City of Orange - File #: 24-0204

Date	Ver.	Action By	Action	Result	Action Details	Meeting Details	Video
3/21/2024	1	Orange City Council	Received and filed		Action details	Meeting details	Video

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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First Budget Study Session for the Proposed Fiscal Year 2024-25 Budget.

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2. Summary

This is the first budget study session in support of the preparation of the Fiscal Year 2024-25 Budget. This session is intended to provide an initial analysis of the projected General Fund revenues and expenditures for FY 2024-25.

3. Recommended Action

recommendation

Receive and file the report and provide direction to staff.

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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.

Goal 2: Be a fiscally healthy community

b: Analyze future fiscal needs and potential revenue opportunities.

Goal 2: Be a fiscally healthy community

c: Provide appropriate reserves.

6. Discussion and Background

Proposed General Fund Revenues for FY 25

Based on current trends and analysis, the total General Fund revenues for Fiscal Year 2024-25 (FY 25) are projected to be approximately $144 million, $6.2 million or 4.6%, over the estimated ending revenue for Fiscal Year 2023-24 (FY 24). This increase is mostly attributed to a change in process of allocating indirect costs. While the General Fund is estimated to receive more revenue from other funds for indirect costs, the General Fund will in turn contribute more to support internal service funds such as 710 (Equipment/Vehicle Maintenance) 740 (Self Insurance - Liability) and 780 (IT Operating).

Provided in Table 1 below is a summary of the major General Fund revenues by source type, comparing the changes from FY 23 actual revenues to FY 24 year end estimates, as well as FY 25 proposed revenues:

Table 1: FY 25 Estimated General Fund Revenue

Revenue Source	FY 23 Actual Revenue	FY 24 Year End Estimate	FY 25 Proposed Budget	FY 25 Variance from YE Estimate
Property Tax	52,059,067	54,223,500	55,226,900	2.9%
Sales Tax	50,110,935	50,010,600	50,980,600	1.9%
TOT	6,080,399	5,960,000	5,960,000	-%
Franchises	2,622,044	2,852,060	2,881,500	1.0%
Licenses and Permits	6,983,399	6,289,600	6,335,400	0.7%
Fines and Forfeitures	2,008,770	2,017,800	2,317,800	14.9%
Use of Money Property	2,379,075	2,429,626	2,560,926	5.4%
Rev from Other Agencies	1,235,990	3,627,071	1,217,600	-66.4%
Fees for Services	6,491,550	5,585,100	5,744,100	2.8%
Miscellaneous Revenues	2,779,559	1,081,400	736,615	-31.9%
Interfund Revenues	3,526,228	3,635,631	9,545,100	162.5%
Total Operating Revenue	137,063,842	137,712,388	144,006,541	4.6%
Transfers In	2,000,000	2,629,000	-	-100%
Total Revenues	139,063,842	140,341,388	144,006,541	2.6%

Provided below is a summary of the assumptions used for the FY 25 General Fund revenues:

• Property Tax is the largest source of General Fund revenue and is expected to be $55.2 million. Given its historically stable growth rates, the FY 25 projected revenue is just under $1.6 million or 3% increase from FY 24 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 FY 25, the City anticipates receiving almost $51 million, just shy of $1 million or 2% above the FY 24 year-end estimate. In the current economic environment, household spending has remained relatively flat due to inflation rates and less discretionary spending. Nevertheless, trends are slightly more favorable than the prior year’s projections.

• Transient Occupancy Tax (TOT) is projected to be approximately $6 million, no change from the FY 24 year-end estimate. Business and leisure travel activity is expected to remain at current levels in FY 25. 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 higher than $6.3 million, a minimal change from the FY 24 estimate. There are no material changes anticipated for building-related permits and annual fire permits in FY 25. However, upon consideration of the Master Fee Schedule at the preliminary budget, this projection may also increase.

• Fines and Forfeitures are projected to be over $2.3 million, an increase of $300,000 or 15% from FY 24 estimates. This increase is mostly attributed to anticipated increased revenue from parking citations.

• Fees for Service are currently projected to be over $5.7 million, a slight increase of $200,000 or 3% from the FY 24 estimate. This is mostly attributed to a slight increase in development fee-related activity. However, as with Licenses and Permits, upon consideration of the Master Fee Schedule during the preliminary budget, this projection may increase.

• Interfund Revenues are projected to be $9.5 million, an increase of $5.9 million or 163% from the FY 24 year end estimate. The majority of this increase can be attributed to a change in methodology for indirect cost allocations. 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 cost of operating. In addition to revenues, indirect cost allocations also have an expenditure component for the General Fund, which will be explained in the Expenditure section of this report.

• Other Revenue Sources, which include Use of Money & Property, Revenue from Other Agencies, and Miscellaneous Revenues are projected to decrease by $2.7 million, or 35% as compared to the FY 24 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 types of one-time revenues are not budgeted due to the difficulty to predict, which is the reason for the significant decrease compared to FY 24 year end estimates.

In summary, revenues are projected to increase by almost $3.7 million, or 2.6% over current year-end estimates, bringing the total FY 25 General Fund revenue budget to $144 million, including transfers. Staff will monitor economic trends and will refine revenue projections if necessary, noting significant changes during the preliminary budget.

Proposed General Fund Expenditure for FY 25

The proposed FY 25 General Fund expenditure amounts to $161.3 million. This reflects a $18.5 million or 13% increase in expenditures over the FY 24 year-end estimate. Some of this increase is attributed to a change in methodology for indirect cost allocations to fund Internal Service Funds, which is significantly offset by the Interfund Revenues. Additionally, the FY 25 proposed expenditures do not include a 4% vacancy savings rate, which has been budgeted in previous fiscal years.

Excluding internal service costs, and the impact of the vacancy rate, the FY 25 expenditures are $7.6 million, or 6% higher than the FY 24 year end estimate. As in previous years, we will continue to refine the proposed budget to align with the City Council‘s goals and priorities for FY 25.

Table 2: FY 25 Estimated General Fund Expenditure

Expenditure Category	FY 23 Actual Expenditure	FY 24 Year End Estimate	FY 25 Proposed Budget	FY 25 Variance from YE Estimate
Salaries/Benefits	93,878,356	99,918,541	110,485,810	10.6%
Contractual Services	14,591,246	15,104,536	16,081,641	6.5%
Misc Expenditure	548,951	263,013	642,200	144.2%
Materials/Supplies	2,590,240	1,967,973	2,445,621	24.3%
Capital Outlay	501,255	175,097	28,800	-83.6%
Debt Service - Pension Obligation Bonds	14,665,936	15,540,072	15,544,031	-
Debt Service - Lease Revenue Bond	1,715,400	1,713,000	1,714,700	0.1%
Debt Service - Other	192,856	-	-	-
Capital Improvement	-	-	-	-
Allocations	6,900,081	8,128,634	14,293,200	75.8%
Total Operating Expenditure	135,584,321	142,810,866	161,236,003	12.9%
Transfers Out	25,850,849	-	-	-
Total Expenditure	161,435,170	142,810,866	161,236,003	12.9%

Provided below are the budget assumptions impacting the FY 25 General Fund expenditures:

1. Salaries & Benefits: Salaries and Benefits are estimated to be a little under $110.5 million, about 10.6% or $10.6 million more than the FY 24 year end estimate. Negotiated salary increases and regular salary step increases for applicable employees account for approximately $7.4 million of personnel-related expenditure in FY 25. Additionally, overtime and part-time staffing costs account for approximately $6.9 million of the FY 25 proposed budget, further detailed in Attachment A. In addition to these changes, City departments have requested modifications to several positions based on increased level of duties and changing operational needs. The total costs of these modifications are approximately $155,000. Details of the recommended personnel requests that are included in the proposed FY 25 budget are included in Attachment A.

a. Vacancy Rate: In previous budget years, a vacancy rate was included in the budget, accounting for estimated vacancies for the upcoming year. The vacancy rate was calculated by using the previous fiscal year’s actual expenditure to estimate what percentage of the personnel budget would be unspent by the year’s end. Following City Council’s priority to recruit for safety personnel as well as utilizing outside consulting services to cover administrative vacancies have offset any unspent budget in FY 24. In an effort to reflect the City’s current personnel needs, the FY 25 expenditures does not include the 4% vacancy rate which was budgeted for in FY 23 and FY 24. This change results in an increased impact to the General Fund of approximately $4.4 million.

2. Contractual Services: Expenditures in the Contractual Services category are estimated to be almost $16.1 million, about 6.5% or $1.0 million more than the FY 24 year end estimate. Many of the expenditure increases proposed in FY 25 are due to increases in currently contracted services. In general, these costs cannot be reduced while maintaining the same level of service. The estimated increases in contractual obligations total approximately $1.0 million and are included in detail in Attachment A.

3. Miscellaneous Expenditure: Expenditures in the Miscellaneous Expenditures category are estimated to a little more than $640,000, about 144% or $380,000 more than the FY 24 year end estimate. Most of this increase is due to 2024 General Election costs, estimated to be about $250,000.

4. 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 FY 25, staff projects allocating a total of $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. For FY 25, indirect cost allocations are calculated based on the percentage of expenditures in relation to the total budget. The net impact to the General Fund is approximately $250,000 after considering both expenditures and revenues designated to fund these allocations.

5. 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 in order 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 in order to invest in public safety infrastructure. Combined, the FY 25 interest and principal payments for these bonds are scheduled to increase by just under $6,000, which is a 0.1% increase compared to FY 24.

6. Other Expenditure Categories, including Capital Outlay, are projected to decrease by $146,000 or 84%. The majority of this decrease is due to the reprioritization of departmental furniture replacement costs, which have been reallocated to other areas of the operating budget. Additionally, as part of the budget process, departments have submitted requests that communicate needs for ongoing programs and services. Departmental requests included in the FY 25 Proposed budget total almost $610,000, details included in Attachment A.

Based on the assumptions for the FY 25 revenues and expenditures, we are projecting an operating budget deficit of about $17.3 million.

Proposed General Fund Balance for FY 25

The beginning undesignated fund balance is expected to be negative $1.9 million. With the proposed expenditures exceeding revenues by almost $17.3 million and the required increase in catastrophic reserve, the end fund balance is projected to be negative $21.5 million. The following table highlights the Estimated Available General Fund Balance for FY 25:

Table 3: Proposed General Fund Balance

	FY 24 Year End Estimate	FY 25 Budget Study Session	Variance from FY 24 Year End Estimate
Estimated Beginning Undesignated Fund Balance - 7/1/2024	11,687	(1,920,869)	(1,932,556)
Revenues	137,712,388	144,006,541	6,294,153
Transfers-In	2,629,000	-	(2,629,000)
Total Revenues	140,341,388	144,006,541	3,665,153
Expenditures	142,810,866	161,236,003	18,425,137
Transfers Out	-	-	-
Total Expenditures	142,810,866	161,236,003	18,425,137
Carryovers from FY23	1,736,528	-	(1,736,528)
Estimated Ending Fund Balance - 6/30/2025	(721,263)	(19,150,331)	(18,429,068)
Catastrophic Reserve Designation	1,199,606	2,327,327	1,127,721
Estimated Undesignated Fund Balance - 6/30/2025	(1,920,869)	(21,477,658)	(19,556,789)

Table 4: Projected Catastrophic Reserve Balance

	FY 24 Year End Estimate	FY 25 Budget Study Session	Variance from FY 24 Year End Estimate
Estimated Beginning Reserve Balance at 7/1	22,506,997	23,706,604	1,199,606
Increase/(Decrease) to Reserve	1,199,606	2,327,327	1,127,720
Projected Ending Catastrophic Reserve Balance at 6/30/2025	23,706,604	26,033,931	2,327,327

The next study session is scheduled for April 16and will focus on the City’s Capital Improvement Program. Staff will incorporate the City Council’s directions and feedback received from the study sessions in the FY 25 Preliminary Budget for review during a regular City Council meeting in May.

7. ATTACHMENTS

• Attachment A

Legislation Details