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June 14, 2022
Honorable Mayor and Members of the City Council:
I am pleased to submit for your consideration the Fiscal Year 2022-2023 (FY23) Budget.
This Budget incorporates the City’s firm commitment to fiscal responsibility, effective use of our resources, and high quality service delivery to our residents, businesses, and visitors. In addition, this budget has added a 10 -year forecast planning analysis to help the city understand the longer-term impact of current decisions proposed.
Looking back at the past year, it is evident the residual effects of the pandemic have become less detrimental on our local economy. In the last year, we have seen increases across every industry, particularly in oil and gas as well as restaurant and hotel industries.
As Federal, State and County COVID guidelines relaxed and more patrons felt comfortable venturing out of their homes to travel and shop, we saw increased sales in the auto and general consumer goods industries.
As previously noted, with most industr ies recovering from the COVID -19 pandemic, revenues continue to trend upwards. It is expected that our FY 2 3 revenue will steadily increase from our adopted FY 22 estimates, with sales tax, transit occupancy tax, and fees for services and licenses and permits leading the growth. Inversely, the cost to deliver services to residents, businesses, and visitors continues to increase substantially.
At $130.7 million, the General Fund expenditure budget reflects the rising costs of doing business while also ensuring the multi -faceted needs of the community are met , with a particular focus on the City Council’s commitment to public safety.
While the economy has slowly been rebounding from the unprecedented circumstances related to the COVID-19 pandemic, the stability of the economy remains uncertain. High inflation rates affecting the cost of goods and services and the staffing shortages in the food service, hospitality, and retail industries are indicators that the City will continue to monitor to ensure we adapt our fiscal actions to match the economic reality that is ahead.
As in the past, t he City Council has made i t a priority to continue to implement prudent and conservative fiscal policies to weather fluctuations in the economy while still balancing the growing needs of the community.
Orange continues to have a bright future. We remain one of the safest cities in California; we have an outstanding business environment and are home to several major corporations, hospitals, regional shopping centers and a diverse group of small businesses; we have one of the nation’s largest historical di stricts – Old Towne Orange – with its thriving plaza area commercial district; we have excellent and well -maintained residential neighborhoods and parks ; and, our residents have tremendous community
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spirit with a great deal of pride in their hometown . In spite of the residual effects of the pandemic, Orange continues to take a proactive response to address all issues affecting our citizens and business community. The budget for FY 2 3 has been prepared to be responsive to the needs of the citizens and businesses of the City of Orange with a focus on public safety while being fiscally responsible in an effort to prepare for any potential economic downturns.
GENERAL FUND REVENUE
Total General Fund revenues for FY 23 are projected to be $130.7 million. • Property Tax is the largest source of General Fund revenue and is expected to be $50.6 million, a $2.2 million, or 4.5% increase from FY 22 estimates. There continues to be minimal impact on property tax collections, d espite the potential for non - payments due to economic hardships resulting from the pandemic. Annual increases in assessed property values and more property tax increment distributed from the County of Orange for the Successor Agency are projected to contri bute higher property tax receipts. In addition, property tax in lieu of motor vehicle license fees is expected to be above budget as this revenue is tied to property tax growth. • Sales Tax The City anticipates receiving $50.1 million in net sales tax revenue, the second largest sources of General Fund Revenue. We anticipate that auto sales will continue to increase slightly, as demand continues to be high despite inventory shortages. The pos itive performance in building and construction activity seen in previous years is anticipated to remain flat as more consumers spend their money on other sectors and interest rates continue to increase. Restaurants are expected to trend upwards, as there a re no anticipated state restrictions on capacity and indoor gathering in the future. We expect fuel sales begin to decrease from record highs beginning in the 4th quarter of 2022 . We are also aware that fuel prices may also discourage the use of vehicles, temporarily deferring an increase in fuel sales. With the shift to online shopping, especially during the pandemic, a llocations from the county tax pool will continue to bring in more revenue than in previous years as more consumers continue to prefer online shopping; consequently, general consumer goods growth is expected to be flat.
• Transient Occupancy Tax (TOT) is projected to be $5.1 million, an increase of about $690,000 (15.7%) above the FY 22 estimate. Both business and leisure travel continue to ease out of the effects from the pandemic due to fewer restrictions on federal and state mandates and more consumer confidence on traveling. The Disney resort has been fully open with minimal restrictions since last year, and stadiums are open, resulting in an increase in TOT to the various resorts and hotels within its vicinity. Short term rentals also have contributed a portion of the TOT. • Fees for Services and Licenses and Permits account for a combined $11.5 million and are set by the Master Fee Schedule. As part of the preparation of the FY 23 budget, s taff has updated current charges for services based on revised time estimates and costs for delivering each service. With the proposed fees, we anticipate recovering approximately 63% of costs asso ciated with provided services. As more
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Sales Tax,
$50,098,773
Property Tax,
$50,611,117
Transient Occupancy Tax,
$5,090,000
Other Taxes , $900,000
Franchises , $2,641,702
Licenses & Permits ,
$6,163,360
Fines & Forfeitures ,
$2,130,000
Use of Money & Property ,
$1,609,544
Revenue from Other
Agencies , $1,700,000
Fees for Services ,
$5,306,479
Miscellaneous Revenues ,
$950,000
Inter-fund Revenue ,
$3,531,732
in-person participat ion continues in leisure activities, particularly in sports and recreation class enrollment, as well as continued development activity, we anticipate increases of fees for services. As for licenses and permits, after following the prior year’s trend, building-related permits and annual fire permits are anticipated to remain steady in FY 23, with regular fee increases expected. Increased fees include mechanical, electrical, and plumbing permits as well as new construction plan check and inspection fees. Additionally, some fees have decreased slightly due to minor decreases in cost, as applicable.
• Fines and Forfeitures are projected to be $2.1 million, an increase of about $280,000 (15%) from FY 22 estimates. Previous years’ fines were down significantly as parking enforcement was suspended due to COVID restrictions, and moratoriums were placed on certain fines and penal ties. These areas are expected to be back in full force, which leads to an anticipation in returning to pre-pandemic revenue levels.
FY 23 General Fund Revenues
While we anticipate the projected revenue amount of $130.7 million for FY 23 , we continue to remain cautious th at any future growth in General Fund revenue will be modest and will occur gradually as the economy continues to emerge in all sectors of industry and commerce.
FY 23 General Fund Expenditures
The City is fortunate to have the history of conservative spending practices. These provided a model in ambiguous economic times, when a strong national economy did not necessarily translate to robust local revenues to provide a healthy offset to ever - increasing expenditures. Over the years, early implementation of many budget reduction
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measures, including departmental operating budget reductions, underfunding internal service fund allocations, implementing operational efficiencies, and freezing vacant positions, has enforced this standard while maintaining a stable financial position. The City has continued to implement these budget-balancing measures over the past several years and has remained vigilant in controlling spending growth during better financial times.
For FY 23, to ensure our ability to adopt a balanced budget, we are implementing the following key budget-balancing measures:
• Departmental Budget Reductions: In FY 19, an analysis determined that departments had not been using their entire budgeted allocation by the end of each fiscal year. This was primarily the result of vacant positions and more efficient use of operation monies. As such, the City Council ad opted a budget reduction policy to “close the gap” on, what was then, an anticipated budget deficit. In past years, the outcome of this policy direction yielded a General Fund expenditure reduction of about $2.5 million through decreases on all department budget salaries and benefits (S&B) by 2.5%, and on maintenance and operations (M&O) by 5%. For FY 23, it remains clear a portion of this budget reduction policy should continue in order to close an expected gap between anticipated revenues and projected ex penditures. City departments were given their respective target reduction amounts, resulting in a total expenditure reduction of $1.2 million in M&O only. We also anticipate additional savings as staff will charge approximately $750,000 in administrative and design costs to capital improvement projects in FY 23. Applying this to the FY 23 budget, these savings will be counted in advance, which will result in a reduced revenues over expenditures amount at the close of FY 23.
• Use of Anticipat ed Vacancy Savings: In the past several years, salaries and benefits cost have been a source of end-of year savings of approximately $3.5 million.
This is mostly due to position vacancies through normal attrition or those intentionally not filled. Coupled with the many recent and upcoming retirements of City staff, it is reasonable to assume we will likely have $3.8 million of unused a ppropriation at the end of the year, approximately 4% of the total budget allocated for salaries; therefore, the FY 23 budget assumes approximately $3.8 million of anticipated vacancy savings that will be used as a source of funds to balance the budget. • PERS Retirement Costs: On March 15, 2021, the City successfully issued 2.7% Pension Obligation Bonds (POBs), in the amount of $286.5 million, to effectively refinance the City’s Unfunded Accrued Liability (UAL) with CalPERS as of that date.
The UAL represented ongoing expenditures with a 7% interest/discount rate, coupled with increasing annual contributions to reduce the overall balance. The overall savings as a result of the issuance of the POBs in the General Fund for FY 23 is $5.9 million.
Concurrent with the issuance of the POBs, Council adopted a comprehensive Reserve Policy and Pension Funding Policy, which established the reserve levels for various City funds, as well as a method to proactively manage future unfunded pension liabilities.
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As a result of these balancing measures, the $130.7 million General Fund Expenditure is balanced with revenues exceeding expenditures by $9,000.
FY 23 General Fund Expenditures
ESTIMATED GENERAL FUND BALANCE FOR FY 23
As a result of the second installment of the ARP monies being received prior to the close of FY 22, increased revenues, and reduced expenditures, the FY 23 projected beginning General Fund unreserved fund balance was $23.5 million. FY 2 3 revenues of about $130.7 million and expenditures of about $130.7 million result in a balanced budget with a small surplus of $9,000 , bringing the unreserved fund balance to $ 1.2 million, after recommended transfers of $22.3 million from the unreserved fund balance to the following funds: $7.75 million to the Computer Equipment Replacement Fund; $7.0 million to the Capital Projects Fund; $5.75 million to the Equipment Replacement Fund; and $660,000 to General Liability Fund. In addition, we propose the FY 23 budget include a $1.1 million transfer of General Fund monies to the General Fund Contingency Reserve, bringing the reserve balance to $21.77 million, in compliance with the City’s established policy amount. This results in a FY 23 estimated ending General Fund reserved and unreserved fund balance just under $23 million. When the final results of FY 22 are presented at the
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October meeting, City Council will have the opportunity to give direction to replenish the other various reserve funds.
Estimated Available General Fund Balance
Unreserved Fund Balance Available @ 6/30/22 $23,468,556
FY 23 Estimated Revenues $130,732,707 FY 23 Estimated Revised Expenditures (130,723,636) Net Surplus 9,072
Transfers Out
Transfer to Computer Replacement Fund (7,750,000) Transfer to Capital Improvement Fund (7,000,000) Transfer to Equipment Replacement Fund (5,750,000) Transfer to General Liability Fund (600,000) Transfer to General Fund Contingency Reserve (1,093,938) Total Transfers Out (22,253,938)
Estimate Available Fund Balance @ 6/30/23 1,223,690
General Fund Catastrophic Reserve 21,761,898
Est. Reserved & Unreserved General Fund Balance @ 6/30/23 $ 22,985,588
FY 23 Reserve and Unreserved Fund Balances
Estimated Available Reserves @ 6/30/23
Accrued Liability/PERS set-aside (Fund 760) $6,236,040 Capital Projects (Fund 500) 9,203,718 Information Technology Capital (Fund 790) 5,567,966 All Other Internal Service Funds (various) 6,950,326 Total Est. Available Reserves @ 6/30/23 $27,958,050
Unreserved General Fund Balance 1,223,690
General Fund Catastrophic Reserve 21,761,898
Total Est. Available Reserves @ 6/30/23 $50,943,638
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REVIEW OF OTHER KEY FUNDS
While the General Fund accounts for approximately 49% of overall expenditures, there are several other funds managed by the City. The FY 23 budget reflects a total of $267.2 million in expenditures for all funds. The key areas are summarized below:
The Water Enterprise Fund, which includes both operating and capital expenditu res, is projected to begin FY 2 3 with an available fund balance of $ 2.9 million. Revenue and expenditures are estimated at $ 42.2 million and $ 42.7 million, respectively, which includes $2.2 million in water capital projects . As a result, the expected ending FY 23 available fund balance is about $2.4 million. It should be noted that this fund balance estimate assumes all funding for multi-year projects will be spent in FY 23. While most of the funding is budgeted up -front, the project balances are carried over until completion and are included in the year -end fund balance once the FY 2 2 accounting records are finalized.
The Sanitation Fund, which includes sewer maintenance, tree trimm ing and environmental compliance services, is projected to begin FY 2 3 with an available fund balance of $2.7 million. FY 23 revenue projections are $5.9 million and expenditures are $7.8 million, resulting in an estimated ending fund balance of about $771,000. Specific to the Sewer Capital Projects Fund, the FY 23 revenue estimate is $2.2 million and capital improvement expenditures towards sewer line replacement and maintenance are $ 2.2 million. The estimated FY 23 ending fund balance is $1.9 million.
The Gas Tax Fund is projected to begin FY 2 3 with a fund balance of about $530,000.
FY 23 revenue estimates are $4.0 million with expenditures of about $4.5 million, resulting in an ending fund balance of about $83,000. Specifically, The Road Maintenance and Rehabilitation Account (RMRA) will begin FY 23 with a fund balance of about $360,000.
In FY 23, the City will receive about $3.1 million from the State, which will be fully allocated towards Pavement Management Program expenses.
CITY HIGHLIGHTS
As the economy rebounds from the residual effects of the pandemic, t he City has taken the opportunity to continue to make positive enhancements and changes in the community and to the organization:
• Public Safety – Police Department Enhancements: In an effort to enhance services and continue providing exceptional public safety services, several key positions were added to the Orange Police Department in FY23. This includes the addition of five sworn Police Officers, the unfreezing of 6 sworn officer positions, two full-time Parking Control Officers, two Police Services Officers, and a full -time Civilian Investigative Officer. The addition of the Parking Control Officers will assist with the influx of parking complaints and associated issues, particularly generated in the busy downtown Plaza area. The addition of the Police Services Officers will a lleviate sworn positions by
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performing non -sworn administrative, patrol and investigative duties, including the management of digital evidence collected through the body worn camera program.
And finally, the Civilian Investigative Officer will assist with the background investigative services required to onboard new police officers and meet ongoing recruiting demands, ensuring the department continues to attain the highest level caliber of employee.
• Public Safety – Fire Department Implementation of Ambulan ce Operator Program: In response to increased calls for service, the Fire Department will implement an Ambulance Operator Program, adding 12 full -time employees (FTE) and 6 part -time staff. The program bolsters the current Fire Department’s service capacity by adding a fifth rescue ambulance and increasing the staffing levels of the truck companies. It is anticipated the program will increase availability of the rescue ambulances, provide staffing levels recommended by the National Fire Protection Association (NFPA), and enhance the ability to manage and control emergencies without depleting departmental resources when multiple requests for service occur. • Continued Focus on Economic Development: Attracting and retaining businesses in Orange has always been a critical focus for the City. Recognizing the strength of our local economy is an essential driver to the success of the City, our staff continues to look at traditional and innovative ways to provide business development services.
The City continues to strengthen relationships with existing businesses with a focus on large employers and those businesses that generate significant revenue for the City. Partnerships with the Chamber of Commerce, the Small Business Administration, and the Small Business Deve lopment Center help us provide the support that our small businesses need to thrive. In addition, a vital component of our business development program is ensuring for a streamlined and efficient land -use entitlement process. Our Community Development Dep artment is in the process of developing the North Tustin Specific Plan to ensure that zoning in the area allows flexibility to encourage the redevelopment of aging commercial centers. Some key businesses currently in the entitlement process and planning to invest in Orange include a third In -N-Out location and CHOC, who is building a new medical office building and expanding an existing parking structure. Finally, the Orange Plaza Paseo street closure during the pandemic provided a lifeline to downtown busi nesses and helped lay the groundwork for a strong economic recovery in Old Towne. The result is that we continue to see significant private property investment in the downtown core with new businesses such as Finney’s Crafthouse & Kitchen, blk.coffee, and The Richland Hotel bringing new life to historic buildings. • New Fire Headquarters Coming Soon: The new Fire Headquarters and Station No. 1 facility, located on the 1.5 acre City-owned property sited on East Chapman at Water Street, has been under construction since January 2021. This new facility will provide increased emergency service response to the Old Towne and immediate surrounding area, and to the general population of the City of Orange. Furthermore, the project will replace the current 50 -year old Fire Station No. 1 and Headquarters building, and provide for improved administrative and training space, and increased room for fire apparatus. The total cost of the project, including design, construction, and outfitting, is estimated at $24.9 m illion and will utilize funds from the successful issuance of
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Lease Revenue Bonds in July 2020. It is estimated the project will be completed in Summer 2022.
• City Continues to Make Significant Investments in its Capital Improvement Plan (CIP): Over the pas t several years, despite challenging economic conditions and especially during the COVID -19 pandemic , we have seen a high level of capital improvement activity in Orange. Looking forward, the CIP identifies 149 projects proposed for the five -year period. F or the upcoming fiscal year, there are 19 new budgeted projects and continued investment in 130 projects that are either a continuation of previously approved plans, or anticipated to start during the out-years.
With these proposed projects, the City Counc il will be investing $38.1 million in the upcoming fiscal year and $122.0 million over the five-year planning horizon. This is a major investment in the City’s infrastructure, and represents a significant commitment to our community’s future. As in years past, funding for the CIP comes from different sources including Gas Taxes, Measure “M”, Developer Impact Fees, State and Federal Grants, former Redevelopment and Lease Revenue Bond Proceeds, and Community Development Block Grants. The following are highlights of the FY 23 Capital Improvement Plan:
• Completion of construction of the Fire Station Headquarters and Station No. 1. • Rehabilitation of the Police Headquarters Atrium.
• Design and development of a pickleball and fitness facility in Hart Park • Design and construction of the Corp Yard Renovation project. • Installation of video surveillance and heightened security in Hart Park • Installation of shade sails in tot lots at La Veta and Belmont Parks • Rehabilitation of Orange library facilities, including ADA door access at Taft Library
• Commitment of $6 million to the Pavement Management Program and an additional $7.6 million for street maintenance and rehabilitation efforts at various locations throughout the City.
• Commitment of $3.5 million towards 7 projects intended to maintain or improve the City’s water production and distribution, including $1.5 million for pipeline replacement.
• Commitment of $2.2 million to the Sewer Replacement Program
LOOKING FORWARD
The economy is improving incrementally as the City Council’s prudent policies continue to set the stage to meet the budgetary challenges and demands of FY 2 3. While it is important to continue on the path of caution to ensure long -term fiscal health, the City Council works hard to be able to allocate the necessary resources to allow the City to provide the citizens and businesses of the City with the excellent services they have come to expect and to bolster the City’s public safety.
While the Orange economy projects a positive o utlook, the nation is currently experiencing higher inflation as the economy transitions from the pandemic and supply
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catches up to demand, with moderately higher inflation expected to continue through the end of 2023. Following the adoption of the FY 2 3 Budget, staff will continue to monitor the economy, and be vigilant with the City’s budget by taking proactive and reactive measures as needed. We will stay focused on the status of our current fiscal condition as well as plan for an equally challenging FY 24 budget.
We are optimistic that the reopening of the economy will yield a renewal in economic activity for our City, which in turn will provide resources to continue our mission to provide exceptional customer services to our Orange residents.
THANKS AND APPRECIATION
Undoubtedly, the preparation of this budget would not be possible without the dedication and commitment of the City’s Department Heads and their key staff members. A special note of thanks to the Finance team who worked extra hard to modify some of their forecasting and budgeting processes to meet my expectations as the new City Manager.
The extra effort required to prepare the departmental budgets overlays on top of the busy demands of the City’s day-to-day operations.
I would also like to express my appreciation to the members of the City Council for your confidence in the City’s management team as well as your policy direction in this budget process. As they say “it takes a village” and often requires some compromise to get to a final plan. I believe this document reflects the consensus direction you provided, and will meet the needs of our Departments to continue to provide top quality service and services to our community.
Sincerely,
Rob Houston
City Manager