May 26, 2026
Agenda Item No. 10
TO:
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM:
Jason Al-Imam, Administrative Services Director/Treasurer – 949-644-3126, [email protected] PREPARED BY:
Jessica Nguyen, Budget Manager – 949-644-3192, [email protected] TITLE:
Third Quarter Budget Update
ABSTRACT:
The Administrative Services Department prepares quarterly financial reports to review General Fund revenues and expenditures and monitor budgetary trends across other City of Newport Beach funds. This report summarizes revenues, expenditures and the estimated fund balance through the third quarter of Fiscal Year 2025–26.
The third quarter financial report analyzes the City’s financial activity from January through March 2026. Based on information available through the end of the quarter, the City projects an unrestricted General Fund operating surplus of $16.1 million for FY 2025–26, including full funding of the contingency reserve. This represents an increase of $3.2 million from the second quarter projection. Recommended revenue and expenditure adjustments are outlined in this report and will be incorporated into proposed Budget Amendment No. 26-076.
This report was reviewed and discussed with the Finance Committee on May 14, 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
Approve Budget Amendment No. 26-076, adjusting revenue estimates and expenditure appropriations for the Fiscal Year 2025-26 budget as further outlined in this report.
DISCUSSION:
Economic Overview
In the first quarter of calendar year 2026, the median sales price for detached single-family residences in Newport Beach increased 16.8% from the same period in the prior year, reaching $5 million. This represents an increase of approximately $720,000 from the median sales price recorded for the quarter ending December 31, 2025. The increase was driven primarily by a shift in the mix of sales, with more homes selling in higher price ranges and fewer at the lower end of the market. While several high-end sales further boosted average pricing, the rise in the median sales price also indicates that typical home values across the market moved higher.
As the market enters the spring homebuying season, home prices are expected to continue rising, supporting a positive outlook for the City’s property tax revenues. However, potential inflationary pressures in the coming months may pose risks to housing affordability and overall market activity.
The City will continue to monitor potential impacts on tax revenues and adjust revenue projections as needed based on evolving economic conditions and data-driven analysis. Overall, the City’s diverse and stable revenue base, combined with prudent fiscal management, positions it well to maintain long-term financial sustainability.
General Fund Revenues
General Fund revenues are projected to end the fiscal year approximately 1.2%, or $4.0 million, above second quarter projections. The increase is primarily due to higher-than-anticipated revenues from service fees and charges, investment earnings, licenses and permits, miscellaneous revenues, and transient occupancy tax revenue. Revenue projections for key categories have been updated to reflect current economic conditions and the latest forecasts.
The table below summarizes changes in projected General Fund revenues compared to the second quarter FY 2025–26 projections. Additional detail on material variances is provided below.
FY 2025-26 Projected General Fund Revenues
* Gross TOT revenues are projected at approximately $41.1 million. Effective January 1, 2025, VNB’s share increased to 23% of hotel TOT, while its share of residential TOT decreased to 0%. VNB is projected to receive approximately $7.3 million, resulting in net TOT revenues of $33.8 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 and second 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. Third quarter projections reflect a slight decrease of $0.5 million, or 0.3%, from second quarter estimates.
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 second quarter, sales tax revenue was projected at $48.7 million. However, an updated projection provided by the City’s sales tax consultant reflects a 0.3%, or $0.1 million, increase over the second quarter projection. Overall, sales tax revenue is now estimated at $48.9 million for the current fiscal year, which is $3.0 million, or 6.5%, higher than prior year actuals. A major contributor to this growth is the autos and transportation sector, which is projected to increase by $1.3 million, or 11.4%, compared to the prior year.
Transient Occupancy Tax – Transient Occupancy Tax (TOT) is the third-largest revenue source for the General Fund, accounting for more than 10% of total General Fund revenues. As noted in the second quarter budget update, TOT revenues were projected to decline by approximately $0.9 million (2.8%) compared to first quarter projections. However, third quarter results indicate that commercial TOT is up 1.6% fiscal year-to-date, driven by stronger than anticipated booking activity. Accordingly, staff recommends a budget amendment to increase commercial TOT revenue projections by $0.9 million.
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, investment earnings, miscellaneous revenues, licenses and permits, and intergovernmental revenues. Changes in projected amounts are proposed in the following categories:
Service Fees & Charges including plan check fees, recreation classes, and emergency medical services fees, are projected to exceed second quarter estimates by approximately $2.0 million (7.0%). The increase is primarily driven by higher-than-anticipated plan check activity in the Community Development Department, particularly related to apartment projects, as well as increased attendance at Recreation and Senior Services facilities citywide. Additional recreation revenues will be offset by corresponding increases in instructor-related expenditures.
Investment Earnings are projected to exceed second quarter projections by approximately $622,751 due to favorable market conditions through March 31, 2026.
Miscellaneous Revenues include restricted revenues, damage to City property, bad debt recoveries, donations and contributions, and non-operating revenues such as proceeds from the sale of materials and equipment. This category is projected to exceed second quarter projections by approximately $0.5 million (29.6%). The increase is primarily attributable to a one-time donation to the Police Department from the Newport Beach Foundation.
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 7.7%, above the second quarter projection. This variance is primarily attributed to higher volumes of building, plumbing and electrical permits, reflecting an overall increase in residential and commercial development projects.
General Fund Expenditures
The FY 2025-26 General Fund revised expenditure budget totals $356.4 million. Spending trends in FY 2025-26 are generally consistent with prior years and do not indicate any cause for concern. As of quarter three, additional expenditure savings of $2.6 million are projected largely due to year-to-date savings from vacancies.
The following table summarizes second quarter projected actuals compared to updated estimates based on year-to-date data, along with expenditure savings by budget category. Additional details explaining significant variances are provided below.
FY 2025-26 Projected General Fund Expenditures
Significant expenditure budget variances are as follows:
The revised salary and benefits budget totals $195.4 million. An analysis of third quarter salary and benefit activity indicates that $4.1 million in personnel savings accrued during the third quarter.
The contract services and maintenance and repair expenditures are projected to exceed second quarter projections by a combined $0.9 million, driven by increased utilization of temporary staffing in the Community Development Department, as well as higher outside agency service costs and maintenance activity at fire stations citywide within the Fire Department. Additionally, the Recreation and Senior Services Department requests a budget amendment to appropriate funds which are to be fully offset by revenues as previously mentioned in this report. These amounts are built into the projected revenue and expenses included in the tables in this report.
The grant operating budget is projected to increase by $66,723 from second quarter projections primarily due to staff proposing a budget amendment to increase appropriations by $53,311.32 to make remaining estimated payments to the State of California under the PP-GEMT-IGT program for State Calendar Year 2025.
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. Unrestricted General Fund resources are currently projected to total $19.5 million at the end of FY 2025–26. After allocating an estimated $3.4 million to fully fund the contingency reserve, $16.1 million is expected to remain available for City Council appropriation. As in prior years, additional savings are anticipated, which could increase the final year-end surplus.
FY 2025-26 Projected General Fund Sources, Uses, and Budget Surplus Non-Operating Transfers Out
A one-time transfer out from the General Fund to the Office of Traffic Safety Fund (OTS, Fund 110) in the amount of $11.43 is included to correct an invoice allocation posted to the incorrect account.
Major Funds
Staff have evaluated the fiscal condition of the City’s major operating funds, as summarized below:
Measure M-Competitive Fund, the Orange County Transit Authority (OCTA) Environmental Cleanup Program provides Measure M2 funding for water quality improvement projects that address transportation-generated pollution. The City was awarded a grant to purchase a second trash rover that will be deployed in Newport Harbor. A budget amendment is requested to appropriate the $68,000 in OCTA grant funds to Account No. 1230052-980000-26X12 and expense in 1230052-980000-26X12.
PEG Fees Fund, the Public, Education, and Government (PEG) Fund receives revenue from cable franchise agreements and is restricted to supporting community cable access. Eligible expenditures include capital-related costs such as equipment (e.g., cameras and editing systems), as well as facility construction, upgrades and renovations to studios and control rooms. Historically, the City has charged PEG-eligible expenditures to the General Fund. Staff is now correcting this practice to ensure that qualifying expenditures are appropriately accounted for in the PEG Fund. Accordingly, a budget amendment is requested to appropriate $30,000 from the PEG Fund unappropriated fund balance.
Fire Equipment Fund, Public Safety Development Impact Fees were established to provide capital improvements related to buildings, furnishings, vehicles equipment software, and similar facilities utilized by the City’s Fire Department. The Fire Department received $141,000 of development impact fees from the 1401 Quail location. Staff proposed to recognize $141,000 in account 75604-561083-23040 and expense to account 75604-911024-23040 for equipment such as radios and ballistic helmets with vest supplements.
Staff has evaluated the fiscal condition of the City’s other major operating funds (Water and Wastewater). The budget performance analysis for these funds indicates that no adjustments are necessary, and variances between budgeted and actuals amounts are reasonable.
FISCAL IMPACT:
As a result of the Budget Amendment (Attachment A), an additional $765,000 in revenue and $679,00 in expenditures will be appropriated to the accounts listed in the amendment. Approval of these budget amendments is reflected in the “Q3 Projection” column of the previous FY 2025–26 General Fund Sources and Uses table.
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).
ATTACHMENT:
Attachment A – Budget Amendment No. 26-076
Third Quarter Budget Update
May 26, 2026
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