TO: Honorable Mayor and Members of the City Council
THRU: Tom Kisela, City Manager
FROM: Trang Nguyen, Finance Director
1. Subject
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Fiscal Year 2024-25 City of Orange Budget and Five-Year Capital Improvement Program.
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2. Summary
Each spring, the City staff presents the City Council with an annual budget that serves as the City’s financial and operational plan for the upcoming fiscal year. This budget document is prepared following two City Council study sessions, two regular meetings, and one special meeting during which various aspects of the proposed budget were considered and Council direction was given.
3. Recommended Action
recommendation
The following action items are recommended to adopt the Fiscal Year 2024-25 Budget, effective July 1, 2024:
1. Adopt Resolution No. 11565. A Resolution of the City Council of the City of Orange adopting said City’s Budget for Fiscal Year 2024-25 and authorizing transfer of funds within and between appropriations, transfer of funds between funds, and additional appropriations.
2. Adopt Resolution No. 11564. A Resolution of the City Council of the City of Orange adopting the appropriations limit for Fiscal Year 2024-25.
3. Adopt Resolution No. 11566. A Resolution of the City Council of the City of Orange to approve and authorize staff to submit to the Orange County Transportation Authority the Measure M2 Seven-Year Capital Improvement Program for Fiscal Year 2024-25 through 2030-31 to comply with Measure M2 eligibility criteria.
4. Adopt Resolution No. 11560. A Resolution of the City Council of The City of Orange amending Resolution No. 11511 between the City of Orange and The Orange Municipal Employees’ Association.
5. Adopt Resolution No. 11562. A Resolution of the City Council of The City of Orange Rescinding Resolution No. 11533 and amending the Citywide Pay Schedule in accordance with the requirements of California Code of Regulations, Title 2, Section 570.5.
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4. Fiscal Impact
Adoption of the annual budget establishes the City financial plan for Fiscal Year 2024-25.
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.
6. Discussion and Background
Background:
The City’s budget is a financial plan based on anticipated revenues and expenditures in a fiscal year starting July 1 through June 30. Each year, the City’s budget is prepared, prioritizing public safety and infrastructure projects, City Council Goals, and providing the highest possible service levels to the community. The Fiscal Year 2024-25 (FY25) budget development has been presented and reviewed at five City Council meetings and three Budget Ad Hoc meetings.
The adoption of the FY25 Budget and related documents will ensure the City has established a set of legally adopted appropriations, met all the requirements of the Gann Initiative, and complied with the Measure M and Transportation Congestion Relief Fund (TCRF) funding requirements (Maintenance of Effort) of a Seven-Year Transportation Capital Improvement Plan. And the FY25 budget represents the City’s spending plan for the coming fiscal year, which will begin July 1, 2024 and end June 30, 2025.
In summary, the FY25 Budget, for all funds, includes total revenues of approximately $259.9 million and total expenditures of $281.7 million, including transfers and Redevelopment Agencies. The General Fund total revenues are approximately $148.2 million and expenditures of $156.2 million, including transfers.
Discussion:
Fiscal Year 2023-24 (FY24) General Fund Year-End Estimates
Staff presented an operating deficit of approximately $1.1 million during the mid-year review. Since then, staff has updated the year-end estimates for the General Fund and we anticipate closing FY24 with a surplus of approximately $5.1 million. The surplus is from one-time revenue of $3 million from CR&R for road mitigation and a $2.5 million transfer from the Capital Project Fund that was approved last year to balance the FY24 budget. After setting aside required funding to the designated Catastrophic Reserve (16.6%), the General Fund has a projected undesigned fund balance of about $3.7 million. This estimate is based on year-to-date actual and does not include any year-end entries. Staff will return in the fall with a more comprehensive review of FY24 once the books have been closed.
Fiscal Year 2024-25 (FY25) General Fund Revenues
The FY25 total General Fund operating revenues, not including transfers in, are projected to be approximately $145 million, almost $5 million or 3.6% over the estimated ending revenue for FY24.
Provided in Table 1 is a summary of the major General Fund revenues by source type, comparing the changes from FY24 year-end estimates and FY25 proposed revenues:
Table 1: FY25 General Fund Revenue
Provided below is a summary of the assumptions used for the FY25 General Fund revenues:
• Property Tax is the largest source of General Fund revenue and is projected to be $55.7 million. Given its historically stable growth rates, the FY25 projected revenue is just under $1.5 million or 2.7% increase from FY24 year-end estimates. Revenue growth is associated with assessed property values which typically increase each year at a rate no greater than 2%. Additional growth comes from home sales which trigger property reassessments and Proposition 8 value recaptures.
• Sales Tax is the second largest source of General Fund revenue. In FY25, the City anticipates receiving about $51.7 million, over $1.6 million or 3.2% above the FY24 year-end estimate. In the current economic environment, household spending has remained strong and trends are slightly more favorable than the prior year’s projections.
• Transient Occupancy Tax (TOT) is projected to be approximately $5.9 million, remaining flat from the FY24 year-end estimate. Business and leisure travel activity is expected to remain at current levels in FY25. Approximately $600,000 of this revenue is attributable to the Short-term Rental (STR) program which currently has 125 licensed properties.
• Licenses and Permits are currently projected to be slightly over $7 million, just over a 1% increase from the FY24 estimate. There are no material changes anticipated for building-related permits and annual fire permits in FY25. However, upon completion of the fee and cost allocation study, staff will return to the City Council for consideration on updating the Master Fee Schedule.
• Fines and Forfeitures are projected to be over $3 million, an increase of $1 million or 50% from FY24 estimates. This increase is mostly attributed to anticipated increased revenue from the augmented parking enforcement program.
• Fees for Service are currently projected to be over $6 million, a slight decrease of about $88,000 or -1% from the FY24 estimate. This is mostly attributed to a slight decrease in development fee-related activity. However, similar to Licenses and Permits, upon completion of the fee and cost allocation study, staff will return to the City Council for consideration on updating the Master Fee Schedule.
• Interfund Revenues are projected to be about $7 million, an increase of $3.4 million or 94% from the FY24 year-end estimate. This process charges other departments their portion of the cost of administrative service departments for services such as information technology, finance, human resources, and other citywide, non-departmental costs. These charges are applied as revenue to the General Fund and used to offset the operating costs. Similar to Licenses and Permits and Fees for Service, upon the completion of the fee and cost allocation study, staff will be returning to the City Council for consideration on updating the Master Fee Schedule.
• Other Revenue Sources, which include Use of Money & Property, Revenue from Other Agencies, and Miscellaneous Revenues are projected to decrease by about $4.4 million, or -44% as compared to the FY24 estimate. Revenues in these categories include one-time revenues from donations or grants, reimbursements for expenditures, as well as income from investment interest and rental income. Many of these one-time revenues are difficult to project and fluctuate year over year.
• Transfers In, at the May 28th City Council meeting, the City Council authorized the transfer of $3,000,000 one-time funding received from CR&R for road mitigation to the General Fund. This is a one-time transfer for FY25.
At the May 28th City Council meeting, the City Council directed staff to pursue 12 revenue enhancements of which three are available in FY25 and the remaining nine will require additional research. Staff will return to the City Council with details of these revenue enhancements as they become available. The following revenue enhancements are included in the adopted budget document for FY25:
• Passing on credit card fees to users for $150,000,
• Collecting on business license back tax $51,000, and
• Parking enforcement $1,000,000.
Details on all revenue enhancement are available in Attachment F.
In summary, the General Fund operating revenues, not including transfers, are projected to increase by $3.2 million, or 2.3% over current year-end estimates, bringing the total operating revenue to over $145.2 million. The total FY25 General Fund revenue with transfer in is $148.2 million. Staff will return to the City Council to amend the revenue projections as additional revenues become available.
Fiscal Year 2024-25 (FY25) General Fund Expenditures
The General Fund operating expenditure amounts to $156.2 million. This is an increase of almost $12 million or 8.3% increase in expenditure over the FY24 year-end estimate. The operating expenditure reflects an expenditure reduction of almost $4.1 million approved by the City Council at the June 11th meeting. Details of the reduction are available in Attachment G. The increase is attributed to the elimination of the 4% vacancy savings rate, which was budgeted in previous fiscal years, contractual increases in the labor groups, increased funding allocations, and the rising costs for materials and services.
Table 2: FY25 Estimated General Fund Expenditure
Provided below are the budget assumptions impacting the FY25 General Fund expenditures:
• Salaries and Benefits: Salaries and benefits are projected to be slightly under $107 million, about 7.1% or $7 million more than the FY24 year-end estimate. The increase was reduced from the original projection of about $10.6 million due to the approximately $2.5 million in budget reductions that were approved by the City Council and almost $1 million from budgeting for vacant positions at 75% to align with the recruitment schedule. As noted previously, the increase of $10.6 million is a combination of eliminating the 4% vacancy rate that was previously included in the prior year budget, negotiated salary increases, and regular salary step increases for applicable employees.
• Contractual Services: Expenditures in the Contractual Services category are projected to be almost $14.7 million, about -8.1% or $1.3 million less than the FY24 year-end estimate. This reflects the approved service reductions by the City Council on June 11th.
• Miscellaneous Expenditure: Miscellaneous Expenditure is projected to be a little more than $640,000, about 86% or $296,000 more than the FY24 year-end estimate. Most of this increase is due to 2024 General Election costs, estimated to be about $250,000.
• Debt Service: The City’s debt service payments can be split into two categories - the Pension Obligation Bonds and the Lease Revenue Bond. The Pension Obligation Bonds were purchased in 2020 to pay down the City’s Unfunded Accrued Liability (UAL) balance, thus reducing the City’s debt to CalPERs while taking advantage of favorable interest rates. The City’s Lease Revenue Bond was purchased in 2020 to invest in public safety infrastructure. Combined, the FY25 interest and principal payments for these bonds are scheduled to increase by just over $38,000 or 0.3% increase compared to FY24.
• Allocations (Internal Service Funds): Allocations to the City’s Internal Service Funds from the General Fund supports operating costs related to vehicle and computer equipment maintenance, accrued liability, and vehicle replacements. Historically, these internal service funds were underfunded in an effort to decrease impacts to the General Fund at the time of budget adoption, with the intent to supplement any necessary overages by utilizing surplus at the end of the year through transfers. As the City has continued to face budgetary challenges, there has been less surplus realized, leaving these funds underfunded and deferring necessary replacements. For FY25, staff project about $14.3 million for operating costs, between the Equipment Maintenance, Computer Equipment Maintenance, Accrued Liability, and Vehicle Replacement funds to ensure the City is fully supporting these areas. Staff will return to the City Council for consideration with an updated cost allocation plan once the study is complete.
In summary, the General Fund operating expenditures, not including transfers, are projected to increase by almost $12 million, or 8.3% over current year-end estimates, bringing the total operating expenditures to over $156.2 million.
General Fund Balance for FY25
Based on the FY24 year-end estimates, the beginning undesignated fund balance is expected to be $3.7 million. With the proposed expenditures exceeding revenues by almost $8 million and the required increase to the Catastrophic Reserve, the projected ending fund balance is an approximate $6.3 million deficit. The following table highlights the FY25 General Fund budget and undesignated fund balance.
Table 3: Proposed General Fund Balance
Staff will continue to review the City’s budget with the Budget Ad hoc committee in the upcoming year to continue to refine the FY25 budget. As additional reductions and/or amendments are identified, staff will return to the City Council with the recommended actions.
The budget presented is an abbreviated version and focuses only on the General Fund. The attached budget package, Attachment A, contains the essential elements that are included and required for adoption of the FY25 Budget including:
• Budget Resolutions
• Schedule of Changes in Fund Balance
• Statement of Revenues and Expenditures
• FY25 Capital Improvement Projects
• Five-Year Capital Improvement Plan
Conclusion
Following adoption of the FY25 Budget, staff will complete the preparation of the Budget and Capital Improvement Plan documents and present them to the City Council upon publication. Staff will return to the City Council with recommendations on additional revenue enhancements and budget reductions, if needed.
7. ATTACHMENTS
• Attachment A - 1) Resolution No. 11565
• Attachment A - 2) FY25 Schedule of Changes in Fund Balance
• Attachment A - 3) Statement of Revenues and Expenditures
• Attachment A - 4) FY 25 Capital Improvement Projects
• Attachment A - 5) Five-Year Capital Improvement Plan
• Attachment B - Resolution No. 11564
• Attachment C - Resolution No. 11566
• Attachment D - Resolution No. 11560
• Attachment E - Resolution No. 11562
• Attachment F - FY25 Revenue Enhancements
• Attachment G - FY25 Budget Reductions