efforts in the coming months, which should continue to support a modest increase in TOT revenues for the remainder of the fiscal year.

Major Expenditures
Mutual Aid Activity
In contrast to previous years, staff deferred budgeting fire mutual aid-related expenditures and reimbursements to the midyear review, when annual costs are typically fully incurred. This approach allowed staff to develop a new system for accounting for mutual aid activities separately from routine fire expenditures, providing muchimproved clarity and transparency.

The new system for accounting for these costs and reimbursements is to record mutual aid activities under a new sub-department in the General Fund (001-4230 Fire Mutual Aid), with specific revenue accounts established to track the categories of reimbursements the City receives. This new accounting system will ensure that mutual aid reimbursements are allocated strictly for mutual aid-related expenditures, including maintenance or replacement of vehicles and equipment and personnel costs associated with mutual aid responses and coverage.

These budget adjustments are included in this midyear report.

Current Personnel Costs
The City delivers essential services to citizens and visitors through a dedicated workforce, the cost of which represents a significant portion of the City's expenditure budget. Over the next two years, personnel costs are expected to rise considerably as the City implements three-year contracts approved in June 2024 for both represented and non-represented employee groups.

Pension Liability Payments
Pension obligations for the City of Morro Bay are comprised of payments to CalPERS for current employees’ current-year pension contributions and minimum payments toward the much larger amount associated with past pension obligations, called the “unfunded accrued liability” or UAL. The UAL is primarily associated with prior employees and more generous pension tiers that have since been phased out under State law with pension reform. The City expects to see increasing minimum UAL payments due annually for the next several years, as shown visually in the scenario below. The City’s UAL payments are a moving target impacted by CalPERS’s achieved rate of returns in the market. The City recognizes a 3% discount on the annual amount due by making lump payments in July, rather than following CalPERS’ monthly payment schedule. To keep payments below a target smoothing level of $3.4 million, the City may need to begin withdrawals from the trust as early as 2028.

Midyear Budget Report FY 2024-25
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Figure 1 Section 115 Trust Modeling with Existing Contributions Unfunded Capital Needs
The City has invested significant resources in capital improvements over the past five years, with the Water Reclamation Facility being the City’s largest and most innovative project yet. Ongoing infrastructure improvements continue to compete for funding amidst growing operating and personnel costs. For General Fund projects, the forecast is particularly inadequate. The City’s Annual Pavement Management Program is the most notable underfunded capital need. In the August 27, 2024 presentation to City Council, the City’s pavement management consultant recommended an average $4.5 million annual investment to maintain the City’s existing pavement rating of “fair/at risk” or 60 PCI. This is an increase over the $2.8 million annual investment recommended in a 2022 pavement management report, a target the City has yet to meet. In addition to pavement management, the City also has a growing list of storm drain replacements, sidewalk repairs, park improvements, accessibility upgrades, and fire engine replacements to fund in the near future.

Near-Term Actions
To effectively navigate these competing priorities, the city must invest in comprehensive financial planning, prioritize projects based on their impact and urgency, and determine funding sources. It may be prudent to reallocate previously adopted budget to the projects deemed highest priority rather than allocating additional funding from the general fund and/or Measure Q/E. The FY 2024-25 budget aimed to keep non-personnel operating expenditures as flat as possible. This approach will also be recommended for FY 2025-26 budget development.

Staff provides this transparent communication about the City's budgetary challenges and priorities to foster understanding and support for the difficult decisions that may need to be made in the coming budget years. A cautious and proactive approach to fiscal management will assist the City in weathering uncertainties and maintaining its financial stability over the long term.

Midyear Budget Report FY 2024-25
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General Fund
The General Fund remains stable at midyear, with expenditures and revenue tracking closely with the adopted budget. Staff estimates for the remainder of FY 2024-25 suggest a slight increase in the unassigned or available General Fund balance compared to FY 2023-24. Estimates do not include midyear amendments except where those activities have already occurred, such as grant revenues received, mutual aid reimbursements, and mutual aid personnel costs.

Table 3 FY 2024-25 General Fund Total Revenues and Expenditures Amended Budget 1/31/25 Actuals % Rec'd/ Used Estimated
Total Revenues 19,683,146 13,577,559 69% 20,808,270
Total Operating Expenditures 19,483,091 12,945,017 66% 19,616,341 Transfers to Capital Projects Fund 1,150,000 1,150,000 100% 1,150,000 Totals ($949,945) ($517,458) $41,929
The general fund's available fund balance has been built up through prudent fiscal policies and budget savings over recent years. However, the long-term fiscal forecast for the General Fund indicates that this available fund balance will decrease rapidly in the coming years as the city seeks to maintain service levels and partially fund deferred maintenance such as pavement and storm drain projects.

Table 4 Fund Balance Summary (in thousands)
Fund Description FY 2020-21 FY 2021-22 FY 2022-23 FY 2023-24 FY 2024-25
Budget
FY 2024-25
Estimated
General Fund (nonspendable) 3,974 3,163 3,190 3,190 3,163 3,190 General Fund (committed – GF only) 798
General Fund (unassigned – GF only) 2,763 6,412 6,449 4,098 3,012 4,046 The City’s current reserve policy requires a minimum emergency reserve of 33% of operating expenses (including Measure Q/E) and a target of 50%. The FY 2024-25 budget assumed the City would hold 43% in reserves. Staff has not yet completed a risk-based reserve analysis, which could suggest lowering the General Fund's reserve threshold; however, it is not advisable to set the reserve threshold below 20%, considering what is already known about the city's vulnerability to severe weather, high inflation, and fluctuations in tourism. As such, the General Fund’s ability to support critical capital projects remains severely hampered.

Key General Fund Revenue Sources Analysis
The adopted General Fund Revenue Budget for FY 2024-25 is approximately $19.6 million. As of January 31, 2025, the General Fund had received 69% of its revenues, or $13.5 million.

Overall, General Fund revenues fiscal-year-to-date are on track. The total percentage collected is higher than the 58% one may expect seven months through the year despite the routine lag in collections of major revenue sources such as property tax, sales tax, and TOT. This is partially explained by the receipt of one-time transfers from enterprise funds per the City’s Cost Allocation Plan and the receipt of interest income, which is posted to the General Fund throughout the year and distributed to other funds at year-end.

Major revenue sources are described below in more detail, as they collectively account for over three-quarters of budgeted General Fund revenues. Table 5 presents all General Fund revenue sources in summary format,

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including historical data from FY 2021-22. The “Other Revenues” classification includes grants, donations, auctioned property, refunds, adjustments, and restitution.

Table 5 Key Revenue Sources FY 2022 to Current
Revenue Source 2022 Actual 2023 Actual 2024 Actual 2025 Actual Thru 1-31
2025
Adopted
2025 %
Rcv'd
2025
Estimated
Property Taxes 4,981,027 5,275,945 5,573,238 3,253,028 5,660,782 57% 5,685,301 Intergovernmental
Revenues
97,661 213,615 64,384 40,517 45,012 90% 63,785
Sales & Use Tax 2,753,611 2,249,114 2,777,093 1,050,133 2,632,000 40% 2,631,457 Cannabis City Tax 512,944 502,149 469,133 224,339 490,000 46% 448,678 Transient Occupancy
Tax
4,255,140 4,681,648 4,473,923 2,310,794 4,500,000 51% 4,500,000 Franchise Fees 641,869 698,791 782,158 256,213 747,380 34% 803,000 Licenses & Permits 761,616 660,964 698,361 549,598 725,000 76% 952,302 Revenues From
Current Services
2,434,859 2,219,441 2,378,825 1,852,421 2,050,082 90% 3,108,175 Fines & Forfeitures 22,062 27,056 34,193 22,180 31,090 71% 41,541 Other Revenues 330,052 505,615 961,326 204,646 403,015 51% 352,041 Revenues From Use of
Money & Property
593,997 615,133 743,173 2,443,108 733,000 333% 601,353
Interfund Revenue
Transfers
1,224,866 3,088,584 2,060,218 1,316,931 1,620,639 81% 1,620,638 Totals $18,609,703 $20,738,055 $21,016,025 $13,523,908 $19,638,000 69% $20,808,270 Property Tax Revenue
Property tax is the largest revenue category for the City’s General Fund, accounting for 27% of budgeted General Fund revenues in FY 2024-25. Property taxes are considered a relatively stable revenue source. The County provides property tax estimates, and this year’s estimates are consistent with the adopted budget.

Recommendation: None.

Transient Occupancy Tax Revenue
Transient Occupancy Tax (TOT) is the General Fund’s second largest revenue source, accounting for 23% of the City’s budgeted General Fund revenues for FY 2024-25. The city levies and retains a 10% TOT on all hotels, motels, and vacation rentals (including RV parks offering short-term stays) to fund city services provided to visitors to Morro Bay. In addition, the City acts as the fiscal agent and collects and remits an additional 3% to Visit Morro Bay, the Morro Bay Tourism Business Improvement District (TBID), and an additional 1.5% to Visit SLOCAL, the Countywide Tourism program.

As a highly economically sensitive revenue source, the City monitors TOT closely. In recent years, TOT revenues have plateaued. Staff anticipates FY 2024-25 revenues to come near or slightly above the budgeted amount.

Recommendation: None.

Revenues from Current Services (Charges for Service)
City Revenues from Current Services consist primarily of plan check fees, building inspection fees, and recreation sports and youth services fees. These fees are assessed based on recovery formulas, which reflect the

Midyear Budget Report FY 2024-25
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approximate costs of providing these services and, as a total category, account for 13.7% of the City’s General Fund revenue budget for FY 2024-25. These revenues also include fire mutual aid reimbursement. Due to the intentional delay in budgeting mutual aid activity, revenues from current services are tracking high at midyear.

After correcting for mutual aid, the actual percentage of revenue received in this category is approximately 54%.

Recommendation: Amendments are recommended to recognize mutual aid reimbursements based on approved CalOES invoices.

Sales Tax Revenue
Sales tax is the fourth largest revenue source for the City’s General Fund in FY 2024-25, budgeted to generate

13.4% of the Fund’s revenue budget for the year. The base statewide sales and use tax rate is 7.25%, and the City’s General Fund receives 1% of that base tax. This sales tax revenue does not include the 1.5% local sales tax collected through voter-approved Measure Q/E.

The City contracts with industry expert HdL to analyze collections history, forecast sales tax revenues and pursue revenues on the City’s behalf that belong to the City. Sales Tax receipts are tracking with budget estimates, adjusted for the delay in receipts. As with TOT tax receipts, sales tax trends this fiscal year are flat, with only a modest 2-3% growth projected for FY 2025-26 and 2026-27.

Recommendation: None.

Other General Fund Revenues
Other General Fund revenues comprise less than a quarter of the Fund’s budgeted revenues. These include Transfers in, Franchise Fees, Cannabis City Tax, Business Tax, Rental Income, Licenses and Permits, and Grant Revenues.

Recommended General Fund Revenue Budget Amendments
Staff recommends the following General Fund revenue budget amendments at midyear.

Table 6 Requested FY 2024-25 General Fund Revenue Budget Amendments Description Dept. Increase
(Decrease)
One-time/
Ongoing
G/L Account
Nuclear Preparedness Program Grant. Move to correct
sub-department.

Fire (12,360) One-Time 001-4210-3393
Nuclear Preparedness Program Grant. Recognize
actual amount received.

Fire EOC 14,411 One-Time 001-4220-3393
Mutual Aid Reimb-Personnel. Recognize actual amount
approved by CalOES.

Fire Mutual
Aid
767,132 One-Time 001-4230-3502
Mutual Aid Reimb-Vehicle/Equipment. Recognize
actual amount approved by CalOES.

Fire Mutual
Aid
200,187 One-Time 001-4230-3503
Mutual Aid Reimb-Admin. Recognize actual amount
approved by CalOES.

Fire Mutual
Aid
196,148 One-Time 001-4230-3504
Mutual Aid Reimb-Expense Claims. Recognize actual
amount approved by CalOES.

Fire Mutual
Aid
7,926 One-Time 001-4230-3505
General Fund Revenue Total $1,173,444

Midyear Budget Report FY 2024-25
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General Fund Expenditures Analysis
The adopted General Fund expenditure budget for FY 2024-25 is approximately $20.6 million. As of January 31, 2025, General Fund expenditures totaled $14.1 million, or 70% of budget. After accounting for expenditure activity front-loaded at the start of the budget year, the actual percent of budget spent is 58%, which is on track for midyear. The tables below demonstrate expenditures for the fiscal year to date by expense type (object).

Where midyear requests result from actual costs already incurred (such as mutual aid activity), those expenditures are included in the estimated column below. All other midyear requests are omitted from staff estimates and the ten-year fiscal forecast.
“Other” expenditures include payments to other agencies (such as SLO County) and special events.

Table 7 FY 2024-25 Expenditure Budget Status by Object
Object Amended Budget Actuals % Used Estimated
Personnel Services 13,137,966 8,636,649 66% 13,233,346
Supplies 794,222 468,242 59% 741,808
Services 3,522,868 1,874,076 53% 3,569,565
Insurance 703,607 700,266 100% 700,266
Capital Outlay 132,133 105,180 80% 139,613
Debt Service 35,190 17,595 50% 35,189
Interfund Transfers 2,053,059 2,053,059 100% 2,053,059
Other 254,046 239,949 94% 293,496
Totals $20,633,091 $14,095,017 68% $20,766,342
Recommended General Fund Expenditure Budget Amendments
Staff recommends several amendments to the General Fund expenditure budget at midyear. The operating surplus of the General Fund will cover the proposed budget amendments unrelated to fire mutual aid reimbursement. All expenses associated with fire mutual aid are reimbursed, so they do not impact the overall budget. Any capital expenditures funded by the General Fund that exceed the operating surplus will be drawn from available fund balance. Consequently, decreasing the operating surplus will increase the amount of fund balance needed for capital projects. Most of the recommended adjustments are for one-time expenditures.

However, approximately $85,000 in spending may be ongoing and should be considered with future year budget adoptions, depending on available funding.

Table 8 Requested FY 2024-25 Expenditure Budget Amendments Description Dept. Increase
(Decrease)
One-time/
Ongoing
G/L Account NonDiscretionary
Part-Time Pay. Correct budget error;
miscalculation of hours requested.

Human
Resources
5,060 One-Time 001-3140-4310
Investigations. Unexpected employee
matter.

Human
Resources
25,000 One-Time 001-3140-6151 X
Human Resources Subtotal 30,060

Midyear Budget Report FY 2024-25
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Regular Pay. Four-month cost for
increased staffing to bring Business
Licenses and TOT processing in-house.

Accounting
& Treasury
18,006 Ongoing 001-3510-4110 X
Other Pay. Four-month cost for
increased staffing to bring Business
Licenses and TOT processing in-house.

Accounting
& Treasury
300 Ongoing 001-3510-4599 X
Employer Paid Benefits. Four-month
cost for increased staffing to bring
Business Licenses and TOT processing inhouse.

Accounting
& Treasury
10,585 Ongoing 001-3510-4910 X
Pension Normal Cost. Four-month cost
for increased staffing to bring Business
Licenses and TOT processing in-house.

Accounting
& Treasury
2,020 Ongoing 001-3510-4911 X
Accounting & Treasury Subtotal 30,911
Regular Pay. Salary savings due to
several FMLA leaves and staff turnover.

Police (60,000) One-Time 001-4110-4110 X
Overtime. Additional overtime needed
to cover several FMLA leaves, training,
and other staffing shortages.

Police 50,000 One-Time 001-4110-4120 X
Investigations. Increased cost for carry
concealed weapons permits.

Police 500 One-Time 001-4110-6151 X
Pre-Employment Testing. Due to
employee turnover.

Police 6,000 One-Time 001-4110-6153 X
Outside Vehicle Repair/Maintenance.

Increased costs due to aging fleet.

Police 50,000 Ongoing 001-4110-6604 X
Police Subtotal 46,500
Regular Pay. Mutual aid-related
personnel costs.

Fire Mutual
Aid
27,531 One-Time 001-4230-4110 X
Overtime. Mutual aid-related personnel
costs.

Fire Mutual
Aid
372,848 One-Time 001-4230-4120 X
Part-Time Pay. Mutual aid-related
personnel costs.

Fire Mutual
Aid
18,420 One-Time 001-4230-4310 X
Employer Paid Benefits. Mutual aidrelated personnel costs.Fire Mutual Aid
25,965 One-Time 001-4230-4910 X
Pension Normal Cost. Mutual aidrelated personnel costs.Fire Mutual Aid
9,250 One-Time 001-4230-4911 X
Communication Supplies. Mobile radios
for all fire vehicles; meets CalOES
communications standards for mutual
aid.

Fire Mutual
Aid
135,000 One-Time 001-4230-5108 X
Safety Equipment. Fire investigation
supplies; supports mutual aid.

Fire Mutual
Aid
20,000 One-Time 001-4230-5121 X
Building Maintenance Supplies. Selfcontained Breathing Apparatus fill stations electrical repairs; supports
mutual aid.

Fire Mutual
Aid
6,000 One-Time 001-4230-5502 X
Small Tools/Equipment. Extrication
tools, disaster response trailer, etc.;
supports mutual aid.

Fire Mutual
Aid
5,000 One-Time 001-4230-5530 X
Digital Services. Increased pricing for
services; supports mutual aid.

Fire Mutual
Aid
4,500 Ongoing 001-4230-6129 X

Midyear Budget Report FY 2024-25
- 12 -
Outside Vehicle Repair/Maintenance.

Mutual aid-related vehicle
repair/maintenance.

Fire Mutual
Aid
24,500 One-Time 001-4230-6604 X
Transfer Out. Fund command vehicle
replacement utilized for mutual aid
response.

Fire Mutual
Aid
80,000 One-Time 001-4230-8501 X
Payment to Other Agency. Adjust for
underestimate during budget
development; supports mutual aid.

Fire Mutual
Aid
18,000 One-Time 001-4230-8721 X
Fire Mutual Aid Subtotal 747,014
General Fund Expenditure Total $854,485
If all General Fund Budget Amendments are approved, the available General Fund balance at the end of FY 2024- 25 would be increased by approximately $319,000 subject to change as the remainder of the fiscal year progresses. It is important to note that most of the City’s revenue increase is related to Fire mutual aid reimbursements, which are restricted to mutual aid-related expenditures. Thus, although total fund balance may increase due to these amendments, $424,379 of available General Fund balance will be restricted for future Fire Department appropriation per the California Fire Assistance Agreement (CFAA). This funding will be tracked in a restricted asset account on the balance sheet for future allocation.

Table 9 Summary of Recommended General Fund Midyear Budget Amendments Amended Budget Increase (Decrease) Midyear Budget
Total Revenues 19,683,146 1,173,444 20,856,590
Total Operating Expenditures 19,483,091 854,485 20,337,576 Transfers to Capital Projects Fund 1,150,000 0 1,150,000 Totals ($949,945) $318,959 ($630,986)
General Fund Personnel Changes
Since May 2022, the City has utilized HdL to provide business license and transient occupancy tax administration services. After more than two years under this structure, informed by feedback from the business community, City staff has concluded that HdL’s service model is not the best fit for the City. As a result, the decision has been made not to renew the service contract. While HdL adhered strictly to the City’s municipal code, the presence of a third party between City staff and the business community posed significant challenges for such a critical function.

The contract period ends March 31, 2025 and City staff will assume the administrative function April 1, 2025.

When the contract with HdL was approved by City Council, it was communicated that providing these services successfully in-house would require another employee. After thorough analysis, staff recommends not adding a new position but rather using existing staff structure and employees by converting the two existing part-time positions into two full-time positions. The existing duties of the two part-time positions will be consolidated into one of the full-time positions. The second full-time position will take on the duties of business license application and renewal processing, including coordination with all City departments, transient occupancy tax filings, providing the essential customer support, and completing regular reporting and disbursements to Visit Morro Bay and Visit SLO Cal. The estimated cost to the general fund for the remainder of the fiscal year would be approximately $31,000, depending on effective date of full-time status. After accounting for overhead and audit

Midyear Budget Report FY 2024-25
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costs, there may be a nominal increase to the overall cost of providing these services in-house, however those costs could be mitigated by altering the annual audit method.

The following chart depicts the full-time equivalent (FTE) change from budget to recommended structure. The net impact of the change is a 1.1 FTE increase in total full- and part-time staffing.

Staff looks forward to reconnecting with the business community through providing these services.

Table 10 Citywide Summary Full-Time Staffing

CITYWIDE SUMMARY FULL-TIME STAFFING
Presented as Full-Time Equivalent (FTE)
2021-22 2022-23 2023-24 2024-25 2024-25
Amended Funded Funded Budget Amended
Citywide FTE
Administrative Services 9.0 9.0 9.0 9.0 10.4
City Manager's Office 5.0 5.0 5.0 6.0 6.0
Recreation Services 4.0 4.0 4.0 6.0 6.0
Community Development 6.0 7.0 7.0 8.0 8.0
Fire Department 15.0 15.0 16.0 16.0 16.0
Public Works 36.6 36.6 37.0 37.0 37.6
Police 21.4 22.5 22.5 22.5 22.5
Harbor Department 6.0 6.0 7.0 7.0 7.0
Total City-wide FTE 103.0 105.1 107.5 111.5 113.5
Table 11 Citywide Summary Part-Time Staffing

CITYWIDE SUMMARY PART-TIME STAFFING
Presented as full-time equivalents (FTE) based on the number of hours budgeted. 2021-22 2022-23 2023-24 2024-25 2024-25
Amended Funded Funded Budget Amended
Citywide FTE
Administrative Services 0.4 0.6 0.6 0.3 0.0
City Manager's Office 0.0 0.0 0.0 0.2 0.2
Recreation Services 11.2 15.8 15.8 14.0 14.0
Community Development 1.5 1.9 1.9 1.6 1.6
Fire Department 2.6 4.6 4.6 2.1 2.1
Public Works 2.6 2.7 2.7 3.9 3.3
Police 0.0 0.0 0.0 1.7 1.7
Harbor Department 3.4 3.2 3.2 5.3 5.3
Total Citywide FTE 21.7 28.7 28.7 29.0 28.1

Midyear Budget Report FY 2024-25
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Recommended General Fund Vehicle Replacement Fund Budget Amendments The General Fund Vehicle Replacement Fund was established to accumulate funding for the replacement of vehicles that are used by the General Fund’s departments. The FY 2024-25 budget includes expenditures for the replacement of three vehicles: one SUV for Police, one truck for Fire, and one truck for Consolidated Maintenance. Using State of California vehicle replacement standards, 74% of the City's trucks and 86% of SUVs are eligible for replacement.

Recommended amendments in this fund support replacing a Fire Department command vehicle used for mutual aid response. The funding source for this request is current-year CalOES reimbursement transferred from the Fire Mutual Aid program in the General Fund (001-4230).

Table 12 Requested FY 2024-25 General Fund Vehicle Replacement Fund Revenue Amendments Description Dept. Increase
(Decrease)
One-time/
Ongoing
G/L
Transfer In. Funding for new command vehicle transferred from General Fund – Fire Mutual Aid program.

Fire Mutual
Aid
80,000 One-Time 050-4230-3801
GF Vehicle Replacement Revenue Total $80,000
Table 13 Requested FY 2024-25 General Fund Vehicle Replacement Fund Expenditure Adjustment Description Dept. Increase
(Decrease)
One-time/
Ongoing
G/L
Trucks. New command vehicle for fire, reimbursed by mutual aid. Fire Mutual Aid
80,000 One-Time 050-4230-7202
GF Vehicle Replacement Expenditure Total $80,000
Measure Q/E Fund
Measure E was approved by the voters in November 2020 as a 1% local transaction and use tax, in addition to the 0.5% local transaction and use tax from Measure Q, which was approved by the voters in 2006. The State administers the taxes as one tax, totaling 1.5%. This is codified and explained in detail in Chapter 3.26 of Morro Bay’s Municipal Code. While Measure E is a General Tax, the City Council has identified priority spending areas consistent with the ballot measure language in 2020 and the prior 2006 ballot language used when Measure Q was approved. As directed by City Council on April 13, 2021, the four priority areas of spending for Measure Q/E include:
- Maintain public safety services by funding staff positions that are most closely aligned with the purposes of Measures Q and E. Expenses include costs associated with Morro Bay Fire Department, Morro Bay Police Department, and Morro Bay Harbor personnel and equipment, in addition to the Fire Headquarter Debt service and the Fire Engine loan repayment;
- Maintain or enhance cleanliness and safety of public spaces such as parks, waterfront, and the beach by funding personnel, supplies, expenses, and equipment to support City operations in departments including Public Works Consolidated Maintenance and Harbor Department; - Invest in infrastructure and equipment such as street paving, storm drains, and vehicle replacements that support City services. This priority may include increasing the capacity to implement the backlog of unfunded capital projects and

Midyear Budget Report FY 2024-25
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- Ensure the City's financial health by maintaining appropriate reserves to protect against economic downturns, natural/health emergencies, and other unforeseen challenges or opportunities.

Measure E (like Measure Q before it) requires an independent annual financial audit and the establishment of an independent citizens' advisory committee to review yearly expenditures. The Citizens’ Finance Advisory Committee (CFAC) serves as that oversight committee and is to receive annual and annual reporting on expenditures from Measure Q/E revenues. The annual report through June 30, 2024, was on the CFAC meeting agenda for January 21, 2025.

As of January 31, 2025, the Measure Q/E Fund (fund 003) received 41% of budgeted revenues and expended 57% of budgeted expenditures. A summary of revenue and expenditure activity to date follows.

Table 14 FY 2024-25 Measure Q/E Total Revenues and Expenditures Amended Budget 1/31/25 Actuals % Rec'd/ Used Estimated
Total Revenues 4,313,735 1,757,499 41% 4,440,638
Total Operating Expenditures 3,413,907 1,785,075 52% 3,347,415 Transfers to Capital Projects Fund 430,000 430,000 100% 430,000 Totals $469,828 ($457,576) $663,223
Measure Q/E Fund Revenues
Fund revenues are tracking slightly below the prior year and represent five months of sales tax collected due to the two-month lag in receipts. Based on consultation with HdL, staff projecting year-end revenue totals to be just above budget but below FY 2023-24 actuals. Sales tax revenue growth is anticipated to remain flat in FY 2024-25 and increase a modest 2-3% in the coming years.

Measure Q/E Fund Expenditures
Fund-wide, expenditures for the first seven months of the year are on track at 57% of the budget expended as of January 31, 2025. The table below presents expenditures by Department. Interfund transfers represent transfers out to the Capital Improvement Fund completed at the start of the fiscal year, with no changes since budget adoption.

Table 15 FY 2024-25 Measure Q/E Fund Expenditures by Department Department Amended Budget Actuals % Used Estimated
Non-Departmental 30,000 7,202 24% 30,000
Police 898,501 594,483 66% 910,230
Police-Support Services 62,118 38,424 62% 62,120
Fire 996,835 592,711 59% 986,690
Public Works 234,943 134,641 57% 221,402
Consolidated Maintenance 527,812 250,764 48% 481,458
Street Maintenance 350,000 2,554 1% 350,000
Harbor 201,439 109,252 54% 212,013
Harbor Lifeguards 112,258 48,297 43% 94,502
Interfund Transfers 430,000 430,000 100% 430,000
Total $3,843,906 $2,208,328 57% $3,777,415

Midyear Budget Report FY 2024-25
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Recommended Measure Q/E Fund Budget Amendments
Revenues. No revenue amendments are recommended.

Expenditures. Staff recommends one adjustment to Harbor Part-Time Pay, as outlined below.

Table 16 Requested FY 2024-25 Measure Q/E Expenditure Amendments Description Dept. Increase
(Decrease)
One-time/
Ongoing
G/L Account
Part-Time Pay. Adjust Harbor Patrol Reserve pay due to minimum wage increase effective January 1, 2025, and increased demand for harbor patrol coverage.

Harbor 10,000 One-Time 003-6510-4310
Measure Q/E Expenditure Total $10,000
Enterprise Funds
The Enterprise Funds are Proprietary Funds that report the same functions as business-type activities. The following funds are included in this category: Harbor Funds, Water Funds, Sewer Funds, and Transit Funds.

Currently, each enterprise fund has an operating fund and a capital improvement fund. The following gives an update on significant changes or activities in these funds.

Harbor Enterprise Fund
The Harbor Enterprise Fund accounts for revenues from harbor leases, slips, moorings, and other sources expended for maintenance, operation, patrolling, and harbor improvements. As of January 31, 2025, the Harbor Operating Fund had received approximately 46% of budgeted revenue ($1.2 million of $2.6 million) and expended approximately 64% of its budget ($1.7 million of $2.6 million). After netting out transfers and frontloaded insurance expenses paid at the start of the fiscal year, the actual percent of the expenditure budget spent is 54%, which is on track with seven months behind us. As lease agreements outline, a large portion of Harbor Fund revenues are received at the end of the fiscal year for the prior year's percentage rent. Due to that contractual timing, it can be difficult to project revenue budgets in the Harbor Fund. Although the adopted budget anticipated a small operating deficit at year-end, staff’s midyear projections assume harbor lease revenue will increase from prior year actuals, resulting in an operating surplus of approximately $0.5 million, not including the $0.3 million budgeted in the Measure Q/E fund.

As of June 30, 2024, the Harbor Fund had a working capital balance (spendable fund balance) of approximately $1.6 million.

Table 17 FY 2024-25 Harbor Operating Fund Total Revenues and Expenditures Amended Budget 1/31/25 Actuals % Rec'd/ Used Estimated
Total Revenues 2,621,784 1,212,902 46% 3,032,272
Total Operating Expenditures 2,645,113 1,704,862 64% 2,494,559 Transfers to Capital Projects Fund 0 0 0
Totals ($23,329) ($491,960) $537,713
Harbor Department staff continues to evaluate capital improvement projects for FY 2024-25. Significant storm damage in 2023 shifted priorities to address commercial fishing dock repairs and replacement. The former Harbor Director did not recommend continuing to spend funds on design, engineering, and permitting for the

Midyear Budget Report FY 2024-25
- 17 -
underfunded Beach Street Slips project. As a result, all Beach Street Slips funding was transferred to the Storm Recovery – Dock Repairs project in the FY 2024-25 budget. Significant underfunded capital improvement needs for much of the Harbor infrastructure remain a critical consideration for future budget cycles.

Recommended Harbor Fund Budget Amendments
Table 18 Requested FY 2024-25 Harbor Fund Expenditure Amendments Description Dept. Increase
(Decrease)
One-time/
Ongoing
G/L Account
Contractual Services. Adjust for $38,000 in grant-funded boat demo costs, plus deferred maintenance costs.

Harbor 53,317 One-Time 331-6510-6106
Telephone. Increased phone expense due to reallocation of citywide billing after budget adoption.Harbor 3,359 On-going 331-6510-6201 Harbor Operating Fund Expenditure Total $56,676
Water Enterprise Fund
The Water Enterprise Fund accounts for revenues received primarily from water service charges, which are expended for maintenance, operations, and capital improvements to the water system. As of January 31, 2025, the Water Operating Fund had received approximately 46% of its budgeted revenues ($3.6 of $7.8 million) and expended approximately 74% of its budgeted expenditures ($7 million of $9.6 million). FY 2024-25 year-end staff estimates include higher investment returns than budgeted amounts.

Table 19 FY 2024-25 Water Operating Fund Total Revenues and Expenditures Adopted Budget 1/31/25 Actuals % Rec'd/ Used Estimated
Total Revenues 7,806,837 3,578,042 46% 8,092,300
Total Operating Expenditures 6,472,411 3,917,897 61% 6,340,142 Transfers to Capital Projects Fund 3,133,115 3,133,115 100% 3,133,115 Totals ($1,798,689) ($3,472,970) ($1,380,957)
As of June 30, 2025, the amount of working capital (spendable fund balance) in the Water Fund was approximately $13.3 million.

Recommended Water Funds Budget Amendments
No budget amendments are recommended for the Water Fund.

Sewer Enterprise Fund
The Sewer Enterprise Fund accounts for revenues received primarily from sewer service charges, which are expended for maintenance, operations, and improvements to the sanitary sewer system. As of January 31, 2025, the Sewer Fund had received approximately 50% of budgeted revenue ($4.9 of $9.8 million) and expended approximately 74% of its budget ($12.8 of $17.3 million). FY 2024-25 year-end staff estimates include higher investment returns than budgeted amounts and the one-time receipt of insurance proceeds from storm damage.

Midyear Budget Report FY 2024-25
- 18 -
Table 20 FY 2024-25 Sewer Operating Fund Total Revenues and Expenditures Amended Budget 1/31/25 Actuals % Rec'd/ Used Estimated
Total Revenues 9,790,604 4,910,256 50% 10,704,647
Total Operating Expenditures 7,365,158 2,900,846 39% 6,595,134 Transfers to Capital Projects Fund 9,926,428 9,926,428 100% 9,926,428 Totals ($7,500,982) ($7,917,018) ($5,816,915)
As of June 30, 2024, the working capital (spendable fund balance) amount in the Sewer Fund was approximately $22.5 million.

Recommended Sewer Funds Budget Amendments
No budget amendments are recommended for the Sewer Fund.

Transit Enterprise Fund
The Transit Enterprise Fund accounts for the operations and activities associated with the City’s public transit system, Morro Bay Transit, which operates a year-round deviated fixed route with fixed route, Call-A-Ride services, and a seasonal Trolley service. The deviated fixed route operates one fixed route that flexes, or deviates, off-route to provide limited, advance-scheduled, curb-to-curb service (Call-A-Ride), then returns to the next fixed route stop.

Table 21 FY 2024-25 Transit Operating Fund Total Revenues and Expenditures Adopted Budget 1/31/25 Actuals % Rec'd/ Used Estimated
Total Revenues 458,093 214,175 47% 436,358
Total Operating Expenditures 339,245 180,021 53% 308,888 Transfers to Capital Projects Fund 19,200 19,200 100% 19,200 Totals $99,648 $14,954 $108,270
As of June 30, 2024, the working capital (spendable fund balance) amount in the Transit Operating Fund was approximately $2.5 million.

Recommended Transit Fund Budget Amendments
Transit operations are currently being consolidated into San Luis Obispo Regional Transit Authority (RTA). No midyear budget amendments are recommended at this time, but staff anticipates amendments will be required at year-end to adjust for consolidation activities.

Other Funds
Morro Bay has 25 other nonmajor governmental funds with special purposes, two internal service funds, and three fiduciary funds. They are all outlined in detail each year in the Adopted Budget document.

Recommended Other Funds Budget Amendments
Minor midyear budget amendments are recommended in one nonmajor governmental fund and one internal service fund, as outlined below. All the requests below can be funded from the balance of their respective fund, an appropriate source for these costs.

Midyear Budget Report FY 2024-25
- 19 -
Table 22 Requested FY 2024-25 Other (Nonmajor) Funds Expenditure Amendments Fund Description Department Increase
(Decrease)
One-time/
Ongoing G/L
Special Safety
Grants (COPS)
Medical Examinations. Health
assessments for staff.

Police Support
Services
17,600 One-Time 282-4190-6720
Special Safety
Grants (COPS)
Automobiles. New unit for
Community Service Officer.

Police Support
Services
55,000 One-Time 282-4190-7201
Special Safety Grants Expenditure Total $72,600
Risk Management Other Ins./Employee Bond. Alliant
Crime renewal; omitted from
budget in error.

Risk Management 9,750 On-going 430-4317-6472
Risk Management Expenditure Total $9,750
Other Funds Expenditure Total $82,350
As of June 30, 2024, the Special Safety Grants Fund had a restricted fund balance of approximately $0.04 million.

The fund was originally established for the Supplemental Law Enforcement Services (SLESF) grant. Government Code Sections 30061-30065 establish the authority for the SLESF, also known as the state COPS grant. The onetime requests below meet the criteria for use of these restricted funds, which are intended to supplement General Fund Police Department expenditures related to frontline law enforcement services.

As of June 30, 2024, the Risk Management Fund had approximately $0.9 million in working capital, which meets and exceeds its reserve policy of $0.7 million.

Summary Current Year and Ten-Year Fiscal Forecasts
In addition to the discussion of midyear budget status and budget revisions, staff is also providing summary TenYear Fiscal Forecasts prepared for the General Fund, Measure Q/E, and Harbor Operating Fund, as these funds all have recommended budget amendments. The summaries include estimated actuals for the current fiscal year at a summary level and ten future fiscal years through FY 2034-35. The forecasts reflect a continuing effort by staff to analyze the City’s long-term fiscal condition based on current revenue and expense trends and information provided by sources such as the City’s sales tax consultant, the State of California, Visit Morro Bay, and the County of San Luis Obispo. The forecast represents a point-in-time snapshot and an approximate view of what could occur if all assumptions are proven correct.

This year, staff has created multiple scenarios for the General Fund and Measure Q/E forecasts. These scenarios are designed to foster discussion regarding the gap between what the City should be funding and what the City can responsibly fund. They represent limited approachesto responding to the City’s financial constraints: cutting spending and lowering reserves. The City may also wish to consider new revenue opportunities, such as a bond measure or increased taxes. Staff recommends that Council direct staff to develop a new Long Term Financial Plan to generate strategic options for addressing the capital improvement funding shortage.

Assumptions
Staff analyzed revenue trends from 2020 to the present and made several adjustments to the model’s assumptions in order to create a more realistic yet fiscally conservative forecast for the next ten years. Previous forecasts cautiously underestimated revenues and overestimated expenditures. While a conservative approach protects the City's financial security against unforeseen economic downturns and natural disasters, it can also

Midyear Budget Report FY 2024-25
- 20 -
lead to inefficient use of resources and unnecessary delays in implementing critical projects or other City initiatives. This midyear forecast aims to align more closely with actual revenue trends, ensuring optimal budget capacity for delivering high-quality services and providing fair compensation for the workforce that delivers them.

Below is a summary of the assumptions used in the forecast model. • Revenue
o Charges for Service/Other Revenues: 3% based on estimated CPI o Sales Tax: 2% for the near term, rising to 3% to match inflation estimates & HdL forecast o Property Tax: 4% per County of San Luis Obispo estimates o Harbor Lease revenues: 2% for the near term, rising to 3% to match sales tax assumptions • Expenditures
o Other Operations & Maintenance: 0% for FY 2025-26 then 3% based on estimated CPI o Personnel (Operational): Actual increase per MOU through FY 2026-27, then a modest increase for cost-of-living adjustments.
o Personnel (Pension Liabilities): Based on the CalPERS pension outlook tool. Normal pension costs average below 1% while unfunded pension liabilities range between 13% in the near term to -1% at the end of the forecast period.

Capital costs, where known, are based on the current multiyear capital projects budget. Where capital costs are not yet scheduled, a placeholder has been added, as can be seen in the Harbor Fund forecast.

The summary reports emphasize the importance for the City to closely monitor local economic conditions and county and national economic trends and make the necessary budgetary recommendations to align future service delivery and essential capital improvements with estimated available financial resources.

General Fund Forecast
The ten-year forecast for the General Fund projects a narrow margin between ongoing operating revenues and expenditures, leaving little cushion for capital project funding (see Figure 2). Personnel costs represent approximately 68% of General Fund operating expenditures for the forecast period. From FY 2025 through FY 2027, personnel costs are projected to rise in accordance with Council-approved collective bargaining agreements with represented and non-represented employee groups. In the out-years, the forecast assumes only modest cost-of-living adjustments (COLA) for personnel, allowing for a gradual recovery of operating surplus and, therefore, more funding for capital projects.

Forecast Using Recommended Capital Spending Levels
Between the General Fund and Measure Q/E forecasts, staff has modeled the cost of fully funding the current pavement management target of $2.8 million per year and the annual storm drain replacement project at $0.5 million per year for a ten-year total of $18.9 million. Barring any significant deviation from staff assumptions, the forecasts continue to reflect the City’s inability to fully fund capital projects without rapidly depleting emergency reserves.

Midyear Budget Report FY 2024-25
- 21 -
Forecast Adjusted to Comply with Current City Council Reserve Policy It goes without saying that the City would never allow spending levels to result in a negative cash position, as the Forecast Using Recommended Capital Spending Levels illustrates. This second scenario shows a spending plan that complies with the City’s current reserve policy. The current policy requires a minimum reserve of 33% of the operating budget (including Measure Q/E) with a target of 50%. To comply with the minimum reserve, spending reductions are required. In this forecast, staff has modeled an average annual capital funding contribution of $1.2 million per year for a ten-year total of $11.7 million. This scenario requires drawing down the General Fund Emergency Reserve by $0.5 million which meets the current 33% reserve minimum.

Forecast Adjusted to Comply with a 20% Reserve Minimum
Staff has recommended and plans to conduct a risk-based reserve analysis to derive a reserve range specific to the unique risks and obligations of the community of Morro Bay. While this work has not yet been completed, staff is including this model to illustrate the impact of lowering reserves to free up additional funding for capital improvements. This model includes an average annual capital funding contribution of $1.5 million for a ten-year total of $15.1 million. This scenario requires drawing down the General Fund Emergency Reserve by $3 million which meets a 20% reserve minimum.

Figure 2 - Combined General Fund and Q/E Operating Forecast

Midyear Budget Report FY 2024-25
- 22 -
Figure 3 - Combined General Fund and Q/E Capital Needs v. Available Funds Measure Q/E Forecast
The ten-year forecast for the Measure Q/E fund projects a healthy operating surplus. The current structure of appropriations prioritizes personnel and operations/maintenance costs for public safety, public works, and Harbor programs over significant contributions to capital projects.

Forecast Using Recommended Capital Spending Levels
This model, like the General Fund version above, attempts to fund capital improvements at desired levels. This results in a negative fund balance by FY 2028-29. While the allocation of Measure Q/E funding could be adjusted to exclusively fund either capital or operating expenditures, ultimately, the combined resources of the General Fund and Measure Q/E will soon be insufficient to support the needs of a full-service city. This scenario assumes an average annual capital funding contribution of $1.25 million for a ten-year total of $12.5 million.

Forecast Adjusted to Comply with Current City Council Reserve Policy While Measure Q/E does not have its own reserve policy, as the General Fund Emergency Reserve covers it, this scenario avoids spending beyond the fund's means. In this model, an average $1.15 million capital funding contribution is assumed for a ten-year total of $11.5 million.

Harbor Operating Forecast
The ten-year forecast for the Harbor Operating fund projects a slim margin between ongoing revenues and expenditures, a small cushion made possible only by budgeting all Harbor part-time personnel costs in the Measure Q/E fund. Pending the results of a capital needs assessment for the Harbor Department, this forecast has assumed $0.4 million in capital funding per year for a total capital investment of $4 million over the ten-year forecast period. This number is likely insufficient to address actual infrastructure needs.

Midyear Budget Report FY 2024-25
- Appendix 1 -
FY 2024
Actual
FY 2025
Budget
FY 2025
Estimated FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 Beginning Fund Balance 9,639,131 6,643,554 7,194,280 7,236,208 5,590,256 2,600,623 764,422 (686,532) (1,825,646) (2,643,226) (3,125,147) (3,299,327) (3,157,024) Revenue
Property Tax 5,572,306 5,660,782 5,685,301 5,912,713 6,149,221 6,395,190 6,650,998 6,917,038 7,193,719 7,481,468 7,780,727 8,091,956 8,415,634 Sales Tax 2,777,093 2,632,000 2,631,457 2,684,086 2,737,767 2,819,900 2,904,497 2,991,632 3,081,381 3,173,823 3,269,038 3,367,109 3,468,122 Transient Occupancy Tax 4,473,923 4,500,000 4,500,000 4,590,000 4,681,800 4,822,254 4,966,922 5,115,929 5,269,407 5,427,489 5,590,314 5,758,023 5,930,764 Other Revenue 6,132,485 5,224,579 6,370,874 5,625,608 5,794,376 5,968,208 6,147,254 6,331,672 6,521,622 6,717,270 6,918,789 7,126,352 7,340,143 Transfers In 2,060,218 1,620,639 1,620,638 1,549,863 1,596,359 1,744,250 2,123,577 2,264,385 2,396,716 2,530,618 2,556,136 2,583,320 2,572,220 TOTAL REVENUE 21,016,025 19,638,001 20,808,270 20,362,270 20,959,524 21,749,802 22,793,248 23,620,656 24,462,846 25,330,668 26,115,003 26,926,760 27,726,883 Expense
Personnel 11,563,409 12,825,966 12,921,346 13,797,481 14,646,463 14,985,564 15,440,049 15,745,752 16,050,210 16,359,647 16,606,788 16,865,681 17,098,785 Operational costs 9,382,977 10,227,542 10,351,522 11,000,594 11,726,634 11,961,166 12,200,390 12,444,397 12,693,285 12,947,151 13,206,094 13,470,216 13,739,620 Ongoing costs for long-term liabilities (PERS) 2,180,432 2,598,424 2,569,824 2,796,887 2,919,829 3,024,398 3,239,659 3,301,354 3,356,925 3,412,495 3,400,694 3,395,465 3,359,165 Other Operations & Maintenance 5,668,463 5,358,743 5,444,747 5,444,747 5,608,090 5,776,332 5,949,622 6,128,111 6,311,954 6,501,313 6,696,352 6,897,243 7,104,160 Transfers Out (Ongoing) 779,450 870,382 870,382 896,493 923,388 951,090 979,623 1,009,011 1,039,282 1,070,460 1,102,574 1,135,651 1,169,721 Debt Service Payments 35,189 35,190 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 TOTAL EXPENSE 18,046,511 19,090,281 19,271,664 20,173,911 21,213,130 21,748,176 22,404,483 22,918,064 23,436,636 23,966,609 24,440,904 24,933,765 25,407,855 Net Surplus (Shortfall)-Operating 2,969,514 547,719 1,536,605 188,358 (253,606) 1,626 388,765 702,592 1,026,210 1,364,059 1,674,099 1,992,995 2,319,027 Capital 1,106,865 1,150,000 1,150,000 1,800,000 2,700,000 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000 Annual Pavement Management Program - 650,000 650,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 Annual Storm Drain Replacement Project - 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 Replacement Type 3 Fire Engine 900,000
Net Surplus (Shortfall)-including Capital 1,862,649 (602,281) 386,605 (1,611,642) (2,953,606) (1,798,374) (1,411,235) (1,097,408) (773,790) (435,941) (125,901) 192,995 519,027 Contribution to 115 Trust * 887,000 312,000 312,000 - - - - - - - - - - Transfers Out (One-Time)
General Fund Emergency Reserve Fund (GFER) 3,292,000 - - - - - - - - - - - Vehicle Replacement Fund 107,000 - - - - - - - - - - -
Compensable Leave Fund 21,500 32,677 32,677 34,311 36,026 37,828 39,719 41,705 43,790 45,980 48,279 50,693 53,227 Ending Total Fund Balance 7,194,280 5,696,596 7,236,208 5,590,256 2,600,623 764,422 (686,532) (1,825,646) (2,643,226) (3,125,147) (3,299,327) (3,157,024) (2,691,224) Less Non-Spendable Fund Balance 3,190,000 3,163,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 Ending Available Fund Balance 4,004,280 2,533,596 4,046,208 2,400,256 (589,377) (2,425,578) (3,876,532) (5,015,646) (5,833,226) (6,315,147) (6,489,327) (6,347,024) (5,881,224) Measure E Fund Operating Expenses
(excluding transfers) 3,083,373 3,271,789 3,544,320 3,544,320 3,742,029 3,832,265 3,944,160 4,029,972 4,029,972 4,029,972 4,029,972 4,029,972 4,029,972 General Fund Emergency Reserve Fund
(GFER) Balance 7,160,082 7,160,082 7,521,644 7,672,077 7,825,518 7,982,029 8,141,669 8,304,503 8,470,593 8,640,005 8,812,805 8,989,061 9,168,842 Total Fund Balance as % of Total Operating
Expenses
(General Fund + GFER) /
(General Fund + Q&E Operating)

52.8% 43.3% 50.7% 42.5% 29.0% 21.7% 16.2% 12.2% 9.6% 8.3% 8.2% 9.1% 11.2% Minimum Reserve Levels * MET MET MET MET NOT MET NOT MET NOT MET NOT MET NOT MET NOT MET NOT MET NOT MET NOT MET General Fund Emergency Reserve Policy: 33%
operating expenses. Includes Measure E fund 6,972,862 7,379,483 7,529,275 7,827,016 8,235,203 8,441,545 8,695,052 8,892,852 9,063,980 9,238,872 9,395,389 9,558,033 9,714,483

AVAILABLE FUND BALANCE (EXCESS OF
MINIMUM RESERVES) * 4,191,500 2,314,195 4,038,577 2,245,316 (999,061) (2,885,095) (4,429,915) (5,603,994) (6,426,614) (6,914,014) (7,071,911) (6,915,996) (6,426,865) Fund Balance Notes
Ten-Year Forecast Capital Spending Totals: $18,900,000 Ten-Year Forecast Average Annual Capital Spending: $ 1,890,000 * In years when the available fund balance is forecast to go negative, withdrawals from the General Fund Emergency Reserve would be required. * The City's Reserve Policy states that in years the minimum reserve levels are met, the General Fund will contribute 33% of the prior year's audited available balance to a Section 115 Trust to address pension liabilities. * Funds in excess of minumum reserves may be appropriated by Council for any use. * Minimum Reserve Levels are determined using the combined fund balance of the GFER and General Fund Available Fund Balance.

GENERAL FUND (001)
Forecast Using Recommended Capital Spending Levels

Midyear Budget Report FY 2024-25
- Appendix 2 -
FY 2024
Actual
FY 2025
Budget
FY 2025
Estimated FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 Beginning Fund Balance 9,639,131 6,643,554 7,194,280 7,236,208 6,190,256 4,300,623 4,264,422 4,613,468 4,324,354 4,356,774 4,574,853 4,400,673 4,542,976 Revenue
Property Tax 5,572,306 5,660,782 5,685,301 5,912,713 6,149,221 6,395,190 6,650,998 6,917,038 7,193,719 7,481,468 7,780,727 8,091,956 8,415,634 Sales Tax 2,777,093 2,632,000 2,631,457 2,684,086 2,737,767 2,819,900 2,904,497 2,991,632 3,081,381 3,173,823 3,269,038 3,367,109 3,468,122 Transient Occupancy Tax 4,473,923 4,500,000 4,500,000 4,590,000 4,681,800 4,822,254 4,966,922 5,115,929 5,269,407 5,427,489 5,590,314 5,758,023 5,930,764 Other Revenue 6,132,485 5,224,579 6,370,874 5,625,608 5,794,376 5,968,208 6,147,254 6,331,672 6,521,622 6,717,270 6,918,789 7,126,352 7,340,143 Transfers In 2,060,218 1,620,639 1,620,638 1,549,863 1,596,359 1,744,250 2,123,577 2,264,385 2,396,716 2,530,618 2,556,136 2,583,320 2,572,220 TOTAL REVENUE 21,016,025 19,638,001 20,808,270 20,362,270 20,959,524 21,749,802 22,793,248 23,620,656 24,462,846 25,330,668 26,115,003 26,926,760 27,726,883 Expense
Personnel 11,563,409 12,825,966 12,921,346 13,797,481 14,646,463 14,985,564 15,440,049 15,745,752 16,050,210 16,359,647 16,606,788 16,865,681 17,098,785 Operational costs 9,382,977 10,227,542 10,351,522 11,000,594 11,726,634 11,961,166 12,200,390 12,444,397 12,693,285 12,947,151 13,206,094 13,470,216 13,739,620 Ongoing costs for long-term liabilities (PERS) 2,180,432 2,598,424 2,569,824 2,796,887 2,919,829 3,024,398 3,239,659 3,301,354 3,356,925 3,412,495 3,400,694 3,395,465 3,359,165 Other Operations & Maintenance 5,668,463 5,358,743 5,444,747 5,444,747 5,608,090 5,776,332 5,949,622 6,128,111 6,311,954 6,501,313 6,696,352 6,897,243 7,104,160 Transfers Out (Ongoing) 779,450 870,382 870,382 896,493 923,388 951,090 979,623 1,009,011 1,039,282 1,070,460 1,102,574 1,135,651 1,169,721 Debt Service Payments 35,189 35,190 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 TOTAL EXPENSE 18,046,511 19,090,281 19,271,664 20,173,911 21,213,130 21,748,176 22,404,483 22,918,064 23,436,636 23,966,609 24,440,904 24,933,765 25,407,855 Net Surplus (Shortfall)-Operating 2,969,514 547,719 1,536,605 188,358 (253,606) 1,626 388,765 702,592 1,026,210 1,364,059 1,674,099 1,992,995 2,319,027 Capital 1,106,865 1,150,000 1,150,000 1,200,000 2,100,000 - - 950,000 950,000 1,100,000 1,800,000 1,800,000 1,800,000 Annual Pavement Management Program - 650,000 650,000 1,000,000 1,000,000 - - 750,000 750,000 900,000 1,300,000 1,300,000 1,300,000 Annual Storm Drain Replacement Project - 500,000 500,000 200,000 200,000 - - 200,000 200,000 200,000 500,000 500,000 500,000 Replacement Type 3 Fire Engine - - - - 900,000 - - - - - - - - Net Surplus (Shortfall)-including Capital 1,862,649 (602,281) 386,605 (1,011,642) (2,353,606) 1,626 388,765 (247,408) 76,210 264,059 (125,901) 192,995 519,027 Transfers In (One-Time)
General Fund Emergency Reserve Fund (GFER) - - - - 500,000 - - - - - - - - Transfers Out (One-Time)
General Fund Emergency Reserve Fund (GFER) 3,292,000 - - - - - - - - - - - - Vehicle Replacement Fund 107,000 - - - - - - - - - - - - Compensable Leave Fund 21,500 32,677 32,677 34,311 36,026 37,828 39,719 41,705 43,790 45,980 48,279 50,693 53,227 Contribution to 115 Trust 887,000 312,000 312,000 - - - - - - - - - - Ending Total Fund Balance 7,194,280 5,696,596 7,236,208 6,190,256 4,300,623 4,264,422 4,613,468 4,324,354 4,356,774 4,574,853 4,400,673 4,542,976 5,008,776 Less Non-Spendable Fund Balance 3,190,000 3,163,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 Ending Available Fund Balance 4,004,280 2,533,596 4,046,208 3,000,256 1,110,623 1,074,422 1,423,468 1,134,354 1,166,774 1,384,853 1,210,673 1,352,976 1,818,776 Measure E Fund Operating Expenses
(excluding transfers) 3,083,373 3,271,789 3,544,320 3,544,320 3,742,029 3,832,265 3,944,160 4,029,972 4,029,972 4,029,972 4,029,972 4,029,972 4,029,972 General Fund Emergency Reserve Fund
(GFER) Balance 7,160,082 7,160,082 7,521,644 7,672,077 7,325,518 7,472,029 7,621,469 7,773,899 7,929,377 8,087,964 8,249,724 8,414,718 8,583,012 Total Fund Balance as % of Total Operating
Expenses
(General Fund + GFER) /
(General Fund + Q&E Operating)

52.8% 43.3% 50.7% 45.0% 33.8% 33.4% 34.3% 33.1% 33.1% 33.8% 33.2% 33.7% 35.3% Minimum Reserve Levels * MET MET MET MET MET MET MET MET MET MET MET MET MET General Fund Emergency Reserve Policy: 33%
operating expenses. Includes Measure E fund 6,972,862 7,379,483 7,529,275 7,827,016 8,235,203 8,441,545 8,695,052 8,892,852 9,063,980 9,238,872 9,395,389 9,558,033 9,714,483

AVAILABLE FUND BALANCE (EXCESS OF
MINIMUM RESERVES) * 4,191,500 2,314,195 4,038,577 2,845,316 200,939 104,905 349,885 15,402 32,170 233,946 65,008 209,661 687,305 Fund Balance Notes
Ten-Year Forecast Capital Spending Totals: $ 11,700,000 Ten-Year Forecast Average Annual Capital Spending: $ 1,170,000 * In years when the available fund balance is forecast to go negative, withdrawals from the General Fund Emergency Reserve would be required. * The City's Reserve Policy states that in years the minimum reserve levels are met, the General Fund will contribute 33% of the prior year's audited available balance to a Section 115 Trust to address pension liabilities. * Funds in excess of minumum reserves may be appropriated by Council for any use. * Minimum Reserve Levels are determined using the combined fund balance of the GFER and General Fund Available Fund Balance.

GENERAL FUND (001)
Forecast Adjusted to Comply with Current City Council Reserve Policy

Midyear Budget Report FY 2024-25
- Appendix 3 -
FY 2024
Actual
FY 2025
Budget
FY 2025
Estimated FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 Beginning Fund Balance 9,639,131 6,643,554 7,194,280 7,236,208 5,590,256 3,600,623 3,764,422 3,513,468 3,574,354 3,556,774 3,574,853 3,500,673 3,642,976 Revenue
Property Tax 5,572,306 5,660,782 5,685,301 5,912,713 6,149,221 6,395,190 6,650,998 6,917,038 7,193,719 7,481,468 7,780,727 8,091,956 8,415,634 Sales Tax 2,777,093 2,632,000 2,631,457 2,684,086 2,737,767 2,819,900 2,904,497 2,991,632 3,081,381 3,173,823 3,269,038 3,367,109 3,468,122 Transient Occupancy Tax 4,473,923 4,500,000 4,500,000 4,590,000 4,681,800 4,822,254 4,966,922 5,115,929 5,269,407 5,427,489 5,590,314 5,758,023 5,930,764 Other Revenue 6,132,485 5,224,579 6,370,874 5,625,608 5,794,376 5,968,208 6,147,254 6,331,672 6,521,622 6,717,270 6,918,789 7,126,352 7,340,143 Transfers In 2,060,218 1,620,639 1,620,638 1,549,863 1,596,359 1,744,250 2,123,577 2,264,385 2,396,716 2,530,618 2,556,136 2,583,320 2,572,220 TOTAL REVENUE 21,016,025 19,638,001 20,808,270 20,362,270 20,959,524 21,749,802 22,793,248 23,620,656 24,462,846 25,330,668 26,115,003 26,926,760 27,726,883 Expense
Personnel 11,563,409 12,825,966 12,921,346 13,797,481 14,646,463 14,985,564 15,440,049 15,745,752 16,050,210 16,359,647 16,606,788 16,865,681 17,098,785 Operational costs 9,382,977 10,227,542 10,351,522 11,000,594 11,726,634 11,961,166 12,200,390 12,444,397 12,693,285 12,947,151 13,206,094 13,470,216 13,739,620 Ongoing costs for long-term liabilities (PERS) 2,180,432 2,598,424 2,569,824 2,796,887 2,919,829 3,024,398 3,239,659 3,301,354 3,356,925 3,412,495 3,400,694 3,395,465 3,359,165 Other Operations & Maintenance 5,668,463 5,358,743 5,444,747 5,444,747 5,608,090 5,776,332 5,949,622 6,128,111 6,311,954 6,501,313 6,696,352 6,897,243 7,104,160 Transfers Out (Ongoing) 779,450 870,382 870,382 896,493 923,388 951,090 979,623 1,009,011 1,039,282 1,070,460 1,102,574 1,135,651 1,169,721 Debt Service Payments 35,189 35,190 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 35,189 TOTAL EXPENSE 18,046,511 19,090,281 19,271,664 20,173,911 21,213,130 21,748,176 22,404,483 22,918,064 23,436,636 23,966,609 24,440,904 24,933,765 25,407,855 Net Surplus (Shortfall)-Operating 2,969,514 547,719 1,536,605 188,358 (253,606) 1,626 388,765 702,592 1,026,210 1,364,059 1,674,099 1,992,995 2,319,027 Capital 1,106,865 1,150,000 1,150,000 1,800,000 2,700,000 1,800,000 600,000 600,000 1,000,000 1,300,000 1,700,000 1,800,000 1,800,000 Annual Pavement Management Program - 650,000 650,000 1,300,000 1,300,000 1,300,000 500,000 500,000 800,000 900,000 1,300,000 1,300,000 1,300,000 Annual Storm Drain Replacement Project - 500,000 500,000 500,000 500,000 500,000 100,000 100,000 200,000 400,000 400,000 500,000 500,000 Replacement Type 3 Fire Engine - - - - 900,000 - - - - - - - - Net Surplus (Shortfall)-including Capital 1,862,649 (602,281) 386,605 (1,611,642) (2,953,606) (1,798,374) (211,235) 102,592 26,210 64,059 (25,901) 192,995 519,027 Transfers In (One-Time)
General Fund Emergency Reserve Fund (GFER) - - - - 1,000,000 2,000,000 - - - - - - - Transfers Out (One-Time)
General Fund Emergency Reserve Fund (GFER) 3,292,000 - - - - - - - - - - - - Vehicle Replacement Fund 107,000 - - - - - - - - - - - - Compensable Leave Fund 21,500 32,677 32,677 34,311 36,026 37,828 39,719 41,705 43,790 45,980 48,279 50,693 53,227 Contribution to 115 Trust 887,000 312,000 312,000 - - - - - - - - - - Ending Total Fund Balance 7,194,280 5,696,596 7,236,208 5,590,256 3,600,623 3,764,422 3,513,468 3,574,354 3,556,774 3,574,853 3,500,673 3,642,976 4,108,776 Less Non-Spendable Fund Balance 3,190,000 3,163,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 3,190,000 Ending Available Fund Balance 4,004,280 2,533,596 4,046,208 2,400,256 410,623 574,422 323,468 384,354 366,774 384,853 310,673 452,976 918,776 Measure E Fund Operating Expenses
(excluding transfers) 3,083,373 3,271,789 3,544,320 3,544,320 3,742,029 3,832,265 3,944,160 4,029,972 4,029,972 4,029,972 4,029,972 4,029,972 4,029,972 General Fund Emergency Reserve Fund
(GFER) Balance 7,160,082 7,160,082 7,521,644 7,672,077 6,825,518 4,962,029 5,061,269 5,162,495 5,265,745 5,371,060 5,478,481 5,588,050 5,699,811 Total Fund Balance as % of Total Operating
Expenses
(General Fund + GFER) /
(General Fund + Q&E Operating)

52.8% 43.3% 50.7% 42.5% 29.0% 21.6% 20.4% 20.6% 20.5% 20.6% 20.3% 20.9% 22.5% Minimum Reserve Levels * MET MET MET MET MET MET MET MET MET MET MET MET MET General Fund Emergency Reserve Policy: 20%
operating expenses. Includes Measure E fund 4,225,977 4,472,414 4,563,197 4,743,646 4,991,032 5,116,088 5,269,729 5,389,607 5,493,321 5,599,316 5,694,175 5,792,747 5,887,565

AVAILABLE FUND BALANCE (EXCESS OF
MINIMUM RESERVES) * 6,938,385 5,221,265 7,004,655 5,328,686 2,245,110 420,362 115,008 157,242 139,197 156,597 94,979 248,279 731,022 Fund Balance Notes
Ten-Year Forecast Capital Spending Totals: $15,100,000 Ten-Year Forecast Average Annual Capital Spending: $ 1,510,000 * In years when the available fund balance is forecast to go negative, withdrawals from the General Fund Emergency Reserve would be required. * The City's Reserve Policy states that in years the minimum reserve levels are met, the General Fund will contribute 33% of the prior year's audited available balance to a Section 115 Trust to address pension liabilities. * Funds in excess of minumum reserves may be appropriated by Council for any use. * Minimum Reserve Levels are determined using the combined fund balance of the GFER and General Fund Available Fund Balance.

GENERAL FUND (001)
Forecast Adjusted to Comply with a 20% Reserve Minimum

Midyear Budget Report FY 2024-25
- Appendix 4 -
Forecast Using Recommended Capital Spending Levels
FY 2024
Actual
FY 2025
Budget
FY 2025
Estimated
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 Starting Fund Balance 1,325,072 323,655 483,772 1,146,994 882,125 510,135 186,511 (106,249) (337,778) (504,279) (602,967) (618,799) (550,018) Revenue
Tax Revenue 4,509,073 4,313,735 4,440,638 4,529,451 4,620,040 4,758,641 4,901,400 5,048,442 5,199,895 5,355,892 5,516,569 5,682,066 5,852,528 Other Revenue - - - - - - - - - - - - -
Transfers In - - - - - - - - - - - - -
TOTAL REVENUE 4,509,073 4,313,735 4,440,638 4,529,451 4,620,040 4,758,641 4,901,400 5,048,442 5,199,895 5,355,892 5,516,569 5,682,066 5,852,528 Expense
Personnel 2,211,885 2,611,695 2,611,283 2,854,227 3,031,234 3,100,145 3,190,077 3,253,266 3,316,389 3,380,573 3,433,674 3,489,096 3,545,703 Operational Costs 1,829,746 2,143,570 2,131,363 2,345,065 2,499,840 2,549,836 2,600,833 2,652,850 2,705,907 2,760,025 2,815,225 2,871,530 2,928,961 Ongoing costs for long-term liabilities (PERS) 382,139 468,126 479,919 509,161 531,394 550,309 589,244 600,416 610,482 620,548 618,448 617,566 616,743 Other Operations & Maintenance 707,254 690,093 736,133 690,093 710,796 732,120 754,083 776,706 800,007 824,007 848,727 874,189 900,415 Transfers Out (operating) 164,234 - - - - - - - - - - - - Debt Service Payments - - - - - - - - - - - - -
TOTAL EXPENSE 3,083,373 3,301,789 3,347,416 3,544,320 3,742,029 3,832,265 3,944,160 4,029,972 4,116,396 4,204,581 4,282,401 4,363,285 4,446,118 Net Surplus (Shortfall)-Operating 1,425,700 1,011,946 1,093,222 985,131 878,010 926,376 957,240 1,018,470 1,083,499 1,151,312 1,234,168 1,318,781 1,406,410 Capital 2,267,000 430,000 430,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 Morro Bay Bridge Inspection & Assessment - 80,000 80,000 - - - - - - - - - - Active Transportation Plan / Active Corridor
Studies 67,000 - - - - - - - - - - - -
Local Road Safety Plan (LRSP)
Implementation and Safety Improvements 150,000 - - - - - - - - - - - - Trash and Recycling Can Replacements 60,000 - - - - - - - - - - - - Sidewalk Improvements and Street Tree
Replacements Project 150,000 - - - - - - - - - - - -
Annual Pavement Management Program 1,840,000 350,000 350,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 Net Surplus (Shortfall) including Capital (841,300) 581,946 663,222 (264,869) (371,990) (323,624) (292,760) (231,530) (166,501) (98,688) (15,832) 68,781 156,410 ENDING FUND BALANCE 483,772 905,601 1,146,994 882,125 510,135 186,511 (106,249) (337,778) (504,279) (602,967) (618,799) (550,018) (393,608) NOTE
Ten-Year Forecast Capital Spending Totals: $ 12,500,000 Ten-Year Forecast Average Annual Capital Spending: $ 1,250,000 MEASURE Q/E FUND (003)
Measure E does not have its own reserve policy, as it is covered in the General Fund Emergency Reserve policy.

Midyear Budget Report FY 2024-25
- Appendix 5 -
FY 2024
Actual
FY 2025
Budget
FY 2025
Estimated
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 Starting Fund Balance 1,325,072 323,655 483,772 1,146,994 882,125 510,135 436,511 393,751 412,222 495,721 397,033 381,201 449,982 Revenue
Tax Revenue 4,509,073 4,313,735 4,440,638 4,529,451 4,620,040 4,758,641 4,901,400 5,048,442 5,199,895 5,355,892 5,516,569 5,682,066 5,852,528 Other Revenue - - - - - - - - - - - - -
Transfers In - - - - - - - - - - - - -
TOTAL REVENUE 4,509,073 4,313,735 4,440,638 4,529,451 4,620,040 4,758,641 4,901,400 5,048,442 5,199,895 5,355,892 5,516,569 5,682,066 5,852,528 Expense
Personnel 2,211,885 2,611,695 2,611,283 2,854,227 3,031,234 3,100,145 3,190,077 3,253,266 3,316,389 3,380,573 3,433,674 3,489,096 3,545,703 Operational Costs 1,829,746 2,143,570 2,131,363 2,345,065 2,499,840 2,549,836 2,600,833 2,652,850 2,705,907 2,760,025 2,815,225 2,871,530 2,928,961 Ongoing costs for long-term liabilities (PERS) 382,139 468,126 479,919 509,161 531,394 550,309 589,244 600,416 610,482 620,548 618,448 617,566 616,743 Other Operations & Maintenance 707,254 690,093 736,133 690,093 710,796 732,120 754,083 776,706 800,007 824,007 848,727 874,189 900,415 Transfers Out (operating) 164,234 - - - - - - - - - - - - Debt Service Payments - - - - - - - - - - - - -
TOTAL EXPENSE 3,083,373 3,301,789 3,347,416 3,544,320 3,742,029 3,832,265 3,944,160 4,029,972 4,116,396 4,204,581 4,282,401 4,363,285 4,446,118 Net Surplus (Shortfall)-Operating 1,425,700 1,011,946 1,093,222 985,131 878,010 926,376 957,240 1,018,470 1,083,499 1,151,312 1,234,168 1,318,781 1,406,410 Capital 2,267,000 430,000 430,000 1,250,000 1,250,000 1,000,000 1,000,000 1,000,000 1,000,000 1,250,000 1,250,000 1,250,000 1,250,000 Morro Bay Bridge Inspection & Assessment - 80,000 80,000 - - - - - - - - - - Active Transportation Plan / Active Corridor
Studies 67,000 - - - - - - - - - - - -
Local Road Safety Plan (LRSP)
Implementation and Safety Improvements 150,000 - - - - - - - - - - - - Trash and Recycling Can Replacements 60,000 - - - - - - - - - - - - Sidewalk Improvements and Street Tree
Replacements Project 150,000 - - - - - - - - - - - -
Annual Pavement Management Program 1,840,000 350,000 350,000 1,250,000 1,250,000 1,000,000 1,000,000 1,000,000 1,000,000 1,250,000 1,250,000 1,250,000 1,250,000 Net Surplus (Shortfall) including Capital (841,300) 581,946 663,222 (264,869) (371,990) (73,624) (42,760) 18,470 83,499 (98,688) (15,832) 68,781 156,410 ENDING FUND BALANCE 483,772 905,601 1,146,994 882,125 510,135 436,511 393,751 412,222 495,721 397,033 381,201 449,982 606,392 NOTE
Ten-Year Forecast Capital Spending Totals: $ 11,500,000 Ten-Year Forecast Average Annual Capital Spending: $ 1,150,000 MEASURE Q/E FUND (003)
Measure E does not have its own reserve policy, as it is covered in the General Fund Emergency Reserve policy.

Forecast Adjusted to Comply with Current City Council Reserve Policy

Midyear Budget Report FY 2024-25
- Appendix 6 -
FY 2024 FY 2025 FY 2025
Actual Budget Estimated FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 Starting Fund Balance (Working Capital) 1,353,849 2,018,052 1,561,847 2,071,559 1,845,030 1,584,493 1,354,401 1,143,364 970,770 838,968 749,671 712,258 750,325 Revenue
Harbor Leases 2,266,045 1,967,250 2,311,366 2,357,593 2,404,745 2,476,887 2,551,194 2,627,730 2,706,562 2,787,759 2,871,391 2,957,533 3,046,259 Boat Charges 483,499 426,016 414,881 427,328 440,147 453,352 466,952 480,961 495,390 510,252 525,559 541,326 557,566 Other Charges for Service 63,106 73,500 71,348 73,488 75,693 77,964 80,303 82,712 85,193 87,749 90,381 93,093 95,886 Other Revenue 73,401 155,018 234,677 46,018 47,398 48,820 50,285 51,793 53,347 54,947 56,596 58,294 60,042 Transfers In 53,599 - - - - - - - - - - - -
TOTAL REVENUE 2,939,650 2,621,784 3,032,272 2,904,427 2,967,984 3,057,023 3,148,734 3,243,196 3,340,492 3,440,706 3,543,928 3,650,245 3,759,753 Expense
Personnel 1,324,816 1,529,590 1,429,296 1,665,693 1,744,595 1,783,968 1,836,825 1,872,452 1,907,951 1,944,027 1,973,081 2,003,918 2,031,416 Operational Costs 1,078,830 1,220,903 1,081,228 1,291,542 1,356,119 1,383,241 1,410,906 1,439,124 1,467,907 1,497,265 1,527,210 1,557,754 1,588,909 Ongoing costs for long-term liabilities (PERS) 245,986 308,687 348,068 374,151 388,476 400,727 425,919 433,328 440,045 446,762 445,871 446,164 442,506 Other Operations & Maintenance 650,085 644,324 622,065 622,065 640,726 659,948 679,747 700,139 721,143 742,778 765,061 765,061 811,653 Transfers Out (Ongoing) 397,152 443,199 443,199 443,199 443,199 443,199 443,199 443,199 443,199 443,199 443,199 443,199 443,199 Debt Service Payments - - - - - - - - - - - - -
TOTAL EXPENSE 2,372,054 2,617,113 2,494,559 2,730,956 2,828,521 2,887,115 2,959,771 3,015,790 3,072,294 3,130,003 3,181,341 3,212,178 3,286,268 Net Surplus (Shortfall) - Operating 567,596 4,671 537,713 173,470 139,463 169,908 188,963 227,406 268,198 310,703 362,587 438,067 473,485 Capital Expenditures 280,665 - - 400,000 400,000 400,000 400,000 400,000 400,000 400,000 400,000 400,000 400,000 Net Surplus (Shortfall) including Capital 286,931 4,671 537,713 (226,530) (260,537) (230,092) (211,037) (172,594) (131,802) (89,297) (37,413) 38,067 73,485 Contribution to 115 Trust 68,000 28,000 28,000 - - - - - - - - - - Ending Fund Balance Before Reserves 1,572,780 1,994,723 2,071,559 1,845,030 1,584,493 1,354,401 1,143,364 970,770 838,968 749,671 712,258 750,325 823,810 Fund Balance - % of Total Operating Expenses 66% 76% 83% 68% 56% 47% 39% 32% 27% 24% 22% 23% 25% Minimum Reserve Levels MET MET MET MET MET MET MET MET MET MET MET MET MET 15% Annual Operating Expenses
(Prior Yr Adopted Budget) 349,189 349,189 330,865 374,184 409,643 424,278 433,067 443,966 452,368 460,844 469,500 477,201 481,827 Unreserved/Available Fund Balance 1,223,591 1,645,534 1,740,694 1,470,846 1,174,849 930,123 710,297 526,804 386,599 288,827 242,757 273,124 341,983 Fund Balance is defined as working capital: current assets less current liabilities HARBOR OPERATING FUND (331) Forecast
NOTES
Measure Q/E Fund FY 24-25 budget includes $314,000 of Harbor Department costs. The Harbor Fund would have an operating deficit with those expenditures included in the operating fund.

In years the minimum reserve levels are met, the fund will contribute to a Section 115 Trust for pension liability in an amount commensurate to General Fund contributions from the year's operating surplus.

Boat Charges include live aboard; pier dockage; mooring, slip, and floating dockage rental, slip sublease, and skiff permits.

Other Charges for Services include other service fees such as launch ramp parking, coin-operated services, and other rentals.

Other Revenue includes grant funds, penalties, bad debts recovery, auctioned property, and other miscellaneous revenue.

Other Operations and Maintenance includes services, supplies, debt service, capital outlay, and other expense Transfers out are for internal services costs, including insurance, IT, finance, administration, clerk, attorney, etc. defined by cost allocation.

RESOLUTION NO. 09-25

RESOLUTION OF THE CITY COUNCIL

OF THE CITY OF MORRO BAY, CALIFORNIA,
APPROVING AMENDMENTS TO THE CITY’S FISCAL YEAR 2024-25 BUDGET

T H E C I T Y C O U N C I L
City of Morro Bay, California
WHEREAS, Fiscal Year 2024-25 Midyear Budget adjustments were discussed and approved during the February 25, 2025 Council meeting; and WHEREAS, the Council now desires to amend its Adopted Fiscal Year 2024-25 Budget to include the amendments outlined in Exhibit 1.

NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Morro Bay, California,

1. The operating and capital budgets of the City are amended by the additional and revised revenues, expenditures, and transfers, as shown on the attached Exhibit 1, that were discussed at the February 25, 2025, Council Meeting; and PASSED AND ADOPTED by the City Council of the City of Morro Bay at a regular meeting thereof held on the 25th day of February 2025, by the following vote:

AYES:

NOES:

ABSENT:

ABSTAIN:

RECUSED:
______________________________
CARLA WIXOM, Mayor
ATTEST:
_____________________________
DANA SWANSON, City Clerk