Agenda Item
City Council
Item #: 3.1. 6/6/2023 File #: 23-0361
TO: Honorable Mayor and Members of the City Council
THRU: Tom Kisela, City Manager
FROM: Susan Galvan, Assistant City Manager
1. SUBJECT
Third Study Session for the Proposed Fiscal Year 2023-24 Budget.
2. SUMMARY
This is the third study session in support of the preparation of the Fiscal Year 2023-24 Budget. This study session provides an updated analysis of the projected General Fund revenues and expenditures, Annual Department Accomplishments, Goals, and Objectives, revisions to the Master Fee Schedule, as well as a status and analysis of the Special Revenue, Internal Service, and Water Funds for Fiscal Year 2023-24.
3. RECOMMENDED ACTION
Receive and file the report and provide policy direction.
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.
Goal 4: Provide outstanding public service
b: Provide facilities and services to meet customer expectations.
6. DISCUSSION AND BACKGROUND
This is the third study session in support of the preparation of the City’sFiscal Year 2023-24 (FY 24) budget. This study session intends to focus on the following items:
· Provide an updated status of the current budget year for the General Fund; · Provide an updated analysis of the projected General Fund revenues and expenditures for FY 24;
· Present the proposed revisions to the Master Fee Schedule; · Present a status and analysis of the Special Revenue, Internal Service, and Water Funds for FY 24, and;
· Present the proposed Annual Department Accomplishments, Goals, and Objectives for FY 24.
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Item #: 3.1. 6/6/2023 File #: 23-0361
Status of FY 23 General Fund Budget
General Fund revenues are anticipated to be $135.5 million, approximately $200,000 more than projected at the May 9th Budget Study Session. Transient Occupancy Tax (TOT) was adjusted to anticipate slightly more revenue at approximately $5.3 million. All other revenue projections remained the same and are on target to be received.
General Fund expenditures are anticipated to close at $135.4 million, $1 million less than what was presented at the May 9th Budget Study Session. This difference is attributed to expenditure offset as a result of anticipated grant funding from the HOME American Rescue Plan (ARP) program, awarded early May 2023. Moreover, departments continue to be vigilant in spending and anticipate minor savings in various areas of their operating budgets. Additionally, many City departments have realized savings due to staff vacancies; however, departments have utilized contractual services to ensure operations and services are not interrupted, resulting in an offset of these anticipated savings.
With adjusted budgeted expenditures of $135.4 million, revenues of $135.5 million and anticipated transfers in from reserves of $2.0 million, we are currently projecting a surplus of about $2.1 million.
To date, the estimated ending fund balance for the General Fund is anticipated to be just under $3.0 million.
General Fund Revenues for FY 24
General Fund revenues for FY 24 are projected to be $134.5 million, $1.0 million less than the estimated ending revenue for FY 23. Projected revenues tend to be lower than the previous year’s estimates, mostly due to grants and external revenues that are not initially estimated and would be counted as revenue only once received.
The projected FY 24 revenue is about $660,000 above the revenue projections presented at the May 9th Budget Study Session. The TOT revenue projection was increased by $260,000, projecting less conservatively than previously considered. Additionally, both Licenses and Permits, and Fees for Service, were increased by $200,000 each, for a total of $400,000, to account for user fee adjustments as detailed below.
General Fund Expenditures for FY 24
General Fund expenditure projection is approximately $600,000 less than the projection provided at the last budget study session at $139.5 million. This difference is attributed to the expenditure offset from the FY 24 portion of the HOME ARP grant funding, as described above. Minor adjustments were made to account for anticipated labor costs. A total of $2.0 million accounts for departmental requests for new and upgraded positions as well as increases associated with contractual obligations and rising material costs, many of which support programs associated with Council-driven initiatives.
These proposed requests (see attachment) were presented in the May 9th Budget Study Session report and are included in the expenditure projected for FY 24.
Estimate of General Fund Balance for FY 24
Based on revenues and expenditures, we are projecting a budget deficit of about $3.5 million, a City of Orange Printed on 6/1/2023Page 2 of 7
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Item #: 3.1. 6/6/2023 File #: 23-0361
Based on revenues and expenditures, we are projecting a budget deficit of about $3.5 million, a decrease of about $2.5 million from the last budget session of $6.0 million. This revision is due to reduced expenditures in FY 23 as a result of the HOME ARP grant award, and additional revenue and reduced expenditures in FY 24 as previously noted. As we continue to refine the revenue and expenditure amounts and implement budget balancing measure(s) with Council direction as detailed below, it is anticipated that the City Council will be able to adopt a balanced FY 24 budget.
Estimated Available General Fund Balance
Unreserved Fund Balance Available @ 6/30/23 $2,929,029 FY 24 Estimated Revenues $134,507,312 FY 24 Estimated Expenditures (139,538,218) Expenditures over Revenue (5,030,906)
Unreserved Fund Balance Available @ 6/30/24 (2,101,877) Transfer Out to Catastrophic Reserve (1,401,446)
Estimated Available Fund Balance @ 6/30/24 (3,503,323) General Fund Catastrophic Reserve 23,266,202
Est. Reserved & Unreserved General Fund Balance @ 6/30/24 $19,762,878 Master Fee Schedule
In FY 19, the Council adopted an updated Master Fee Schedule to better reflect the cost of providing services. Each year, staff updates the schedule as part of this budget process, based on revised costs for delivering each service.
With these proposed fees, we anticipate recovering approximately 51% of costs associated with the services provided. The total revenue impact of the recommended increase to fees would represent an increase in General Fund revenue of approximately $662,000; however, only $400,000 has been included in the total revenues of $134.5 million for FY 24, to represent a more conservative estimate.
Increases in fees for accessory dwelling unit applications, business license applications and renewals, fire construction permits, encroachment applications and permits, and increases to new construction permits and building permits account for a major portion of the increase in revenue.
While many of the proposed fees reflect increases based on the actual cost of providing services, some fee decreases reflect reduced cost. Proposed additions include Sidewalk Vending Permits and flat-rate Technology Fees for Mechanical, Electrical, Plumbing, and Fire construction permits. In an effort to be consistent within the Public Records Act, the Police Department is recommending the elimination of Report fees, but charging for reports based on the cost of copying documents instead.
Updated proposed fees for new construction, plan check, and inspection fees that incorporate the City of Orange Printed on 6/1/2023Page 3 of 7
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Item #: 3.1. 6/6/2023 File #: 23-0361
Updated proposed fees for new construction, plan check, and inspection fees that incorporate the cost calculations are included in the detailed listing of recommended fee changes attached to this staff report.
Review of Other Funds
Water Enterprise Fund (600) :
The Water Enterprise Fund started FY 23 with an available fund balance of $18.7 million which includes $8.6 million in funding for projects that have been carried over from the previous year. The revised estimated revenue is $35.0 million, about $7.2 million less than budgeted due to reduced water consumption as a result of both increased rainfall this year and conservation efforts. Expenses are $48.0 million, which includes $11.6 million in capital improvement project carryovers and adjustments, and $2.2 million in new capital improvement projects. The result is an anticipated FY 23 ending fund balance of approximately $5.3 million.
FY 24 revenue and expenditures are estimated at $45.2 million and $45.5 million, respectively, which includes $5.6 million in water capital projects and $39.9 million in operating costs. As a result, FY 24 is expected to end with an available fund balance of about $5.1 million. It should be noted that this fund balance estimate assumes all funding for multi-year projects will be spent in FY 24. 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 23 accounting records are finalized.
Measure M2 Fund (263):
The Measure M2 Fund began FY 23 with an available budgetary fund balance of $5.0 million, and is projected to have an ending fund balance of $84,370. With FY 24 revenues projected at $4.2 million, and expenditures of $3.9 million, the estimated ending budgetary fund balance is $332,000. OCTA projects M2 sales tax is expected to grow at an average annual rate of at least 3% through 2041, the end of the 30-year term. Looking at the City’sannual pavement maintenance program specifically, the Public Works department is currently expending the M2 funding at about $1.8 million a year, a slight reduction from years prior to the pandemic mostly due to reduced revenues. The addition of SB -1 funds in 2017 and support from the Capital Projects fund has softened the financial impacts to this project resulting from increased unit prices, as the cost of materials have increased. Public Works continues to perform necessary street maintenance to keep the City’sPavement Condition Index (PCI) at an acceptable level, but the City’sStreet projected PCI will be negatively impacted if funding levels are reduced.
Sanitation Fund (220/520) :
The Sanitation Fund began FY 23 with an available fund balance of $6.9 million. With adjusted revenue estimates of $6.0 million, expenses of $10.3 million, and new capital projects of $2.5 million, the expected year-end available fund balance is $120,600. The FY 24 projections are $6.2 million in revenue and expenditures at $6.2 million, resulting in an estimated ending fund balance of $170,000.
Similar to the Water Fund (600) detailed above, this fund balance estimate assumes all funding for multi-year projects will be spent in FY 24. 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 23 accounting records are finalized.
At the beginning of FY 23, the available fund balance of the Sewer Capital Projects Fund was $5.1 City of Orange Printed on 6/1/2023Page 4 of 7
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Item #: 3.1. 6/6/2023 File #: 23-0361
At the beginning of FY 23, the available fund balance of the Sewer Capital Projects Fund was $5.1 million. With revenues estimated at $2.3 million, and expenses of about $6.3 million, the estimated ending fund balance is $1.9 million. The FY 24 revenue estimate is $2.4 million, and capital improvement expenditures towards sewer line replacement and maintenance are $2.4 million. The estimated FY 24 ending fund balance is $1.9 million.
Gas Tax Fund (270/274):
The Gas Tax Fund began FY 23 with an available fund balance of $1.0 million, with expected adjusted revenues of $3.6 million and expenses of $4.5 million. This includes operating and capital improvement carryovers of $4.0 million and new capital projects of $490,000. FY 24 revenues estimates are $4.0 million with expenditures of about $4.1 million, resulting in an ending fund balance of approximately $600.
The Road Maintenance and Rehabilitation Account (RMRA) began FY 23 with a fund balance of $3.6 million. Adjusted estimated revenues are $3.0 million and expenditures are about $6.6 million. In FY 24, the City will receive about $3.5 million from the State, which will be fully allocated towards Pavement Management Program expenses.
Internal Service Funds (700 Series) -
The Internal Service Funds are used to account for the financing of goods and services provided by one department or agency to other departments or agencies on a cost reimbursement basis. As such, any reference to revenue represents an allocation of funds from the benefitting department to the fund providing the service, representing an ”expenditure“assigned to the benefitting department and ”revenue” to the service provider.
Equipment Replacement Fund (720) :
We continue to be prudent when replacing vehicles in our fleet. In FY 23, City Council approved $3.8 million to fund equipment replacements. The FY 23 estimated year-end fund balance will be $7.0 million.
The FY 24 budget includes revenue of about $351,000, with no scheduled transfers from the General Fund. Staff is proposing vehicle replacements of just under $3.3 million in this fund, resulting in an estimated $4.1 million ending fund balance. Included in the replacement schedule are three vehicles for Fire ($2.2 million total including purchase of a Seagrave Pumper fire apparatus for $1.3 million), thirteen vehicles for Police ($769,000), and six vehicles for Public Works ($257,000).
Workers’ Compensation Fund (730) :
The Workers’Compensation Fund began FY 23 with an available budgetary fund balance of $3.4 million, and is projected to have an ending fund balance of $4.2 million. With FY 24 revenues and expenditures both projected at $4.2 million, the estimated ending budgetary fund balance remains $4.2 million.
Liability Fund (740) :
The Liability Fund provides funding for the City’sgeneral liability insurance program, which includes limited self-insurance. The fund primarily covers the City’sgeneral liability insurance premiums, and City of Orange Printed on 6/1/2023Page 5 of 7
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Item #: 3.1. 6/6/2023 File #: 23-0361
costs associated with liability and property damage claims filed against the City.
The Liability Fund began FY 23 with an available fund balance of about $366,000 and is projected to have an estimated ending fund balance of $808,000. In FY 24, staff is proposing to allocate $3.6 million in revenue to cover expenditures of $4.2 million, resulting in an estimated FY 24 ending budgetary fund balance of about $160,000.
Employee Accrued Liability (PERS) Fund (760) :
The Employee Accrued Liability Fund primarily accounts for accrued leave payouts to employees, paid upon their termination or retirement. To cover employee leave payouts, fund revenue is allocated through the payroll process. Budgeted expenditures are based on estimated costs of potential FY 24 retirements, making it difficult to calculate. However, we estimate these payouts using an average amount over the past five years.
This fund’ssecondary function is to hold funds in anticipation of increases to future PERS retirement costs. With the issuance of the Pension Obligation bonds, as well a positive market performance in FY 22, there are no transfers for PERS costs for FY 24. The resulting estimated FY 24 ending budgetary fund balance is $5.4 million, of which $4.2 million is designated for pension stabilization.
Capital Projects Fund (500) :
This fund began FY 23 with an available budgetary fund balance of $12.2 million, with the estimated ending available fund balance projected to be a healthy $11.9 million. As such, staff is not proposing any transfers-in from the General Fund to cover proposed expenditures of $3.4 million in new capital improvement projects. However, there will be a transfer out of $1.0 million to the General Fund, to address the excess expenditures in FY 23. The fund is projected to have a fund balance of $8.2 million at the end of FY 24.
Based on feedback received from the City Council at the May 9th Study Session, staff reviewed all projects, associated with the General Fund, and made adjustments resulting in healthier fund balances. Staff continues to make every effort to prolong much needed repairs and improvements to City facilities and infrastructure. Repairs that cannot be postponed have been included in the Five- Year Capital Improvement Plan.
Proposed Annual Objectives for FY 24
A draft set of departmental mission statements, goals, and objectives for the upcoming budget year is provided for Council review (attached). Objectives are prepared for each division within each department and specifically identify main functions and services performed using budgeted funds.
Although provided to the City Council as part of this agenda package, staff will not be formally presenting the proposed FY 24 department summaries at this study session. Rather, if the City Council has specific questions regarding a particular department, please inquire prior to the conclusion of this study session.
Budget Balancing Strategies for FY 24
As previously mentioned, based on current revenues and expenditures, we are projecting a budget deficit of about $3.5 million. Provided below are proposed budget balancing measures to the FY 24 City of Orange Printed on 6/1/2023Page 6 of 7
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Item #: 3.1. 6/6/2023 File #: 23-0361
budget:
“Chilling” Vacant Positions - While every position is much needed, some positions may be held vacant as a budget savings measure. After careful review, staff have identified six new positions which can be held vacant. This includes one City Clerk Records Manager position, a new position proposed and included in the FY 24 budget. Additionally, staff has identified five currently vacant Police Officer positions that can be held vacant as a cost savings measure without affecting overall operations. Estimated savings for holding these positions vacant total approximately $828,000.
Capital Projects Fund Transfer - Per the direction provided by Council at the May 9th Budget Study Session, department staff have revisited current and proposed Capital Improvement Program (CIP) projects scheduled for FY 23 and FY 24. After reviewing projected year end balances, several projects were reduced or deferred, releasing $4.7 million back to the Capital Projects Fund (500) in FY 23. In addition, an estimated $1.5 million in FY 24 projects have been deferred or removed.
Council may propose transferring funds out of the Capital Projects Fund (500) fund balance to close the gap and offset the FY 24 projected General Fund balance deficit. A transfer of $2.8 million to the General Fund would close the budget gap for FY 24.
Provided below is a summary of these measures:
Projected FY 24 Budget Gap $ (3,503,324)
Budget Balancing Measures
“Chilling” Vacant Positions 827,798
Transfer from the Capital Projects Fund (500) 2,800,000 TOTAL BUDGET SAVINGS MEASURES 3,627,798
Estimated FY 24 General Fund Balance $ 124,475
Conclusion
Since the last Study Session on May 9th, staff has further refined the budget projections for FY 24.
With the economy showing signs of slowing down by the end of calendar year 2023, the City faces some significant financial challenges. Staff will continue to monitor trends and search out cost savings measures to minimize unanticipated budgetary impacts. In addition, feedback from the City Council received at this study session will help further refine budgetary projections moving forward.
Budget adoption is scheduled for the June 27th City Council meeting.
7. ATTACHMENTS
· Annual Department Accomplishments, Goals, and Objectives · Five-Year Capital Improvement Program Summary
· Proposed FY 24 Funding Increases Summary
· Fee Study - Proposed Fee Changes
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