Agenda Item
City Council
Item #: 10.1. 5/9/2023 File #: 23-0307
TO: Honorable Mayor and Members of the City Council
THRU: Tom Kisela, City Manager
FROM: Susan Galvan, Assistant City Manager
1. SUBJECT
Second Study Session for the Proposed Fiscal Year 2023-24 Budget.
2. SUMMARY
This is the second study session in support of the preparation of the FY 2023-24 Budget. This study session is intended to provide a status of the current year budget, and an initial analysis of the projected General Fund revenues and proposed expenditures for FY 2023-24.
3. RECOMMENDED ACTION
Receive and file the report and provide direction to staff.
4. FISCAL IMPACT
Fiscal impact will be determined with final budget adoption.
5. STRATEGIC PLAN GOALS
Goal 2: Be a fiscally healthy community
a: Expend fiscal resources responsibly.
b: Analyze future fiscal needs and potential revenue opportunities. c: Provide appropriate reserves.
Goal 4: Provide outstanding public service
b: Provide facilities and services to meet customer expectations.
6. DISCUSSION AND BACKGROUND
This is the second study session in support of the preparation of the City’sFY 2023-24 (FY 24) Budget. This study session is intended to focus on the following items:
· Providing a status of the current year General Fund budget · Providing an initial analysis of the projected General Fund revenues and proposed expenditures for FY 24
Status of Current Year Budget (FY 23)
Review of General Fund Revenues for FY 23
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Item #: 10.1. 5/9/2023 File #: 23-0307
As the end of FY 23 approaches, it is projected that General Fund revenues will increase to $135.3 million, 3.5% (or about $4.5 million) over budget. Sales tax revenues are anticipated to be $74,000 above the budget of $50.1 million largely due a rise in fuel prices. Other major industries are slowing, specifically building and construction and the City’s share of the County’s pool.
Property taxes are expected to be $51.6 million, $1.0 million over the budget of $50.6 million, due to annual increases in assessed property values. Property tax in lieu of motor vehicle license fees is expected to be above budget as this revenue is tied to property tax growth.
Based on current trends, other resources such as Revenue from Other Agencies are expected to have higher than budgeted receipts. Miscellaneous Revenues are anticipated to be $2.8 million, $1.9 million over budget. The majority of this increase is contributed by one-time revenue from the Office of Emergency Services to reimburse the Fire Department’sassistance with wildfires throughout the state.
Review of General Fund Expenditures and Ending Fund Balance for FY 23 General Fund expenditures are tracking on par with budgeted amounts. Historically, expenditures have trended lower than anticipated, but rising costs of materials and supplies and less salary savings have affected the amount of expenditure spending for FY 23. With recent retirements, departments have continued to evaluate the operations of various divisions to determine the most effective structure moving forward. This includes the continuation of scrutinizing every vacancy, filling positions that are necessary, and identifying reclassifications and movement of resources that will increase service levels and promote succession planning efforts. As part of the FY 23 budget adoption, the City’sstaffing increased by 25.5 Full-Time Equivalents (FTE), mostly supporting public safety programs. The cost of these positions has posed a challenge in maintaining salary savings city -wide. Overall, departments have continued to be diligent in maintaining targets on expenditures and being creative in meeting the City’sservice delivery goals despite the rising costs of materials and increased contractual obligations.
With our adjusted budgeted expenditures of $136.4 million, revenues of $135.3 million and transfers in from reserves of $2.0 million, we are currently projecting a surplus of about $900,000. To date, the estimated ending fund balance for the General Fund is approximately $1.7 million.
Initial Review of the Proposed Budget for FY 24
Estimated General Fund Revenues for FY 24
As the economy continues to face challenges, the City has taken a conservative approach in budgeting for revenues. Based on current trends and analysis, the total General Fund revenues for FY 24 are projected to be $133.9 million, $1.4 million or 1.0%, under the estimated ending revenue for FY 23. This difference is mostly attributed to grants and one-time revenues that are not initially budgeted and are not included in the FY 24 budget.
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Item #: 10.1. 5/9/2023 File #: 23-0307
Provided below is a summary of the General Fund revenue highlights for FY 24:
· Sales Tax is the largest source of General Fund revenue. In FY 24, the City anticipates receiving $50.4 million, about $400,000 above the FY 23 estimate. While a harsh recession is not anticipated to occur in FY 24, we anticipate little to no growth across all industries.
Industries that had seen strong performances in previous years following the pandemic, such as building and construction, are projected to slow or decrease. While fuel is projected to perform well, prices are falling from unprecedented highs in the previous quarters and will decrease. As stated in previous years, we anticipate County pools to continue to gradually decrease due to the corporate changes made by Amazon, shifting a significant amount of their sales from the County pools to the cities where their distribution centers are located within the State.
· Property Tax is the second largest source of General Fund revenue and is expected to be $52.9 million, a $1.2 million, or 2% increase from FY 23 estimates. Despite a decrease in volume of home sales in 2022, properties have continued to increase in median price compared to previous years. As such, annual increases in assessed property values and more property tax increment distributed from the County of Orange for the Successor Agency are projected to contribute to higher property tax receipts. Included in this projection, property tax in lieu of motor vehicle license fees are expected to increase as this revenue is tied to property tax growth.
· Transient Occupancy Tax (TOT) is projected to be $5.1 million, no change from the FY 23 estimate. Business and leisure travel activity is projected to remain the same in FY 24.
Approximately $500,000 of this revenue is attributable to the Short Term Rental (STR) program which currently has 125 licensed properties.
· Fees for Service are currently projected to be $5.1 million, a slight decrease of $200,000 from the FY 23 estimate. This is mostly attributed to a change in how the City’s revenue for recreation classes will be accounted for. With large fluctuations in participation, revenue for sports and recreation class enrollment is not included in the budgeted revenues for FY 24 and will be considered as it is received. However, upon consideration of the Master Fee Schedule at the next study session, this projection may increase. · Licenses and Permits are currently projected to be $6.9 million, no change from the FY 23 estimate. There are no increases or decreases anticipated for building-related permits and annual fire permits in FY 24. However, as with the Fees for Service, upon consideration of the Master Fee Schedule at the next study session, this projection may also increase. · Fines and Forfeitures are projected to be $2.0 million, an increase of $102,000 (5.5%) from FY 23 estimates. Staffing challenges in parking enforcement has contributed to lower estimated revenue and is anticipated to continue through FY 24. Additionally, library overdue fines are no longer being collected, affecting overall revenue projections in this category.
Staff continues to refine the revenue projections and will provide an update at the tentatively scheduled third Study Session to include these refinements as well as any feedback from the City City of Orange Printed on 5/4/2023Page 3 of 8
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Item #: 10.1. 5/9/2023 File #: 23-0307
scheduled third Study Session to include these refinements as well as any feedback from the City Council from tonight’s second Study Session.
Estimated General Fund Expenditures for FY 24
Our initial estimate for FY 24 General Fund expenditures is $140.1 million. This reflects a 7.5% increase in expenditures over the original adopted FY 23 budget. As in previous years, we will continue to refine our estimates throughout the budget process.
The following are the most significant impacts to the General Fund expenditures for FY 24:
1. Departmental Operating Budgets : Every year during the budget preparation process, City departments are charged with reviewing their existing operations to determine if there are areas of budgetary savings and operational efficiencies. Departments assess if there are budget increases to address rising costs, respond to required mandates, enhance existing service levels, or the need to implement a new program. This is an effort the departments continue to take seriously and with much internal scrutiny. The following are highlights of General Fund Departmental Requests:
· City Clerk: Currently, the City of Orange records management system is the responsibility of each individual department, rather than a central, regulated process. Due to the increasing call for transparency, Public Records Act requests have increased by over 500% since 2017. As such, the City Clerk’soffice is requesting the restoration of a Records Manager position, which will manage the City’s records management program. The estimated FY24 cost for this position is $116,977.
· City Manager: Per City Council direction, over the last year the City of Orange has joined the League of California Cities and Southern California Association of Governments (SCAG) in order to be better informed about policy and legislative issues at the federal, state, and regional levels. Additionally, the City has hired Townsend Public Affairs to provide legislative analysis and grant writing services. Townsend Public Affairs has already secured $189,950 in grants for FY23, with several applications pending. While the City Manager departmental budget was able to absorb the costs of these services in FY 23, the department is requesting an ongoing additional appropriation of $205,000 to support these initiatives going forward.
Additionally, the department is requesting $63,000 to cover increased property tax expenses on City-owned properties.
· Community Development: With the City’scontinued emphasis on Code Enforcement, the Code Compliance division within Community Development is seeking additional funding to cover operating expense increases as well as personnel costs. These costs are off-set by revenue received from the STR program. The increased operating costs include costs for supplies and training, totaling $10,650. The department is also requesting $10,000 to be added to the budget to cover the cost of temporary personnel to administratively support the Planning Commission and Design Review Committee public meetings. On the personnel side, the department is seeking funding to reclass the Code Compliance Supervisor to the Code Compliance Manager and add a new Code Compliance Officer. The reclassification and new position allow for staff to keep up with increased workload in the department and allow for weekend coverage. The total personnel cost for FY 24 is estimated to be $125,789. The department is also recommending the reclass of an Administrative Specialist to a Permit City of Orange Printed on 5/4/2023Page 4 of 8
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Item #: 10.1. 5/9/2023 File #: 23-0307
department is also recommending the reclass of an Administrative Specialist to a Permit Technician, which is cost neutral and will better suit the needs of the program. · Community Services: The Community Services department is requesting funding to support contractually obligated service cost increases anticipated across multiple contracts, which include orange grove spraying, landscape maintenance, pool maintenance, custodial services, 3rd of July fireworks, and special event sound and lighting. The total funding request for service cost increases is $56,485. The department is also requesting an additional appropriation of $400,425 to fund the FY24 needs of the 517 W Struck transition. However, should staff receive grant funding to offset this cost, staff will return to adjust the budget accordingly.
Additionally, due to an increase of larger-scale projects over the past couple of years (Struck Ave/HRC, Hart Park Pickleball, Grijalva Skatepark, etc.), the department recognizes the need for a higher level of administrative oversight. Therefore, the department is requesting to reclassify the Senior Administrative Analyst Position to Administrative Manager, for an estimated cost of $21,166.
· Finance Department: Due to increased demands in the Budget division, staff is requesting to reclassify the Administrative Analyst I position to Financial Analyst, for an approximate cost of $12,000. Additionally, with the implementation and continuation of the Short Term Rental program, the General Revenue - Business License division is experiencing an increased workload. To ensure that the City continues to provide a high level of service to customers, the Finance department is also requesting to reclassify the 0.75 part time Senior Finance Clerk to 100% FTE, at the cost of approximately $17,300.
· Fire Department: The Fire Department is requesting funds to cover increased costs for obligatory mutual agreements, totaling $80,878 in FY 24. Additionally, the department is requesting approximately $26,524 to reclassify two Senior Office Assistants to two Administrative Assistants, due to necessary changes to the scope of work in order to support the Paramedic program.
· Police Department: Due to City training requirements and the hiring of additional probationary officers, the Police Department is consistently using more ammunition. As such, the department is requesting additional funds in the amount of $65,000 to cover the increased need for ammunition. Additionally, the Police Department is requesting $10,000 to support the increased costs associated with the OCSD Forensic Contract renewal. Lastly, to support increased recruitment and training needs in the department, the Police Department is requesting the addition of a Civilian Investigative Officer for an estimated cost of $93,526. · Public Works: With an increased focus on the Council-driven Clean Orange Initiative, the Public Works department is requesting the addition of two Public Works Maintenance Workers to focus on graffiti abatement and the city-wide beautification program. The cost of these positions are estimated to be $77,153 each, totaling $154,306. Due to increased scope of work in the Tree Services Division, the department is also requesting $14,400 to reclassify the Tree Services Coordinator position to Landscape Coordinator. Additionally, the department is requesting funds to cover increased operating costs primarily for the tree services contract ($300,000) including the addition of tree well maintenance to the Tree Services contract ($115,200), Santiago Creek cleaning ($60,000), Plaza closure device rentals for events ($75,000, partially offset by event reimbursement), and required Commercial Driver Training for new staff ($9,000). The total request for increased operating service costs is approximately $559,200.
2. Estimated Increases to Salaries and Benefits : Fully-burdened positions approved during the FY 23 budget adoption and regular salary step increases for applicable employees amount to approximately $4.6 million in additional staffing costs in FY 24. Estimated increases resulting from City of Orange Printed on 5/4/2023Page 5 of 8
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Item #: 10.1. 5/9/2023 File #: 23-0307
approximately $4.6 million in additional staffing costs in FY 24. Estimated increases resulting from labor negotiations are included but are not inclusive of all potential costs. Any additional negotiated costs will be added to the budget, if necessary, when approved by the City Council.
The FY 24 projected expenditures also include department overtime and part-time staffing costs, which are projected to increase by approximately $377,000 and $55,000, respectively.
3. Internal Service Funds : For FY 24, we project allocating a total of $7.9 million for operating costs between the Equipment Maintenance, Computer Equipment Maintenance, Accrued Liability, and Vehicle Replacement funds. Most Internal Service Funds (ISF) are budgeted as part of FY 24 operational costs, as opposed to being funded by unreserved General Fund balance generated through prior year savings. Allocations not completely covered by General Fund operational costs are funded by prior year savings and will be brought forward for City Council consideration at the year-end FY 23 closure of the financial books.
Based on the revenues and expenditures, we are initially projecting a budget deficit of about $6.2 million. As we continue to refine the revenue and expenditure amounts and incorporate feedback and direction from City Council, it is anticipated that a balanced FY 24 budget will be adopted.
Budget Balancing Strategies
Although we are currently projecting a negative FY 24 fund balance, there are several strategies for consideration to close the budget deficit. The following are various areas of discussion:
· Increase Ongoing Revenue
· Work Force Adjustments
· Operating Budget Adjustments
· One-Time Revenue Enhancements
Feedback from the City Council received at this study session will help further refine our projections.
Upon receiving policy direction, staff will update the budget with new numbers and scenarios for further review.
Preliminary Estimate of the General Fund Balance for FY 24 The beginning fund balance is projected to be $1.7 million. With revenues below expenditures, the ending fund balance is projected to be in the negative about $6.0 million. The following table summarizes the Estimated Available General Fund Balance for FY 24:
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Item #: 10.1. 5/9/2023 File #: 23-0307
Estimated Available General Fund Balance
Unreserved Fund Balance Available @ 6/30/23 $1,719,029 FY 24 Estimated Revenues $133,887,312 FY 24 Estimated Expenditures (140,120,638) Revenue over Expenditures (6,233,326)
Unreserved Fund Balance Available @ 6/30/24 (4,514,297) Transfer Out to Catastrophic Reserve (1,498,128)
Estimated Available Fund Balance @ 6/30/24 (6,012,425) General Fund Catastrophic Reserve 23,260,026
Est. Reserved & Unreserved General Fund Balance @ 6/30/24 $17,350,459 Conclusion
We continue to refine the FY 24 revenue and expenditure amounts. In addition, feedback from the City Council received at this study session will help further refine our projections. The next study session is tentatively scheduled for June 13, and we anticipate recommending adoption of the budget City of Orange Printed on 5/4/2023Page 7 of 8
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Item #: 10.1. 5/9/2023 File #: 23-0307
session is tentatively scheduled for June 13, and we anticipate recommending adoption of the budget on June 27.
7. ATTACHMENTS
· Proposed Funding Increases Summary
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