FOR THE COUNCIL MEETING OF MAY 21, 2024
COUNCIL AGENDA REPORT
TO: City Council
FROM: Interim City Manager Alex Posada
BY: Interim Finance Director Xenia Bradford
SUBJECT: Preliminary Fiscal Year 2024-26 Budget Development
Description:
The City Council will receive an update on the Fiscal Year 2024-26 Budget Development; provide input on its development, including a General Fund and Measure U overview; and provide input on preliminary budget proposals.
Environmental Notice: The activity is not a “Project” as defined under Section 15378 of the California Environmental Quality Act State Guidelines; therefore, pursuant to State Guidelines Section 15060(c)(3) no environmental review is required.
RECOMMENDATION:
1) Receive and provide input on the Preliminary Budget and fund analysis; and
2) Receive and provide input on the preliminary budget proposals of City departments; and
3) Receive and provide input on the proposed financial policies changes; and
4) Receive and provide input on the proposed fee increases and direct staff to return with the fee update for adoption on June 18, 2024, and
5) Set a public hearing date for adoption of the proposed Fiscal Year 2024-26 Biennial Budget on June 18, 2024.
BACKGROUND:
City staff is currently engaged in the financial plan development of the Fiscal Year (FY) 2024-26 Biennial Budget, encompassing FY 2024 -25 and FY 2025 -26. This financial planning cycle began in October 2023 and will continue until the City Council adoption of the Budget in June 2024. To develop a City Manager’s proposed budget that aligns with the City Council’s goals and priorities , this cycle was extended to incorporate a Department Directors forum to discuss Citywide operational priorities, held on November 17th, a Budget Development Kickoff to engage City departments, held on December 19th, and a City Council Goal-Setting Session, held on February 19th.
2 The budget process encompasses the development, implementation, and evaluation of a plan for the provision of services and capital assets. The goal of the financial plan is to establish desired levels of service while achieving results in the most efficient manner within resource constraints. This will require hard decisions and discipline. The City also must find new revenue sources. The budget process incorporates long-term perspective, established linkages to broad organizational goals, focuses budget decisions on the results and outcomes, and promotes effective communication with stakeholders. City departments worked closely with the Finance Department and the City Manager’s Office through April and May to propose goals and programs to be accomplished over the next two years. The proposed programs were aligned with the City Council goals and priorities set on February 19 th. A summary linking the City Council Goals and Priorities with departmental Goals is presented in Attachment H.
Council Goals:
The City Council goals for Fiscal Years 2024-26 are:
Long-term financial sustainability
Community quality of life
Planning and infrastructure
Organizational well-being
The City Council two-year priorities for Fiscal Years 2024-26 are:
New approach to economic development
Provide youth opportunities
Provide public safety resources
Establish a staffing plan
The City Manager’s proposed budget is in alignment with the City Council adopted goals and priorities. Long-term fiscal sustainability will be essential to achieve. This proposed budget, like many before it, uses a variety of strategies to close a very significant multi- million-dollar imbalance between revenues and expenditures in both fiscal years. Many asks from departments cannot be accommodated. To that end, t he F inancial Plan development process is extended this cycle to include this preliminary presentation to the City Council. In addition, departments will have an opportunity to highlight the proposed programs for each operational area. Following the Preliminary Budget discussion, the City Council’s input will be incorporated into the Final Proposed Budget, which will be presented to the City Council in June for adoption.
DISCUSSION:
Internal review of departments’ preliminary budget proposals has concluded, and staff now seeks the feedback of the City Council, as well as the public at-large on the preliminary budget proposals of City departments. Feedback will be incorporated into the preliminary budget as directed by the City Council and will result in a Proposed 2024 -26 Biennial Budget that will be presented to the City Council in June 2024.
3 Fiscal Year 2024-26 Biannual Budget Investments:
The Proposed Budget will include funding for supplemental budget requests that are necessary to attain Council Goals. There are also some supplemental budget items necessary to allow for the effective delivery of priority public services. The proposed 2024- 26 Biennial Budget shows a significant structural imbalance within the General Fund and Measure U. All other funds are balanced. The ongoing expenditures in the General Fund and Measure U combined exceed the ongoing revenues by $17.4 million in 2024-25 and $19.9 million in 2025-26. Moreover, the proposed 2024-26 Biennial Budget will include a recommendation to fund one-time items with projected one -time savings. The proposed budget also establishes necessary reserves in the self-insurance funds due to changes in insurance markets. The total draw on General fund and Measure U fund balances in the first fiscal year is $20.8 million and in the second fiscal year is $19.9 million. This massive drawdown is discussed below in the policy section.
The chart below shows the General Fund and Measure U fiscal forecast.
The City is no different from many other cities in facing serious financial challenges. The City will continue to move forward with the downtown revitalization, keep the peace, grow more businesses and wonderful programs, and services for residents. In addition, the goals for the coming year are to balance the budget and retain and recruit the best talent possible, a ll while becoming even more efficient. Familiar funding demands persist, starting with ever-spiraling California Public Employees’ Retirement System (CalPERS) payment obligations, increases in personnel compensation, inflation, and rising costs for infrastructure maintenance and contracts. City leadership and the City Council must continue to close the gap between revenues and operational expenditures. The City enters the 2024-25 fiscal year, in a similar manner it has for the past 1 5 years, with a multi-million-dollar structural General Fund budget deficit . The deficit includes structural
4 ongoing imbalance in the General Fund where ongoing expenditures are outpacing the General Fund annual revenues.
The City ’s goals are to maintain services and keep the w orkforce intact as much as possible. The City is incredibly fortunate to receive approximately $27 million in annual revenue from the enhanced one -cent local Measure U sales tax approved by the voters in November 2018. This source maintains many services ( and supports 147 full -time equivalent (FTE) positions, or 20 percent of the workforce) that the General Fund otherwise could not support.
The proposed Preliminary Budget at a glance is comprised of the following total sources and uses citywide.
Citywide Sources:
The City of Santa Maria categorizes operating revenues into six major categories, each with distinct revenue characteristics. Operating revenues and transfers in are anticipated to be $259.1 million in FY 2024-25 and $266.3 million in FY 2025-26; excluding transfers in, operating revenues are expected to total $246.4 million in FY 2024 -25 and $253.5 million in FY 2025-26.
Citywide Uses:
The City’s FY 2024 -26 Biennial Budget totals $354.8 million in FY 2024 -25 and $346.4 million in FY 2025-26, inclusive of capital, maintenance, and equipment project budgets.
5 Proposed Policy Recommendations for Council Consideration and Policy Direction:
To close the projected budget gap, staff proposes, in the first Fiscal Year 2024-25 of the biennial budget to draw on Local Economic Augmentation Fund (LEAF) reserves to the amount of $ 7,844,252, on undesignated General Fund reserves of $8,570,357 , and on undesignated Measure U reserves of $4,413,648 . The remaining LEAF reserves at the end of 2024-25 will be $2,767,396 and undesignated General Fund Reserve and Measure U reserve will be depleted. The undesignated General Fund Reserve was maintained at $10 million since Fiscal Year 2017 -2018. The projected draw on the undesignated General Fund Reserve in the current Fiscal Year 2023 -24 and the proposed draw in the Fiscal Year 2024-25 will fully deplete this reserve.
Staff further proposes to undertake major restructuring efforts in 2024-25 including the following budget balancing efforts to achieve a balanced budget by 2025-26.
1. Initiate revenue measure feasibility analysis. Staff recommends approval of $100,000 in addition to the proposed budget for this effort to engage a consultant.
2. Enhance the economic development program by establishi ng an in -house economic development program and staffing to ensure the economic development efforts are closely aligned with Citywide policies and goals.
3. Continue to update Citywide fees including Growth Mitigation Fees.
4. Review, update, and take all necessary actions to modify the Landscape District assessments to meet the current needs of the City landscapes.
5. Determine sustainable ongoing expenditures level for the General Fund and Measure U fund and engage departments to propose recommended modifications to the services and programs to restructure and close the budget gap by the end of 2024-25. This recommendation is in conformance with the City Council adopted Balanced Budget policy. The budget gap for ongoing operations in the Genera l Fund is as follows: $15.8 million in 2024 -25 and $14.8 million in 2025 -26. The budget gap for ongoing operations in Measure U is as follows: $5.0 million in 2024- 25 and $5.1 million in 2025 -26. These budget gaps do not include investment in
6 Capital Impro vement and Maintenance Programs . The expenditure funding for operating programs and services are outpacing the ongoing revenues within the General Fund and Measure U.
6. Fund Citywide Salaries and Benefits Compensation Study in the amount of $125,000.
Furthermore, staff proposes that Council consider the following financial policy changes to further enhance the fiscal oversight and long -term fiscal sustainability . The detailed language for the proposed policies is included in Attachment G. Proposed modifications are highlighted in red.
1. Set a target level of reserve in the Local Economic Augmentation Fund (LEAF) at 5 percent of the General Fund and Measure U annual ongoing (excluding Capital Expenditure Program) operating appropriations. The draw from fund balance beyond the 5 percent threshold would require Council approval in alignment with Council set policy for the use of the LEAF.
2. Add cost recovery policy identifying principals for 100 percent user fee recovery unless approved otherwise based on Council policy determination for the public benefit.
3. Set reserves for internal insurance funds to appropriately fund rising insurance premiums, fund at levels established by actual analysis for claims and liabilities, and set-aside self-insurance reserves for uninsurable assets.
Next Steps:
Any policy direction provided by the City Council at the Preliminary budget hearing will be incorporated into the final proposed budget. With City Council approval, a public hearing on the proposed budget will be scheduled for June 18th, during which staff will present the final proposed budget inclusive of any changes previously requested by the City Council and request adoption of the proposed 2024-26 Biennial Budget.
If the City Council directs staff to proceed with full cost recovery for governmental fees (excluding Recreation & Parks services fees), staff will bring the proposed fee schedules for Council consideration on June 4th and for the second Public Hearing on June 18th.
Alternative(s)
The City Council may deny the budget amendments as an alternative to this recommendation. However, doing so will limit the ability to maintain current levels of service.
The City Council may provide staff with further direction to modify the proposed budget .
The City Council may provide direction to re -allocate funds across City operations. The limitations to re-allocation of funds are set at the fund level where the Enterprise Funds and Special Revenue funds can only be allocated to fund those specific operations or projects.
7 Fiscal Considerations
The City Council actions taken on the recommendations in this report will determine the fiscal impacts subject to the City Council approval at the public hearing proposed to be held on June 18 th. The proposed budget currently totals $354.9 million in all operating funds 2024-25 and $346.4 million in 2025 -26, inclusive of capital, maintenance and equipment projects.
The proposed budget and schedules above include Supplemental Budget Requests recommended by the City Manager are included as Attachment D.
Proposed Personnel at fund level and department level are included in Attachment C inclusive of the newly requested positions detailed in Attachment D.
The proposed budget also includes appropriations for Capital Improvement Program and Maintenance detailed in Attachment E.
The Proposed Budget as presented complies with the City Council adopted financial policies for all funds except for General Fund and Measure U fund. The Proposed Budget for these funds does not comply with the Balanced Budget policy, which requires that ongoing revenues should meet ongoing operating expenditures. The two funds are proposed to draw on fund reserves to cover ongoing operating expenditures as follows.
CITYWIDE BUDGET SUMMARY - OPERATING
PROPOSED FY 2024-26 BIENNIAL BUDGET
FY 2024-25 FY 2025-26
Revenues & Transfers In
Taxes $ 95,426,552 $ 96,988,610
Licenses, Permits & Fines 3,695,334 3,693,334
Revenue from Use of Money &
Property
5,737,810 5,737,810
Revenues from Other Agencies 31,224,790 30,610,922
Charges for Service 106,195,604 112,198,334
Other Revenue and Transfers 16,810,095 17,086,644
Total Revenues & Transfers In $ 259,090,185 $ 266,315,654
Expenditures & Transfers Out
Operating Programs $ 203,687,594 $ 209,806,806
Capital & Outside Agencies 65,479,856 61,650,602
Debt Service 3,889,012 3,892,511
Transfers 17,774,375 14,613,913
Total Expenditures & Transfers Out $ 290,830,837 $ 289,963,832
Net Operating Budget $ (31,740,652) $ (23,648,178)
8 The budget gap for ongoing operations in the General Fund is: $15.8 million in 2024 -25 and $14.8 million in 2025 -26. The budget gap for ongoing operations in Measure U i s:
$5.0 million in 2024 -25 and $5.1 million in 2025 -26. These budget gaps do not include investment in Capital Improvement and Maintenance Programs. The expenditure funding for operating programs and services is outpacing the ongoing revenues within the General Fund and Measure U. The tables below present sources, uses, and fund balances for the General Fund and Measure U.
The proposed budget includes the assumption that several Governmental Fees would be raised to full recovery level. The Council directed staff to return with the fee study to consider full cost recovery during the Fiscal Year 2022-23 Mid-Year Budget Adoption.
The table below shows the potential revenue growth of $ $1,689,700. The table also shows the current tax subsidies of $1,722,582. Staff recommend the adoption of the user fees. If the City Council elects to proceed with the fee increases, staff will schedule Public Hearings to increase the fees on June 4 th and June 21st with an effective date for newly set fee levels of July 1, 2024.
GENERAL FUND PRELIMINARY BUDGET FY 2024-26
($ IN MILLIONS)
FY 2021-22
Actual
FY 2022-23
Actual
FY 2023-24
Projected
FY 2024-25
Preliminary
FY 2025-26
Preliminary
Revenues $88,988,466 $ 87,607,269 $ 90,311,058 $ 91,812,283 $ 93,420,360 Expenditures 72,085,139 80,356,453 91,812,621 107,648,989 108,196,992 Surplus/(Deficit) $16,903,327 $ 7,250,816 $ (1,501,563) $ (15,836,706) $ (14,776,632)
MEASURE U PRELIMINARY BUDGET FY 2024-26
($ IN MILLIONS)
FY 2021-22
Actual
FY 2022-23
Actual
FY 2023-24
Projected
FY 2024-25
Preliminary
FY 2025-26
Preliminary
Revenues $ 25,502,203 $ 27,104,495 $ 25,881,016 $ 26,716,305 $ 26,886,354 Expenditures 19,859,496 27,465,273 38,572,436 31,707,856 32,034,083 Surplus/(Deficit) $ 5,642,706 $ (360,778) $ (12,691,420) $ (4,991,551) $ (5,147,729)
Beginning Fund
Reserves
$ 11,823,140 $ 17,465,846 $ 17,105,068 $ 4,413,648 $ (577,903) Net Change in
Fund Balance
5,642,706 (360,778) (12,691,420) (4,991,551) (5,147,729) Ending
Unallocated
Reserves
$ 17,465,846 $ 17,105,068 $ 4,413,648 $ (577,903) $ (5,725,632)
9 SERVICE
TOTAL
FEE
REVENUE
TOTAL
SERVICE
COST
TOTAL
PROFIT /
(SUBSIDY)
PCT.
RECOVERY
FROM FEES
POSSIBLE
NEW
REVENUE
ACTUAL SUGGEST
COMMUNITY
DEVELOPMENT
$ 5,793,777 $ 6,876,147 $ (1,082,370) 84.3% VAR $ 1,357,500 PUBLIC SAFETY 1,570,121 1,857,278 (287,157) 84.5% VAR 205,100 UTILITY SERVICES 360,068 283,060 77,008 127.2% VAR 1,600
ADMINISTRATIVE
SVCS
1,150,846 1,580,909 (430,063) 72.8% VAR 125,500
$ 8,874,812 $ 10,597,394 $ (1,722,582) 83.7% $ 1,689,700
Impact to the Community
The preliminary budget review provides the community with an understanding of the resources necessary to maintain and enhance services to the public, invest in infrastructure, and undertake many projects that will directly benefit the community . Adoption of the proposed budget on June 18 th will allow City staff to provide the services desired by the community.
ATTACHMENTS
Attachment A: Major Operating Funds Fiscal Forecasts
Attachment B: Citywide Proposed Financial Statements Summary and Fund Analysis Attachment C: Proposed Personnel Schedules Inclusive of Supplemental Budget Requests Attachment D: Proposed Supplemental Budget Requests Summary Attachment E: Proposed Capital Improvement and Maintenance Funding Request Attachment F: Measure U Proposed Carryovers Summary for Reference Only per Council Request Attachment G: Proposed Financial and Budget Policies
Attachment H: Department Goals and Presentations