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CC SR 20230406 02 - FY23-24 Budget Assumptions CITY COUNCIL MEETING DATE: 04/06/2023 AGENDA REPORT AGENDA HEADING: Regular Business AGENDA TITLE: Consideration and possible action to begin developing the FY 2023-24 Preliminary General Fund Budget. RECOMMENDED COUNCIL ACTIONS: 1. Review the budget assumptions used to develop the proposed FY 2023-24 General Fund Budget and provide Staff with direction on the following: • Affirming the FY 2023-24 budget assumptions, which include: i. Revenue projections and continuing the 3% Utility User Tax and 10% Golf Tax; ii. Personnel costs comprising of: 1. Affirming annual cost-of-living adjustment (COLA), performance merits, and benefits; 2. Funding recruitment incentives; 3. Continuing to fund the temporary part-time Staff Assistant I (Human Resources); 4. Adding one part-time Staff Assistant II (Recreation and Parks); 5. Adding one full-time Administrative Analyst I (Recreation and Parks); and, 6. Adding one full-time Account Clerk (Finance). 7. Funding partially for positions that are aligned with the Department’s recruitment schedule. 8. Continuing to underfill Accounting Supervisor (Finance). 9. Continuing to freeze Executive Assistant (City Manager’s Office). 10. Continuing to freeze GIS Coordinator in the Community Development Department. iii. Non-Personnel costs, including one-time expenditures and contingency budget for emergency repairs; and, iv. Transfers-Out that includes additional transfers to the Capital Infrastructure Program (CIP) Fund in accordance with the City Council Reserve Policy No. 41 and Employee Pension Service Fund in accordance with the Pension Guidelines. • Funding priorities for the projected surplus (projected revenues less projected expenditures) which may include: i. Additional funding for the City Council Goals; ii. Additional transfer to the CIP Fund; and/or iii. Establish a new Public Safety program. 1 Fiscal Impact: N/A Amount Budgeted: N/A Additional Appropriation: N/A Account Number(s): N/A ORIGINATED BY: Jason Loya, Senior Administrative Analyst Vina Ramos, Deputy Director of Finance REVIEWED BY: Trang Nguyen, Director of Finance APPROVED BY: Ara Mihranian, AICP, City Manager BACKGROUND: The City’s budget is a financial plan based on projected revenues and expenditures in a fiscal year starting July 1 through June 30. Each year, the budget is prepared by applying the City’s long tradition of fiscal responsibility and transparency, prioritizing public safety, and providing the highest possible service levels to the community. The annual budget cycle begins with the City Council Goals Workshop, and subsequently, Staff presents the proposed budget, which includes the General Fund budget assumptions for the following year. The framework for the budget assumptions starts with reviewing the mid -year and year- end figures, which then determines the City’s needs for the following year. Generally, prior to presenting them to the City Council, Staff reports the General Fund budget assumptions to the Finance Advisory Committee (FAC) and the capital projects to the Infrastructure Management Committee (IMAC). Overall, the City Council’s budget process consists of the following: In preparation of this second budget cycle meeting, the FY 2023-24 General Fund Budget Workshop, Staff has prepared a list of assumptions used to develop the Proposed General Fund budget. Similar to last year’s report, the City’s revenues for FY 2023-24 are expected to rebound and projected to surpass the pre -pandemic levels (FY 2018-19) by $6.7 million or 21%. Therefore, the budget assumptions were prepared with more available resources and a focus on the City’s needs for services, personnel, and Budget Adoption June 20 Budget Hearing June 6 Preliminary Budget May 16 Budget Workshops April 6 (GF) April 12 (CIP) City Council Goals Workshop March 15 2 maintenance for FY 2023-24. While the recovery of the City’s revenues indicates a positive result for the City, it should be noted that based on the average Consumer Price Index (CPI) for the past five years, the growth in revenues is still behind as a result of the pandemic. Over the past two months, several budget meetings were held between the City Manager, Director of Finance, and Department Heads to build the proposed budget. The goal is to build a budget that is balanced while weighing its future financial impact and addressing the City’s priorities for the community and organization. The meetings started with the baseline budget for FY 2023-24 by discussing the status of the current budget, year-end outlook, and the potential changes for services or programs that were approved by the City Council in the current year. Additional changes were also made to account for regulatory/mandated changes, contractual obligations, and the department’s operational requests, such as personnel needs, scheduled/emergency repairs and maintenance, support from professional services, training, equipment, and supplies. Based on the discussions from these meetings and with the final approval from the City Manager, Staff has prepared this staff report with an emphasis on the General Fund. On March 15, 2023, during the City Council Goals Workshop, the City Council directed Staff to return on April 4 with the updated FY 2023-24 City Council Goals and Action Plan. The budget allocation needed for the goals and action plan will be included in the Preliminary Budget if needed. In summary, the following information is presented tonight for the City Council’s review and direction: • FY 2022-23 General Fund Year-End Estimates • FY 2023-24 Revenue and Expenditure Assumptions • Recurring vs. One-time Revenues and Expenditures • FY 2023-24 Fund Balance Summary • Funding Priorities for Surplus DISCUSSION: FY 2022-23 General Fund Year-End Estimates Staff estimates that the year-end fund balance for the General Fund is $30.3 million, including transfers out. This is an increase of $2.9 million or 11% over the estimated ending fund balance from the revised budget. After applying the City Council Reserve Policy of $15.1 million or 50% of the operating budget, the estimated unrestricted excess reserve is $15.1 million, an increase of approximately $3.1 million or 26% of the estimated unrestricted excess reserve on June 30, 2023. As illustrated in Table 1 on the next page, the City’s revenues are estimated to end the year at approximately $1.5 million or 4% higher than budget. Moreover, the expenditures are estimated to end the year at almost $1.4 million or 4% lower than budget. A detailed analysis of the year-end report is available in a separate staff report that will also be presented tonight. 3 Table 1: FY 2022-23 General Fund – Fund Balance Summary FY 2023-24 General Fund Revenue Assumptions Overview A return to economic normalcy in 2021 led to moderate revenue growth in the General Fund and year-end actuals consistent with historical figures. As recovery efforts continued, the rising cost of goods and services due to inflation became an additional factor that contributed to the historical revenue growth observed in FY 2021-22. Compared to the prior year, FY 2021 -22 actuals increased by 19% and ended the year just below $36 million, excluding transfers. To maintain a more conservative outlook, the FY 2022-23 revenue budget remained relatively flat and closely aligned with the prior year’s actuals. Year-end estimates for FY 2022-23 are currently on pace to grow 4% over the revised budget. Actual revenues have performed above expectations on a month-over-month basis from August through December 2022. As a result, General Fund revenues rose by roughly $2.3 million, or 14%, above budget and totaled just over $18 million at the end of December. Despite this trend, however, ongoing contractionary efforts to slow down the economy played a vital role in the assumptions used to develop the FY 2023-24 proposed budget. In FY 2023-24, General Fund revenues are anticipated to reach nearly $38.7 million, including transfers. Based on current projections, FY 2023-24 revenues are expected to General Fund FY 2022-23 Revised Budget FY 2022-23 Year-End Estimates Estimated Beginning Fund Balance - 7/1/2022 30,391,900 30,391,900 Add: Revenues 35,737,000 37,266,500 1,529,500 4% Add: Transfers-In 300,000 300,000 - 0% Total Revenues 36,037,000 37,566,500 1,529,500 4% Less: Expenditures (32,476,674) (30,285,900) (2,190,774)-7% Less: Transfers to TOT (3,870,200) (4,686,000) 815,800 21% Less: Transfers to CIP - Additional (1,364,200) (1,364,200) - 0% Less: Other Transfers-Out (65,000) (65,000) - 0% Less: Additional Transfers - CIP Ladera (PY Surplus) (889,500) (889,500)- 0% Less: Transfers to Pension (PY Surplus) (400,000) (400,000)- 0% Total Expenditures (39,065,574) (37,690,600) (1,374,974) -4% Estimated Ending Fund Balance - 6/30/2023 27,363,326 30,267,800 2,904,474 11% Less: 50% Reserve Policy (15,363,800) (15,142,950) (220,850)-1% Estimated Unrestricted Excess/(Deficit) Reserve - 06/30/23 11,999,526 15,124,850 3,125,324 26% Increase/(Decrease) from Revised Budget 4 exceed the FY 2022-23 revised budget by $2.6 million, or 7%, and year-end estimates by $1.1 million, or 3%. With respect to the ongoing economic uncertainty, the proposed budget anticipates declining growth rates in various industries coupled with ongoing trends and historical figures. Staff will remain apprised of changing economic conditions and provide updated information and material changes throughout the budget cycle. Below is a detailed discussion and analysis of the General Fund’s major revenue sources. Property Tax Property Tax represents the largest and most stable revenue source in the General Fund. Given its historically stable growth rates, the proposed budget anticipates property tax revenues to reach over $17.2 million, an increase of $842,700, or 5%, over the FY 2022- 23 revised budget. Compared to year-end estimates, FY 2023-24 proposed revenues reflect a similar increase of approximately $80 8,700, or 5%. Revenue growth is associated with assessed property values which typically increase each year at a rate no greater than 2%. Additional growth can come from home sales which trigger property reassessments and Proposition 8 value recaptures. There are three primary factors that determine the annual change in property tax revenue received by the City: • Inflation (Based on the California Consumer Price Index – CCPI) All properties not reduced by Proposition 8 are subject to a maximum CCPI increase of 2% annually. For FY 2023-24, the County Assessor will be applying a 2% increase to these properties resulting in a $302 million increase in real property value within the City. • Transfer of Ownership (Sale of property to a new owner) For properties that have sold between January and December 202 2, the increase in value has been factored into the property tax revenue calculation and provided an additional $445 million in property value. • Proposition 8 Recapture (Additional increase in assessed property value) Proposition 8 allows for properties that have experienced a decrease in value due to a downturn in the housing market to have the value used in the calculation of their property tax be based on the current market price. As home values recover, properties that received this relief can experience an annual increase in assessed value at a rate greater than the 2% CPI limit mentioned above. This recapture in value accounted for an additional $11 million in property value. The three factors mentioned above, plus several other factors used in the calculation of property tax, combined to make an expected 5% increase in overall property value. This increase, plus property tax transfer revenue generated when a property is sold, property tax revenue received in lieu of vehicle license fees, and other small revenue sources , were used in creating the projection of almost $17.2 million for FY 2023-24. 5 Property Taxes FY 21-22 Actual Revenue: $15,741,842 FY 22-23 Year-end Estimate: $16,440,800 FY 23-24 Proposed Budget: $17,249,500 FY 23-24 Net Change to YE Estimate: +$808,700 (5%) Transient Occupancy Tax (TOT) TOT is regarded as the second largest revenue source in the General Fund. TOT revenue from Terranea accounts for $6.5 million, or 97%, of the $6.7 million proposed in FY 2023 - 24. The remaining 3% is comprised of miscellaneous hotel tax revenues. In total, proposed revenues are projected to rise above the FY 2022 -23 revised budget by $934,600, or 16%. This notable variance pertained to the substantial and unanticipated rebound experienced in the hotel sector during the second quarter of 2022 and led to the largest amount of TOT revenue received on record. As this upward trend meets a slowing economy, proposed revenues are more narrowly forecasted to top FY 2022-23 year-end estimates by $110,900, or 2%. Transient Occupancy Tax FY 21-22 Actual Revenue: $6,170,132 FY 22-23 Year-end Estimate: $6,573,800 FY 23-24 Proposed Budget: $6,684,700 FY 23-24 Net Change to YE Estimate: +$110,900 (2%) Sales and Use Tax Sales Tax revenues are likely to reach almost $2.9 million in the FY 2023 -24 proposed budget. Proposed revenues are projected to increase by roughly $16 8,600, or 6%, compared to the prior year’s revised budget. Nevertheless, the latest statewide forecast indicates that the overall growth rate will decline from 4% in the current fiscal year to 0.4% in the upcoming fiscal year. Considering a relatively flat growth rate, proposed revenues slightly rose over FY 2022-23 year-end estimates by approximately $11,400. This forecast reflects the likelihood of an economic downturn and changes in consumer sentiment related to discretionary spending. Sales and Use Tax FY 21-22 Actual Revenue: $2,782,443 FY 22-23 Year-end Estimate: $2,844,400 FY 23-24 Proposed Budget: $2,855,800 FY 23-24 Net Change to YE Estimate: +$11,400 (0.4%) Permits and Fees 6 This revenue source is comprised of various permit and fee types such as building and safety permits, plan check permits, planning and zoning permits, animal licenses, and other miscellaneous permits. The Community Development Department brings in around 95% of all license and permit revenues which can vary year-to-year due to the variety of sources. A proposed total of nearly $3.2 million in FY 2023-24 points toward an increase in revenue of roughly $93,900, or 3%, above the revised budget. Staff also anticipates a decrease of approximately $253,700, or -7%, below the FY 2022-23 year-end estimate to adjust for a decline in backlogged permit activity post-pandemic. Additionally, Staff will take the Master Fee Schedule to the City Council on May 2, 2023 for possible consideration of adjustments in permit fees based on the Consumer Price Index (CPI). If an increase is approved, budget figures will be updated to reflect any material changes and incorporated into the FY 2023-24 Preliminary Budget. Permits and Fees FY 21-22 Actual Revenue: $3,338,328 FY 22-23 Year-end Estimate: $3,425,200 FY 23-24 Proposed Budget: $3,171,500 FY 23-24 Net Change to YE Estimate: -$253,700 (-7%) Franchise Tax The City receives payments from franchisees for the use of municipal rights-of-way from vendors such as EDCO, Cox, and Southern California Gas Company. Staff analyzes historical data and reviews industry projections as the basis for annual assumptions. To that end, franchise tax revenue is slated to increase slightly above the FY 2022-23 revised budget to a total of $2.2 million in FY 2023-24. Compared to the FY 2022-23 revised budget and year-end estimates, proposed revenues are forecasted to grow by $50,000. Based on the current forecast, FY 2023-24 revenue is expected to grow by approximately 2% over the upcoming fiscal year. Staff will monitor the trend in revenues and provide updates as they become available. Franchise Taxes FY 21-22 Actual Revenue: $2,278,003 FY 22-23 Year-end Estimate: $2,150,000 FY 23-24 Proposed Budget: $2,200,000 FY 23-24 Net Change to YE Estimate: +$50,000 (2%) Utility User Tax (UUT) UUT is dependent on external factors, including weather conditions, consumption of utilities, natural gas prices, and rate increases. Staff uses historical data and estimates from the Bureau of Labor Statistics for CPI to establish baseline assumptions. As proposed, revenues are expected to grow $281,000, or 13%, higher than the FY 2022-23 revised budget to a total of $2.5 million. Compared to year-end estimates, proposed UUT revenues indicate a more moderate growth rate of 2%. 7 UUT FY 21-22 Actual Revenue: $2,525,992 FY 22-23 Year-end Estimate: $2,431,800 FY 23-24 Proposed Budget: $2,482,200 FY 23-24 Net Change to YE Estimate: +$50,400 (2%) At this time, the UUT rate of 3% continues to be a necessary revenue source for the City’s operating needs and is therefore included in the FY 2023-24 budget assumptions. Staff is requesting the City Council’s affirmation on maintaining the 3% Utility User Tax for FY 2023-24. Other Taxes and Miscellaneous Revenues Other Revenue consists of over 20 unique revenue sources, including business license tax, golf tax, interest earnings, rental/lease, parking lot fees, and one-time revenues/donations. Total revenues can vary widely from year to year due to the variety of revenue sources included in this category. Current estimates indicate growth of 8%, or 273,800, and 10%, or $337,400, over the FY 2022-23 revised budget and year-end estimates, respectively. Persistent inflation has led to higher prices, and, therefore, a higher tax base for revenue sources such as the golf tax. Recreation programs and events, alongside rental and lease activity, have also returned to traditional levels, adding to a growing revenue base. Given these assumptions, FY 2023-24 proposed revenues total just over $3.7 million. Other Taxes and Miscellaneous Revenues FY 21-22 Actual Revenue: $3,074,704 FY 22-23 Year-end Estimate: $3,400,500 FY 23-24 Proposed Budget: $3,737,900 FY 23-24 Net Change to YE Estimate: +$337,400 (10%) According to the Rancho Palos Verdes Municipal Code (RPVMC) Section 3.40.140, a legislative review of the Golf Tax is required every four years and must be completed prior to adopting the budget prepared for the corresponding next fiscal year. On June 4, 2019, the City Council approved the Golf Tax rate of 10% for FY 2019-20. The Golf Tax ordinance directs the City Council to determine, based on the needs of the City, if any modification to the tax rate is necessary or if the tax should be repealed. The current estimate of FY 2023-24 Golf Tax revenue is $700,000. Based upon the operating needs of the City, Staff recommends that the City Council affirm that the current Golf Tax rate of 10% continues to be a necessary General Fund revenue source to provide current program service levels. 8 In summary, as shown in Table 2, revenues are projected to increase by almost $1.1 million, or 3%, over current year-end estimates, bringing the total FY 2023-24 General Fund revenue budget to nearly $38.7 million, including transfers. As illustrated in Charts 1 and 2, Property Tax represents the largest revenue source in the General Fund and accounts for 45% of the proposed revenue. TOT holds its position as the second largest revenue source and amounts to 17% of the General Fund. Additionally, Chart 2 provides an overview of major revenue sources by type in proportion to total General Fund revenue, excluding transfers. Table 2: FY 2023-24 Proposed General Fund Revenues Chart 1: FY 2023-24 Proposed General Fund Revenues FY 2021-22 Revenue Source Actuals Revised Budget Year-End Estimates Proposed Budget Property Tax 15,741,842$ 16,406,800$ 16,440,800$ 17,249,500$ 808,700$ 5% Transient Occupancy Tax 6,170,132 5,750,100 6,573,800 6,684,700 110,900 2% Sales Tax 2,782,443 2,687,200 2,844,400 2,855,800 11,400 0% Permits & Fees 3,338,328 3,077,600 3,425,200 3,171,500 (253,700) -7% Franchise Tax 2,278,003 2,150,000 2,150,000 2,200,000 50,000 2% Utility Users Tax 2,525,992 2,201,200 2,431,800 2,482,200 50,400 2% Other Taxes & Misc. Revenues 3,074,704 3,464,100 3,400,500 3,737,900 337,400 10% Subtotal 35,911,444 35,737,000 37,266,500 38,381,600 1,115,100 3% Transfers In 310,000 300,000 300,000 270,000 (30,000) 0% Total 36,221,444$ 36,037,000$ 37,566,500$ 38,651,600$ 1,085,100$ 3% FY 2022-23 Variance to YE Estimate FY 2023-24 9 Chart 2: FY 2023-24 Proposed General Fund Revenues FY 2023-24 General Fund Expenditure Assumptions 10 Overview The proposed budget for General Fund expenditures before transfers-out is $33.5 million, an increase of $1 million or 3% over FY 2022-23 revised budget. When compared to the FY 2022-23 year-end estimates, the proposed budget shows an increase of $3.2 million or 11%. Additionally, the transfers-out is estimated at $4.3 million, a decrease of almost $1.9 million or 30% over the FY 2022-23 revised budget of $2.3 million or -35% over the FY 2022-23 year-end estimates. Overall, the General Fund’s proposed expenditures budget, including transfers out, is almost $37.8 million, a decrease of $1.3 million or -3% over FY 2022-23 revised budget. In comparison to the FY 2022-23 year-end estimates, the proposed budget is lower by $69,000 or less than -1%. The development of the FY 2023-24 budget assumptions continues to include restoring the pre-pandemic service level along with the anticipated needs in FY 2023-24, expenditures related to the City Council Goals, department needs for personnel, transfers-out based on City Council Policy No. 41 Reserve Policy, regulatory and mandated changes, contractual obligations including CPI increases, and one -time costs for new projects/programs. As illustrated in Table 3 below, the major increases from expenditure categories are the following: • New rates from the Los Angeles County Sheriff for public safety services . • Salaries and benefits based on labor agreements. • CPI increases for consultants, repairs, maintenance, and supplies. • Utility costs primarily increase to water costs. • One-time expenditures including: o Building maintenance and repairs (City Hall) o Parks and open space trash receptacles o City’s 50th anniversary celebration o Implementation of the Housing Element including proposed zone changes, Affordable Accessory Dwelling Units Incentive Program, Housing Conservation and Rehabilitation o Contingency budget for emergency events requiring repairs and/or replacement. 11 Table 3: FY 2023-24 Proposed General Fund Expenditures A detailed analysis highlighting the budget assumptions that were used to prepare the General Fund proposed expenditures in FY 2023-24 are discussed below. To illustrate the overall financial operational needs in a fiscal year, the analysis of expenditures focuses on comparing the FY 2023-24 proposed expenditures and FY 2022-23 revised budget instead of FY 2022-23 year-end estimates. The year-end estimates were not used in the analysis as it excludes unfilled/vacant positions and projects and programs that are deemed unfinished by year-end. Personnel Costs Personnel costs account for the salaries and benefits for City employees, including full - time, part-time, and stipend for the City Council and Planning Commissioners. Overall, based on the assumptions, the personnel budget is estimated at almost $13.5 million or 40% of the budget, before transfers out. This is an increase of $656,500 or 5.1% over FY 2022-23 revised budget, which is highlighted below. Personnel Costs FY 22-23 Revised Budget: $12,804,800 FY 22-23 Year-end Estimate: $10,909,200 FY 23-24 Proposed Budget: $13,461,300 FY 23-24 Net Change to FY 22-23 Revised Budget: +$656,500 or 5.1% FY 2021-22 FY 2022-23 FY 2023-24 Expenditure Category Actuals Revised Budget Year-End Estimates Proposed Budget Change to FY 2022-23 Revised Budget Salaries 7,485,648 9,392,920 7,876,100 9,696,300 303,380 3% Benefits 2,917,883 3,411,900 3,033,100 3,765,000 353,100 10% Sheriff's Contract 6,985,320 7,254,000 7,140,000 7,872,000 618,000 9% Legal Services 910,480 940,000 900,000 940,000 0 0% Supplies 496,310 621,028 583,700 693,400 72,372 12% Professional/Tech 2,649,256 3,733,990 3,775,000 3,984,900 250,910 7% Repairs and Maintenance 1,731,038 3,279,428 3,061,900 3,635,200 355,772 11% Training/Conference 233,563 380,543 288,000 414,800 34,257 9% Misc. Expense Capital Outlay 444,539 1,090,115 1,089,000 26,000 (1,064,115)-98% Equipment Replacement Charges 308,400 292,200 290,900 246,900 (45,300)-16% General Liabilities Insurance 737,134 840,000 703,100 800,000 (40,000)-5% Utilities 919,588 671,300 926,400 993,400 322,100 48% Other 384,635 569,250 618,700 438,800 (130,450)-23% Subtotal 26,203,794 32,476,674 30,285,900 33,506,700 1,030,026 3% Transfers-Out 5,424,515 6,588,900 7,404,700 4,252,800 (2,336,100) -35% Total 31,628,309 39,065,574 37,690,600 37,759,500 (1,306,074) -3% 12 Chart 3 is a summary of the major budget assumptions accounting for the $13.5 million in salaries and benefits for each department: Chart 3: FY 2023-24 Personnel Costs per Department On the following page is a detailed discussion and analysis of the General Fund’s salaries and benefits. 13 Salaries In September 2021, the City Council awarded a contract services agreement with Public Sector Personnel Consultants (PSPC) to conduct a comprehensive classification and compensation study and organizational review for all full-time and part-time employees. It is currently unidentified if there will be a fiscal impact from the study. Staff expect s to complete this process and report the results back to the City Council in the next few months. Additionally, on June 21, 2022, the City Council adopted Resolution No. 2022- 42 Tentative Agreement (TA) for a Successor Memorandum of Understanding (MOU) between the City of Rancho Palos Verdes and the Rancho of Palos Verdes Employees Association (RPVEA) for the period of July 1, 2022 through June 30, 2025. Hence, the proposed budget includes personnel assumptions based on the TA. Moreover, the personnel assumptions include salaries for the City Manager, management positions, confidential positions, and part-time positions. Based on the current information, the estimated budget for salaries in FY 2023-24 is approximately $9.7 million, a projected increase of approximately $303,400 or 3% over the FY 2022-23 revised budget. The following highlights the personnel requests and major changes between the FY 2022- 23 revised budget and the proposed FY 2023-24 budget. • Includes budgeting all existing and approved competitive, confidential, and management positions at 100% except for the positions listed below. The funding needs are aligned with the recruitment schedule as recommended by the Departments. o Building Inspector II - funded at 75% o Deputy City Clerk – funded at 75% o Associate Engineer (2 positions) - funded at 75% o Assistant Engineer - funded at 50% • $218,200 accounts for COLA and merit increase for all full-time employees, including competitive positions, confidential positions, and management positions. Per the City’s TA with RPVEA, COLA is estimated at 3%, which is the maximum percentage based as measured by CPI-U reported by the U.S. Bureau of Labor Statistics for the Los Angeles-Long Beach-Anaheim, California metropolitan area covering the prior twelve-month period March to March each year. The CPI-U for February is 5.1%, and the CPI-U for March will be released in mid-April. Moreover, the budget assumption for merit increase is estimated at an average of 4.5%. The merit increase is based on employee’s performance evaluation ranging from 1% to 6% per the City’s MOU with RPVEA. • $126,300 is a placeholder for COLA and merit increase for all part-time employees. The City is currently in the process of the collective bargaining process with the American Federation of State, County, and Municipal Employees (AFSCME). Staff 14 will continue to provide an update on the results from the bargaining process once the information and final financial impact becomes available. o $45,000 for Human Resources for a temporary part-time Staff Assistant I. At this time, this temporary position will continue to provide administrative support for Human Resources including processing of department mail and responding to emails and phone calls; scheduling and coordinating logistics of training; maintaining employee personnel files; assisting in the onboarding of new employees and transitioning to their new position; overseeing employee events and annual employee recognition; and assisting with initial contact regarding leave administration and benefit administration. An assessment will be made in the year to come, after a vacant position in the Human Resources Division is filled, on the need to convert this position to a permanent classification. o Finance Department requests to add a full-time Account Clerk position. During the FY 2022-23 budget process, the City Council approved the Staff’s recommendation of a temporary solution by increasing the number of hours for the Staff Assistant I. As reported at that time, the Finance Department will come back in this year’s budget process after reassessing the Department’s needs for a permanent solution. In lieu of two Staff Assistant I part-time positions, the Finance Department proposes a new full-time position as this would improve continuity for the Department and help manage the increasing level of support needed from citywide departments and customers. The increased levels of support include centralized cashiering, purchasing, and general accounting. The full-time position will also help the Department sustain adequate Staff coverage when needed. The current salary range for the Account Clerk is $54,557 - $70,832. Staff estimates an increase of approximately $14,900 in salaries from the current part-time Staff Assistant I position to Account Clerk. However, the increase is offset by not funding the two part-time Staff Assistant I positions. o $81,600 for the Recreation and Parks Department for adding a full-time Administrative Analyst I and a part-time Staff Assistant II. The Administrative Analyst I position will be supporting the Open Space Division (OSM) efforts for projects and programs such as Management Agreement between the City and the Palos Verdes Peninsula Land Conservancy, Trails Network Plan, CityWorks Maintenance Program, Preserve Project Management, and providing analytical support for City Council Goals. The other proposed position is part-time Staff Assistant II, which will provide administrative support to the Department. Additionally, the proposed position will provide support to other departments and citywide efforts related to events and public response efforts. The current salary range for Administrative Analyst I is $70,605-$91,692, and the range for the hourly rate of Staff Assistant II is $26.16-$33.97. Staff estimates an increase of approximately $117,900 for the two positions. The net increase is further reduced to $81,600 after removing the budget for two vacant Recreation Specialist positions for OSM and Recreation and Parks Administration. 15 o $25,000 for the Recruitment Incentive Program. Beginning in FY 2021-22, the City Council approved the allocation of $60,000 for the Recruitment Incentive Program which is currently underway. The program is intended to incentivize and secure highly qualified employees for difficult-to-recruit positions. Staff requests $25,000 for FY 2023-24 based on projected recruitments. • In the past few years, several vacant positions have been frozen and underfilled and are excluded from the current budget. While most positions have now been restored, the following positions continue to remain frozen in the budget assumptions for FY 2023-24: • Executive Assistant in the City Manager’s Office • GIS Coordinator in the Community Development Department • Accounting Supervisor in the Finance Department (underfilled) Management will continue to reassess the department’s needs in the coming fiscal year, and any changes will be reported to the City Council for approval during the annual budget workshops. As described above, Staff seeks the City Council’s affirmation on the salaries budget assumptions, which include the estimated rates for all existing and approved competitive, confidential, and management positions, part-time positions, COLA, and merits. Staff also seeks affirmation to partially fund positions aligned with the recruitment schedule for Building Inspector II at 75%, Deputy City Clerk at 75%, two Associate Engineers at 75%, and 50% for the Assistant Engineer. Moreover, Staff seeks affirmation to continue the funding for the temporary part-time Staff Assistant I position (Human Resources), add a full-time Account Clerk position (Finance Department), add a full-time position Administrative Analyst I (Recreation and Parks – Open Space Management), add a part- time Staff Assistant II position (Recreation and Parks), add a budget for Recruitment Incentive Program, freeze GIS Coordinator (Community Development), continue to freeze Executive Assistant (City Administration), underfill Accounting Supervisor (Finance), no budget for two part-time Staff Assistants I (Finance), and no budget for two Recreation Specialists (Recreation and Parks). Benefits The projected Benefits for FY 2023-24 Proposed Budget is approximately $3.8 million, with an increase of approximately $353,100 or 10% over the FY 2022-23 revised budget. The major highlights for the budget assumptions to develop benefits of $3.8 million for FY 2023-24 are as follow: • $2.0 million for health, dental, vision, worker’s compensation, Medicare, retirement health savings, and other ancillary benefits such as group term life insurance. Compared to the prior year’s revised budget, these line items increased by $149,000 or 8%. The increases are mainly from the estimated cost increases for health benefits, contribution to Health Savings Account (HSA) aligned with the 16 same amounts established by the Internal Revenue Service (IRS), and adding benefits for filled positions that were previously vacant. • $889,200 for the CalPERS normal rate payment, an increase of $198,000 or 36% over the FY 2022-23 revised budget. The payment is the City’s normal cost for current employees that are in Tier 1, Tier 2, and Tier 3. The majority of the increase is from Tier 1 based on the required normal rate and Tier 2 by adding the budget for filled positions that were previously vacant. The payments summary for each Tier are: o Tier 1: Rate increased from 12.21% to 14.02% for $331,200 or 37% o Tier 2: Rate increased from 8.63% to 10.03% for $313,600 or 35% o Tier 3: Rate increased from 7.47% to 7.68% for $244,400 or 27% • $1.0 million for the CalPERS Unfunded Accrued Liability (UAL) payment for Tier 1. Compared to last year’s revised budget, this is a decrease of $106,000 or -9%. The payment is the City’s unfunded liability, inclusive of current employees and retired employees that are in Tier 1, Tier 2, and Tier 3, and are as follows: Tier 1: Rate increased from 9.94% to 12.09% for $1.1 million or 100% Tier 2: Rate decreased from 0.61% to 0% Tier 3: Rate decreased from 0.31% to 0% • In accordance with the City’s Pension Guideline adopted in FY 2020 -21, the Employee Pension Plan Service Fund must relieve the General Fund of UAL payments in excess of $900,000. As such, relieving the FY 2023-24 General Fund of $135,700 to offset the increases in the benefits category. Staff seeks the City Council’s affirmation on the budget assumptions used for benefits as defined above. Also, in accordance with the City Council-adopted Pension Guidelines, Staff seeks City Council affirmation with the utilization of the Employee Pension Service Fund to relieve the General Fund of $135,700 from the rising cost of the CalPERS annual payment of the unfunded liability in FY 2023-24. Non-Personnel Costs The non-personnel category includes the Los Angeles County Sheriff contract, legal services, professional and technical services, repairs and maintenance, supplies, training and conferences, utilities, and miscellaneous/other expenses. This category represents $20 million, or 60% of the proposed budget, before transfers out. As illustrated below, the FY 2023-24 proposed budget includes an increase of $373,600 or 2% over FY 2022-23 revised budget. Non-Personnel Costs FY 22-23 Revised Budget: $19,671,854 FY 22-23 Year-end Estimate: $19,376,700 17 FY 23-24 Proposed Budget: $20,045,400 FY 23-24 Net Change to FY 22-23 Revised Budget: +$373,600 or +2.0% Below are major highlights of the budget assumptions used to develop the non-personnel budget of $20.0 million. The amounts listed and the percentage to budget per category are based on the proposed budget, before transfers-out. Public Safety Los Angeles Sheriff Department Contract: • Accounts for $7,872,000 or 23% of the proposed budget. • Includes a contract increase of $618,000 or 9% over FY 2022-23 contract. • The increase includes estimated current Cost of Living Adjustment (COLA) and COLAs from prior years. • Current contract is in the process; therefore, Staff will update the City Council once more information becomes available. Special Programs • Special Programs for $143,000, including School Resource Officers for outreach and education at Peninsula schools, Neighborhood Public Safety Grant Program providing reimbursements to neighborhoods for the installation of safety - enhancing tools and technologies, administration for the parking citations program, and Everbridge emergency notification software. • Supplemental Program for $70,000 for funding for additional miscellaneous supplemental (overtime) patrol around the City by the Sheriff’s Department as needed or as requested, including crime suppression, specialized traffic patrols, and fireworks suppression. Legal Services • Accounts for $940,000 or 3% of the proposed budget. • The proposed budget is the same amount as FY 2022-23. • Includes general legal services, code enforcement, litigation, labor negotiation, and legal services related to public records act requests. Professional and Technical Services • Accounts for almost $4 million or 12% of the proposed budget. • Majority of this category includes managed information technolog y services, engineering, environmental planning services, code enforcement related services, flagging/crossing guard services, recreation program instructors, special events, inspections, the peafowl program, other legal services, audit services, and other miscellaneous consulting services. • The proposed budget is higher than the current budget by approximately $814,100. After reducing the one-time costs of $563,200 that are no longer needed, the net increase for this account from the prior year’s budget is approximately $251,000 18 or 6.7%. Summarized below are the increases based on City’s operational needs, emergency/contingency budget, and projected one-time costs. i. $271,400 (Public Works) added for the storm water quality monitoring programs. ii. $110,000 (Non-Department) added for emergency services (as needed): • $100,000 for a contingency budget for emergency events requiring unanticipated services. • $10,000 for a contingency budget for Point Vicente Interpretive Center (PVIC) Exhibit for unforeseen services. iii. $409,000 for one-time costs: • $6,000 (City Administration) for the development of a Peninsula-wide emergency evacuation website currently referred to as Zonehaven. • $216,000 (Community Development) for professional services associated with the 6th Cycle Housing Element Update which includes program analysis, research, and implementation. This also includes ongoing coordination and public outreach such as Incremental Infill Housing Program, Accessory Dwelling Unit (ADU) Programs, Fair Housing, and Zoning Amendment to remove Governmental constraints. • $52,000 (Community Development) for the Residential Rehabilitation Program-Housing Element Program No. 19 in support of home conservation. Staff is proposing to budget for this program, but will explore alternative funding sources, such as CDBG funds, as the primary source of funding to reduce costs borne by the General Fund. • $75,000 (Community Development) for the ADU Incentive Program - Housing Element Program No. 6 in support of ADU development. Similar to the above bullet point, Staff is proposing to budget for this program, but will explore alternative funding sources, such as CDBG funds, as the primary source of funding to reduce costs borne by the General Fund. • $50,000 (Non-Department) for the Drone Show as part of the City’s 50th anniversary celebration at the Fourth of July celebration. 19 • $10,000 (Recreation and Parks) for the Civic Works software integration to support public service requests for Open Space Management. iv. $23,700 is from increases in professional and technical contracts based on CPI, such as auditing services, playground inspection services, and lobbying consulting services. Repairs and Maintenance • Accounts for $3.6 million or 11% of the proposed budget. • The majority of this category includes licensing and support for technology services, tree trimming, landscape and median maintenance, fuel modification, traffic control, custodial, graffiti abatement, and building and park maintenance. • The proposed budget increased approximately by $615,200 or 19% from the prior year’s revised budget. After deducting the one-time costs of $259,500 that are no longer needed, the net increase for this account from the prior year’s budget is approximately $355,800 or 11%. Below are the majority of line items that increased from the prior year. i. $70,000 (Non-Department) added for emergency services (as needed for the coming fiscal year): • $20,000 vehicle collision repairs for the Open Space Management. • $50,0000 unexpected building repairs. ii. $208,000 for one-time costs: • $20,000 (Public Works) for manhole repairs at PVIC. • $188,000 (Public Works) for general maintenance and repairs at city hall. The scope of the project includes such repairs as painting and new carpeting intended to sustain operations in the existing building for at least 5 more years. Moreover, improvements may be used by future tenants if a new City Hall is constructed. At this time, the amount does not include the necessary abatement costs. For a more accurate amount, Staff will present a staff report to the City Council for the final amount and, if needed, a request for additional appropriation when the contract is ready for approval. • In addition to the items above, the majority of the items included in the proposed budget in this category are the following: i. $455,000 fuel modification (hand trimming) ii. $325, 000 fuel modification (fire grazers) iii. $635,000 landscape maintenance at city parks iv. $315,000 street landscaping and tree maintenance 20 v. $60,0000 trail maintenance services including the recently acquired Lower Filiorum Reserve and the temporary closed trails at Sacred Cove. vi. $465,400 information technology maintenance services vii. $310,000 on-going building maintenance such as custodial services, building security, park and gate security, heating, ventilation, air conditioning, pest control, and electrical. Utilities • Accounts for almost $1.0 million or 3% of the proposed budget. • Includes water, electricity, and gas. • The proposed budget is higher than the current budget by approximately $322,000 or 48%. • The increase is a combination of higher water rates and higher water usage compared to the prior year. The increase in usage is mainly due to improving the appearance of City’s parks, medians, and City roadways in response to public requests. Supplies, Training, and Conference, Miscellaneous Expense • The remaining non-personnel costs are supplies, training and conference, and miscellaneous expenses, which represent $2.6 million or 8% of the proposed budget. The main decrease is from one-time costs in FY 2022-23. • The one-time costs included in the proposed budget are the following: i. $50,000 (Public Works) for new trash receptacles for parks, trails, and open space, and streets. • Some of the major items under the miscellaneous category are: i. $800,00 for the City’s insurance premium payments for general liabilities, property dames, and pollution. ii. $246,900 for equipment replacement charges. These are charges to the departments based on an equipment replacement schedule. The accumulation of the charges is recorded in the City’s internal service fund for future use. iii. $190,000 for the property assessments of City-owned parcels paid to the Klondike Canyon Landslide Abatement District and Abalone Cove Landslide Abatement District. iv. $150,000 for the City’s 50th Anniversary celebration events such as Fourth of July celebration and drone show, Sister City Cultural Event, and 50th anniversary celebration dinner banquet at Terranea. 21 • The proposed budget shows a decrease of approximately $109,100 or -4% from the prior year’s revised budget. The decrease is mainly from one-time costs from the 50th anniversary celebration that was completed in the current fiscal year and lower equipment replacement charges based on the equipment replacement schedule. Capital Outlay • Accounts for almost $26,000 or less than 1% of the proposed budget. • This account decreased by almost $1.1 million from the prior year’s budget , mainly from the one-time cost that is no longer needed FY 2023-24. The one-time cost of almost $1 million in FY 2022-23 is the purchase of certain real properties commonly known as the Lower Filiorum and Plumtree properties. Staff seeks City Council affirmation for non-personnel budget assumptions used for the annual operating expenditures described above, including one-time expenditures and contingency budget for emergency repairs as summarized below: • One-time costs: Housing Element Update, Peninsula-wide emergency evacuation website (Zonehaven), 50th Anniversary Celebration, CivicWorks supporting public service requests, PVIC manhole repairs, repairs and maintenance for City Hall, trail construction and repairs, new trash receptables for parks, trails, and open space. • Contingency budget for emergency repairs: Unanticipated emergency repairs, as needed such as building repairs, vehicle collision repairs for Open Space Vehicles, and other miscellaneous emergency repairs. Transfers Out Transfers Out from General Fund are interfund transfers such as transfers to the CIP, Employee Pension Service Plan Fund, and other funds such as the City’s Improvement Authority for Portuguese Bend and Sub-region One, as described in detail below. • Transfer Out to CIP The transfer out of General Fund revenue to the CIP Fund has been a factor of the City’s public safety contract with the Los Angeles County Sheriff’s Department since FY 2017- 18. In FY 2017-18, with the City Council’s goal to continue enhancing public safety services for the residents of Rancho Palos Verdes, the City Council approved reducing the TOT transfers to the CIP Fund by the cumulative annual increases in the public safety contract. As a result, the cost increases of the public safety contract reduced t he transfers to the CIP. For FY 2023-24, Staff estimates to receive approximately $6.5 million in TOT revenue from the Terranea Resort. Based on this estimate, the TOT transfer to the CIP Fund is approximately $4.2 million or 11% of the proposed budget. This amount is the net amount 22 after applying the cumulative annual increases (since FY 2017-18) of almost $2.3 million in the public safety contract as illustrated in Table 4 below. Based on the current information received from the Los Angeles She riff’s Department, the estimated increase in FY 2023-24 is $618,000 or 9% over FY 2022-23 contract. Table 4: FY 2023-24 Transfers Out to CIP Additionally, in accordance with the City Council Reserve Policy No. 41, the City may transfer to the CIP Fund all or a percentage of the prior year’s unrestricted excess reserve in General Fund (FY 2021-22) in the amount of $15.7 million. As such, to the same as FY 2022-23, Staff recommends transferring $889,500 or 6% of the prior year’s estimated unrestricted excess reserve of almost $12 million to the CIP fund. This amount is equivalent to the anticipated annual interest expense payment for the Ladera Community Park Project. Staff seeks City Council affirmation on the additional transfer of $889,500 in accordance with the City Council Reserve Policy No. 41 for the annual payment for the Ladera Linda Community Park Project. • Transfers Out to Employee Pension Service Fund On February 2, 2021, the City Council approved the CalPERS Pension Plan Guidelines which provides a financial plan to address the City’s outstanding pension liability and CalPERS’ continuous change in valuation methodology. Based on City Council’s discretion, the goal is to transfer funds to the Employee Pension Service Fund of at least 10% but no more than 25% of the annual General Fund surplus (revenues minus expenditures, including transfers). As a result, the accumulated funds in the Employee Pension Service Fund would then relieve the General Fund of payment more than $900,000 of the City’s UAL. Since the inception of the pension guidelines, the Employee Service Fund has an estimated fund balance of approximately $1 million ending FY 2022-23. Based on the estimated year-end results of FY 2022-23, the City’s surplus (revenues minus FY 2023-24 TOT Estimates (Terranea)6,455,700$ Less Public Safety Increases:(2,277,900) FY 2017-2018: ($893,000) FY 2018-2019: ($200,500) FY 2019-2020: ($260,800) FY 2020-2021: ($101,000) FY 2021-2022: ($100,900) FY 2022-2023: ($103,700) FY 2023-2024: ($618,000) FY 2023-24 Proposed Budget - Transfer to CIP (TOT)4,177,800$ 23 expenditures including transfers) is almost $1.2 million. Therefore, Staff is proposing the maximum transfer allowed of $291,300 or 25% of the surplus from the General Fund to Employee Pension Service Fund in FY 2023-24. Staff seeks City Council affirmation on the transfer of $291,300 to the Employee Pension Service Fund in accordance with the adopted Pension Guidelines. • Other Miscellaneous Transfers Out The transfers out for Sub-region One and the Improvement Authority are intended to cover annual maintenance charges and to maintain endowment requirements. Since the estimated interest earned in the funds are not enough to cover the costs incurred in these funds, the General Fund will need to transfer funds to subsidize Sub -region One in the amount of $60,000 and the Improvement Authority for Portuguese Bend for $15,000. This is an increase of $10,000 or 20% over revised budget for Sub-Region One and no change for the Improvement Authority Portuguese Bend from the prior year’s revised budget. In closing on expenditures, the following Charts 4 and 5 show the General Fund expenditures by type and department and their respective contribution in percentage (%) terms to the City’s overall total expenditures. Chart 4: FY 2023-24 Proposed General Fund Expenditures – by Category 24 Chart 5: FY 2023-24 Proposed General Fund Expenditures – by Department Staff will continue to monitor the local California economy and any material changes to the budget assumptions will be updated and reported to the City Council in future budget meetings and accordingly, the financial model will be updated and reported for review by the City Council in June. Recurring vs. One-time Revenues and Expenditures Pursuant to City Council Policy No. 45, Balanced Operating Budget, the City Council shall adopt a structurally balanced operating budget that will support financial sustainability for the City’s future. The annual budget for recurring expenditures shall not exceed recurring revenues, and ongoing program expenditures are not funded with one -time revenue sources. By maintaining a structurally balanced budget, the City continues to maintain city reserves at their desired levels. The budget assumptions for FY 2023-24 includes recurring revenues of $38.4 million and ongoing program expenditures of $32.7 million. Aside from the regulatory increases and general operating expenditures, $803,000 of one-time expenditures has been added supporting the Housing Element Update, funding for the City’s 50th anniversary celebration, and building maintenance repairs. In addition, the budget assumptions include $200,000 for contingency budget for emergency events requiring repairs and/or replacement. After capturing the regulatory increases and new ongoing programs, the FY 2023 -24 Proposed Budget positively exceeds the requirement pursuant to the City Council Policy 25 No. 45, Balanced Operating Budget. The City has a structurally balanced operating budget with a surplus of $5.6 million. After including one-time revenues and expenditures, the surplus is $4.9 million. Overall, as shown in Table 5 below, after including all operating expenditures, one-time expenditures, and transfers, the General Fund is projected to end the year with a surplus of $892,100. Table 5: FY 2023-24 Recurring vs. One-Time Revenues and Expenditures At the discretion of the City Council, the surplus of $892,100 can be allocated to operating projects that support the City Council Goals for FY 2023-24, transfers to the CIP Fund, additional pension payments, or designated to any current and/or future City projects. FY 2023-24 General Fund - Estimated Fund Balance Overall, based on the assumptions, Staff projects the fund balance for the General Fund on June 30, 2023 will be almost $31.2 million, net of transfers out. The fund balance is projected to increase by $892,100 or 3% from the FY 2022-23 year-end estimates. After applying the City Council Reserve Policy of 50% of the operating budget, transfers-out of $889,500 for the Ladera Linda loan payment, and $291,300 for the pension fund, the estimated unrestricted excess reserve is $13.2 million, which is a decrease of approximately $1.9 million or -13% from the estimated unrestricted balance on June 30, 2023. A summary of the estimated FY 2023-24 Fund Balance calculation is illustrated in Table 6 on the next page. General Fund Recurring One-Time Total Operating Revenues 38,346,600 35,000 38,381,600 Less: Operating Expenditures 32,703,700 803,000 33,506,700 Structural Surplus/(Deficit)5,642,900 (768,000) 4,874,900 Transfers-In - 270,000 270,000 Less: Transfers-Out 4,252,800 - 4,252,800 Surplus/(Deficit)1,390,100 (498,000) 892,100 26 Table 6: FY 2023-24 General Fund – Fund Balance Summary Staff seeks City Council direction on the funding priorities for the projected surplus of $892,100 for the development of the FY 2023-24 Preliminary Budget. At the discretion of the City Council, the surplus can be allocated to fund, but not limited to: • Operating projects supporting the City Council Goals for FY 2023-24 • Increasing the transfer to the CIP Fund • Establishing a new Public Safety Program Staff will present information on the proposal to establish a new Public Safety Program at the April 6 workshop. General Fund FY 2022-23 Year-End Estimates FY 2023-24 Budget Workshop Estimated Beginning Fund Balance - 7/1/2023 30,391,900 30,267,800 Revenues Add: Revenues 37,266,500 38,381,600 1,115,100 3% Add: Transfers-In 300,000 270,000 (30,000)-10% Total Revenues 37,566,500 38,651,600 1,085,100 3% Expenditures Less: Expenditures (30,285,900) (33,506,700) 3,220,800 11% Less: Transfers to TOT (4,686,000) (4,177,800) (508,200)-11% Less: Transfers to CIP - Additional (1,364,200) - (1,364,200)-100% Less: Other Transfers-Out (65,000) (75,000) 10,000 15% Less: Additional Transfers PY Surplus - CIP Ladera (889,500) - (889,500)-100% Less: Transfers to Pension PY Surplus (400,000) - (400,000)-100% Total Expenditures (37,690,600) (37,759,500) 68,900 0% Estimated Ending Fund Balance - 6/30/2024 30,267,800 31,159,900 892,100 3% Transfers to City Council Restricted Fund Balance Ladera Linda Loan Payment - 889,500 889,500 UAL Payment - 291,300 291,300 50% Reserve Policy 15,142,950 16,753,350 1,610,400 11% Total Restricted Fund Balance 15,142,950 17,934,150 2,791,200 18% Estimated Unrestricted Fund Balance - 06/30/24 15,124,850 13,225,750 (1,899,100) -13% Increase/(Decrease) from FY 2022-23 Year-End Estimates 27 ADDITIONAL INFORMATION: FY 2023-24 City Council Goals and Action Plan On March 15, 2023, the City Council received the third quarter updates for the FY 2022- 23 City Council Goals and Action Plan. At the same meeting, the City Council received a presentation on setting the framework for the FY 2023-24 City Council Goals. At that workshop, the City Council directed staff to return on April 4 with the updated FY 2023- 24 City Council Goals and Action Plan. The budget appropriation for these goals and action plan will be included in the Preliminary Budget and subsequently in the Adopted Budget. Financial Model The City’s Financial Model is prepared and updated by the Finance Department and utilized during the annual budget process in accordance with City Council Policy No.18. The 10-year model integrates historic and current year data with the latest economic assumptions to produce a long-term forecast of revenues, expenditures, and fund balances. In addition to establishing a baseline forecast, the model is relied upon to support deliberations amongst decision-makers and to validate the fiscal impact of various programmatic or financial alternatives. Over time, the model has become fundamental to the budget process. A comprehensive overview is presented each budget cycle in June using figures from the draft budget to provide a more refined financial outlook. Along with that, any improvements or analyses recommended by the City Council during the budget process are instituted and presented. The preliminary assumptions rates in the table below are used to forecast FY 2024-25 and beyond. Staff will continue to monitor the key demographic, economic, and operating indicators. Changes to these indicators, if any, will be included in the financial model staff report in June. Table 7. Economic Model Input Factors FISCAL YEAR END 2023E 2024B 2025F 2026F 2027F 2028F 2029F 2030F 2031F 2032F REVENUES PROPERTY TAX 2.9% 3.9% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% TRANSIENT OCCUPANCY TAXES 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% SALES TAX 1.0% 1.5% 2.1% 2.1% 2.1% 2.1% 2.1% 2.0% FRANCHISE TAX 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% UTILITY USERS TAX 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% PERMIT REVENUES 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% INVESTMENT INTEREST 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% EXPENDITURES NON-PERSONNEL EXPENDITURES 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% PERSONNEL EXPENDITURES 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% HEALTH INSURANCE 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% PERS NORMAL COSTS 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% PERS UNFUNDED LIABILITY 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% SHERIFF CONTRACT 3.5% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% FORECAST ASSUMPTIONS - 2024 FINANCIAL MODEL FY 2022-23 YE Est. and FY 2023-24 Budget prepared outside of model FY 2022-23 YE Est. and FY 2023-24 Budget prepared outside of model 28 The first chart provides a reference for comparison between the 2023 and the preliminary 2024 models, before transfers. As illustrated, General Fund revenues and expenditures increased on average by approximately $1.1 million and $0.8 million, respectively. The annual percent change between models works out to an average of 3% for revenues and 2% for expenditures based on the updated assumptions. More notably, the long-term projected growth rates each fall below historical averages by roughly 1-2% to account for the potential economic decline expected over the short-term. Chart 6. 2023 Model vs 2024 Model Forecast Comparison, Excluding Transfers The second two charts on the following page focus on the preliminary 2024 model and present the 10-year outlook illustrating the difference with transfers in and out of the General Fund. Staff will present a full report and detailed overview of the most up to date financial model in June. 29 Chart 7. 2024 Model - General Fund 10-Year Forecast (Excluding Transfers) Chart 8. 2024 Model - General Fund 10-Year Forecast (Including Transfers) It should be noted that the transfers-out in FY 2023-24 does not include the additional transfers to the CIP Fund for the annual debt payment for the Ladera Linda Community Park and the Employee Pension Service Fund. Generally, these transfers are not part of the annual operating transfers, instead, the transfers are based on the City Council’s approval using the prior year’s surplus in accordance with the City Council Reserve Policy and the City’s Pension Guidelines. 30 CIP Workshop On Wednesday, April 12, 2023, the City Council will conduct its budget workshop on the Capital Improvement Program (CIP). At this workshop, staff will present the status of FY 2022-23 capital projects, propose new capital projects, and the five -year CIP for discussion. Any direction provided by the City Council will be incorporated in the Preliminary Budget to be presented on May 16, 2023. Finance Advisory Committee Prior to presenting the budget assumptions to the City Council, Staff annually reports the General Fund budget assumptions to the Finance Advisory Committee. A meeting was scheduled for March 23, 2023; however, the meeting was cancelled due to a lack of quorum. Instead, Staff will present the budget assumptions in April , and the Committee’s feedback will be incorporated in the Preliminary Budget report to be presented to the City Council on May 16, 2023. Public Notification The City posted on social media and issued a listserv message announcing tonight’s public workshop. To date, no public correspondence has been received. Any public correspondence received after the transmittal of this staff report will be provided to the City Council as late correspondence at the workshop. CONCLUSION: The FY 2023-24 budget assumptions were predicated on historical data, operational trends, and a likely decline in economic activity due to changes in monetary policy. Despite rising prices caused by persistent inflation, General Fund revenues have fared favorably and experienced positive results throughout the fiscal year. According to projections, FY 2023-24 proposed revenues are expected to exceed the FY 2022 -23 revised budget by $2.6 million, or 7%, and year -end estimates by $1.1 million, or 3%. Property tax revenues are estimated to increase to $17.2 million, an increase of $808,700, or 5%, over year-end projections. TOT revenues have experienced notable growth compared to prior years and are anticipated to level-out and total roughly $6.7 million in the FY 2023-24 proposed budget. Across the board, the revenue forecast upholds a fiscally conservative outlook and will be monitored as the local economic environment ebbs and flows. Based on the projected growth in operating revenues, the preparation for the FY 2023-24 budget continues to focus on the City’s operational needs for FY 2023-24. The budget assumptions developed by the City Manager, Department Heads, and Staff prioritizes the City Council Goals, invest in public safety, invest in City’s infrastructure by increasing the budget for maintenance of public facilities, parks, and public rights-of-way, develop budget strategies in recruiting employees and retaining current employees, sets aside a budget for unexpected repairs, and adds one-time costs associated with the City’s Housing Element Update. 31 As a result of several budget meetings and developing budget assumptions with the Department Management and the Director of Finance, the City Manager is presenting the proposed FY 2023-24 General Fund Budget. The proposed budget anticipates operating revenues of $38.4 million to exceed operating expenditures of $33.5 million, resulting in an estimated structural surplus of approximately $4.9 million, before transfers. After applying for the transfers, the revenues are expected to exceed expenditures by $892,100. Lastly, after applying the additional transfers to the CIP Fund and Employee Pension Fund, and the 50% City Council Reserve Policy, Staff estimates an unrestricted excess reserve of $13.2 million, a decrease of $1.9 million or 13% from the estimated balance ending FY 2022-23. Any directions from the City Council tonight will be incorporated in the FY 2022 -23 Preliminary Budget for review at the May 16, 2023 meeting. 32