March 10, 2026
Agenda Item No. 9
TO:
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM:
PREPARED BY:
Jason Al-Imam, Administrative Services Director/Treasurer - 949-644-3126, [email protected] Jessica Nguyen, Budget Manager - 949-644-3192, [email protected] TITLE:
Second Quarter Budget Update
ABSTRACT:
The Administrative Services Department prepares quarterly financial reports to review the status of revenues and expenditures for the City of Newport Beach’s General Fund and to monitor budgetary trends across other City funds. This report presents information on revenues, expenditures and the estimated fund balance for the second quarter of Fiscal Year 2025–26.
The second quarter financial report for FY 2025–26 provides an analysis of the City’s financial activity from October through December 2025. Based on information available through the end of the second quarter, an unrestricted General Fund operating surplus of $12.9 million is projected for FY 2025–26.
This report was reviewed and discussed with the Finance Committee on February 12, 2026.
RECOMMENDATIONS:
Determine this action is exempt from the California Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines because this action will not result in a physical change to the environment, directly or indirectly; and Receive and file this report.
DISCUSSION:
Economic Overview
Property tax, the City’s largest revenue source, is experiencing projected growth by 5.8% in FY 2025-26, driven primarily by strong property sales and rising median home prices.
Sales tax, the City’s second largest revenue source and approximately 15% of General Fund revenues, grew 5.7% in FY 2024–25 and is projected to increase 3.0% in FY 2025–26, reflecting a resilient local economy.
Transient Occupancy Tax (TOT), the City’s third-largest revenue source, is declining in FY 2025-26 due to both continued softness in international tourism and commercial hotel activity and the absence of a one-time increase in hotel stays that occurred in the prior year. In FY 2024-25, TOT demand was temporarily elevated by regional displacement following the Los Angeles wildfires, which resulted in atypically high hotel occupancy. As this non-recurring demand has subsided and travel activity has returned to more typical levels, TOT revenues are projected to decrease year over year.
Overall, the City’s diverse and stable revenue base, coupled with prudent fiscal management, positions it well to maintain long-term financial sustainability.
General Fund Revenues
General Fund revenues are projected to end the year by approximately 0.27%, or $0.9 million, higher than projected in the first quarter. This is primarily due to increases in the following categories: sales tax, license and permits, property income, miscellaneous revenues, fines and penalties. Projections for key revenue categories have been updated based on current economic conditions and revenue forecasts.
The table below summarizes the changes to projected General Fund revenues versus the quarter one projected amounts for FY 2025–26. Details explaining the reasons for the material variances follow.
FY 2025-26 Projected General Fund Revenues
*Gross TOT revenues are projected at approximately $39.8 million, consisting of $30.4 million in hotel TOT and $9.4 million in residential TOT. Effective January 1, 2025, VNB’s share increased to 23% of hotel TOT and 0% of residential TOT. VNB is projected to receive about $7.0 million, resulting in net TOT revenues of $32.8 million.
Property Tax – Property taxes are the City’s single largest General Fund revenue and represent approximately 50% of all General Fund revenues. As reported in the first quarter budget update, property tax revenue was projected at $163 million, reflecting an increase of $1.5 million, or 1.3%, over the prior year. Second quarter projections remain consistent with the previous forecast, and no adjustment is recommended. Accordingly, property tax revenues are expected to remain stable for the remainder of the fiscal year, supporting the City’s overall General Fund outlook.
Sales Tax – The second-largest funding source for the General Fund is sales tax revenue, which accounts for more than 15% of total General Fund revenues. The City’s sales tax base is primarily generated from four industry groups: autos and transportation; general consumer goods; restaurants and hotels; and the State and County pools. As reported in the first quarter, sales tax revenue was projected at $48.1 million. However, an updated projection provided by the City’s sales tax consultant reflects a 1.4%, or $0.7 million, increase over the first-quarter projection. Overall, sales tax revenue is now estimated at $48.8 million for the current fiscal year, which is $2.9 million, or 6.2%, higher than the prior year. A major contributor to this growth is the autos and transportation sector, which is projected to increase by $1.3 million, or 12.2%, compared to the prior year.
Transient Occupancy Tax – The third largest funding source for the General Fund is TOT, making up more than 10% of General Fund revenues. TOT is projected to decline as temporary, non-recurring hotel demand related to Los Angeles wildfire displacement in FY 2024–25 subsides and international tourism and commercial hotel activity remain soft. For FY 2025–26, after distributions to Visit Newport Beach, net General Fund TOT revenues are projected at $32.8 million. This includes a downward revision of $0.9 million (2.8%) from the previous TOT forecast in the first quarter.
All Other Revenue – This category includes all other revenue sources other than the top three (property tax, sales tax and TOT). All other revenue is made up of other taxes, service fees and charges, parking revenue, licenses and permits, property income, fines and penalties, intergovernmental revenues, investment earnings, and miscellaneous revenues. Changes in projected amounts are proposed in the following categories:
Property Income includes City-owned and managed income producing properties, long-term ground leases to concessions, restaurants, hotels and other businesses and organizations, and rental of City facilities to the public. Second quarter projections show a $0.6 million, or 5.67% increase over first quarter projections and are attributed to various properties around the city.
Licenses and Permits include fees for processing building-related permits, street closure permits, dog licenses, and police tow franchise fees. Budget projections indicate an increase of $0.5 million, or 7.33%, above the first quarter projection. This variance is primarily attributed to higher building and plumbing permits, reflecting an overall increase in residential and commercial development projects.
Miscellaneous Revenues include restricted revenue, damage to City property, bad debt recoveries, donations and contributions, non-operating revenues such as proceeds from the sale of materials and equipment, and other miscellaneous revenues. This category is projected to be $0.3 million, or 29.3% higher than first quarter projections. Contributing factors include an increase in one-time receipts.
Fines & Penalties include parking citation fines collected by the City, administrative citation fines, fines remitted to the City from the County of Orange for vehicle code violations, and false alarm penalties. Second quarter projections are expected to exceed first quarter projections by $0.1 million, or 2.42% due to higher administrative citation fine activity in the Police Department.
General Fund Expenditures
The FY 2025-26 General Fund revised expenditure budget totals $351.3 million. Spending trends in FY 2025-26 are generally consistent with prior years and do not indicate any cause for concern. As of quarter two, additional expenditure savings of $1.7 million are projected at this time largely due to year-to-date savings from vacancies.
The following table summarizes budgeted expenditures compared to amounts based on data through the second quarter, along with expenditure savings by budget category. Details highlighting the reasons for the material variances follow.
FY 2025-26 Projected General Fund Expenditures
Significant expenditure budget variances are as follows:
The revised salary and benefits budget totals $196.0 million. An analysis of second-quarter salary and benefit activity indicates that $1.9 million in personnel savings accrued during the quarter, in addition to the personnel salary savings realized in the first quarter.
The contract services budget is expected to have $0.6 million in savings. As of the second quarter, the variance is primarily due to timing of projects. As these savings are preliminary, staff will continue to monitor activity to refine projections as additional data becomes available.
The capital expenditures budgets are trending lower than first quarter projections due to timing of planned project expenditures.
The utilities, supplies & materials, maintenance & repair, and general expense budget show a combined $0.9 million in overages due to higher-than-expected consumption related to facility usage, maintenance requirements, and increased operational demand.
General Fund Sources, Uses, and Projected Surplus
The City continues to maintain a strong and stable financial position. Conservative budgeting practices and adherence to sound financial policies have supported consistent General Fund operating surpluses and healthy reserve levels over the past several years. These practices position the City to sustain current service levels and strategically allocate surplus resources toward key community priorities. Unrestricted General Fund resources are currently projected to total $12.9 million at the end of FY 2025–26. As in prior years, staff anticipate that additional budget savings will be realized in subsequent quarters as the fiscal year progresses.
FY 2025-26 Projected General Fund Sources, Uses, and Budget Surplus Major Funds
Staff have evaluated the fiscal condition of other major operating funds. An analysis of the budget performance for other major operating funds indicates that a budget adjustment is not necessary and variances between budgeted and actual amounts are within reason.
FISCAL IMPACT:
The City projects an unrestricted General Fund surplus of approximately $12.9 million for FY 2025–26, with revenues exceeding budgeted estimates by $0.9 million and expenditures projected to be $2.6 million below the revised budget. No adjustments to the General Fund or other major operating funds are anticipated at this time.
ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at which the City Council considers the item).
Second Quarter Budget Update
March 10, 2026
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