TITLE:
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FISCAL YEAR 2023-24 PROPOSED BUDGET STUDY SESSION
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DEPARTMENT: CITY MANAGER’S OFFICE, FINANCE DEPARTMENT
PRESENTED BY: LORI ANN FARRELL HARRISON, CITY MANAGER CAROL MOLINA, FINANCE DIRECTOR
FOR FURTHER INFORMATION CONTACT: CAROL MOLINA, FINANCE DIRECTOR, (714) 754-5243
RECOMMENDATION:
recommendation
Conduct a Study Session regarding the Fiscal Year 2023-24 Proposed All Funds Budget of $232.8 million, with a General Fund component of $180.3 million, and provide initial feedback and direction to staff in advance of final adoption of the budget by June 30, 2023.
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BACKGROUND:
The Fiscal Year 2023-24 Proposed Budget includes collaboration efforts throughout all sectors, including public safety, parks, facilities, streets and housing for the City of Costa Mesa residents, businesses and visitors. Recommended budget adjustments contained in the Proposed Budget were prudently selected based on operational needs, the provision of essential core services to our community and to more effectively implement the City Council’s stated Goals and Priorities.
Guiding Principles
The guiding principles that inspired the recommendations for the FY 2023-24 Proposed Budget were created when the City Council conducted a Strategic Planning workshop identifying key priorities, as well as a new Mission Statement for Costa Mesa, as follows:
“The City of Costa Mesa serves our residents, businesses, and visitors by promoting a safe, inclusive, and vibrant community.”
In addition, the City Council has developed five Three-Year Strategic Plan Goals:
§ Strengthen the Public’s Safety and Improve the Quality of Life;
§ Achieve Long-Term Fiscal Sustainability;
§ Recruit and Retain High Quality Staff;
§ Diversify, Stabilize, and Increase Housing to Reflect Community Needs; and
§ Advance Environmental Sustainability and Climate Resiliency.
The recommendations contained in the FY 2023-24 Proposed Budget are rooted in the Strategic Plan Goals created by the City Council for a safe, inclusive, and vibrant City.
ANALYSIS:
The theme for the FY 2023-24 Proposed Budget, “The Art of Collaboration,” reflects the City Council’s successful efforts in securing historic levels of funding for a variety of City programs and services that are in need of additional funding, including State and County funding for permanent supportive housing units for seniors and veterans in need through the State’s Project Homekey Program, and over $14 million from the State and the County for eight City parks and open space locations including Lions Park (Café structure), the Costa Mesa Skate Park, Fairview Park for bluff and mesa restoration, Shalimar Park, Ketchum Libolt Park, the Jack Hammett Sports Complex and TeWinkle Park, specifically.
This historic collaboration at all levels of government, and the resultant amount of increased funding from higher levels of government, allows us to achieve important community-centered goals and underfunded pressing needs. With support from State Senator Dave Min, Assemblywoman Cottie Petrie-Norris, and County Supervisor Katrina Foley, the City was able to secure landmark State and County funding to address various quality of life, as well as neighborhood improvements.
Funding requests contained in the FY 2023-24 Proposed Budget help to further stabilize or enhance critical City operations in order to better serve the public, and/or provide City employees with the technology, equipment and overall tools to perform their public service effectively. The Proposed Budget also helps to ensure both short- and long-term fiscal sustainability while committing additional resources to achieve Council’s goals.
Overview of FY 2023-24 Proposed All Funds Budget
The FY 2023-24 Proposed All Funds Budget totals $232.8 million. This reflects an increase of $26.6 million, or 13 percent, from the FY 2022-23 Adopted All Funds Budget of $206.2 million.
Table 1
FY 2023-24 PROPOSED BUDGET - ALL FUNDS
|
Appropriations All Funds |
Proposed FY 2023-24 |
Adopted FY 2022-23 |
Increase/(Decrease) |
|
|
|
|
Amount |
Percent |
|
Operating Budget |
$187,491,589 |
$170,215,673 |
$17,275,916 |
10% |
|
Transfers Out |
14,198,326 |
10,627,990 |
3,570,336 |
34% |
|
Capital Budget |
31,081,719 |
25,312,023 |
5,769,696 |
23% |
|
Total |
$232,771,634 |
$206,155,686 |
$26,615,948 |
13% |
The All-Funds Budget for the City includes governmental, proprietary, and internal service funds, including grants and other restricted funds designated for specific services and purposes provided by higher levels of government (i.e., Federal, State and County governments and agencies).
Many of the City’s special and restricted funds receive ongoing revenue streams, while some are one-time competitive grants and require careful monitoring and record keeping.
In some instances, a Fund can have available fund balances that have accumulated over time and are expended as the need arises and/or to complete specific projects within assigned timeframes. As such, the All-Funds Budget contains many funds that are separate entities with specific accounting and reporting requirements as per government regulations and in some cases, statutes.
The City’s General Fund however, is not restricted and can be used to provide a broad array of public services and is comprised of multiple revenue sources including taxes (such as property, sales, and hotel taxes, among others), user fees, fines, facility rentals, and development related fees, to name a few.
The main factors attributed to the year-over-year increase in the FY 2023-24 Proposed All Funds Budget are as follows:
Operating Budget
The proposed increase of $17.3 million or 10%, for a total of $187.5 million in the Operating Budget’s portion of the FY 2023-24 All Funds Budget is comprised of several items including:
• Annualized funding needed to attract, recruit and retain high quality staff through the recently negotiated labor contracts for all employees Citywide that aligned employee compensation to essentially average (market rate) levels ($5.1 million for year one);
• A $2.4 million increase to the annual CalPERS retirement plan payment, as anticipated, (due to three-year lead time provided by CalPERS);
• A $1 million allocation for future debt service payments for a potential up to $18.0 million bond issuance to rehabilitate two aged Fire Stations and/or other public safety facilities (namely Fire Stations 2 and 4 (Living Quarters));
• Recruitment and retention incentives for public safety to help retain tenured and experienced staff in our Police and Fire Departments for adequate succession planning ($786,000);
• A budget allocation of $500,000 in the Police Department Asset Forfeiture Fund for police camera and jail lock replacements;
• A $700,000 increase in the City’s street sweeping contract, funded through the Gas Tax Fund, to cover the new prevailing wage requirement;
• An increased budget allocation of $500,000 to more closely align the Fire Department’s budget with actual historical overtime costs (a shortfall of approximately $600,000 would still remain);
• A contractual increase of $50,000 in the City Attorney’s budget;
• An additional $400,000 in the Police Department Budget to provide sufficient funding for contractual increases such as laboratory testing, warehouse rentals, jail maintenance and license plate readers; as well as professional training and uniforms for the jail staff; and
• An additional $250,000 allocation to the Workers’ Compensation operating budget in the Self-Insurance Fund to stabilize funding for ongoing claims and administration costs.
Transfers Out
Transfers Out from All Funds total $14.2 million, an increase of $3.6 million, or 34 percent. Of that total, $13.1 million are Transfers Out from the General Fund into three funds, the Capital Improvement Fund ($6.8 million) to support the Capital Assets Needs Ordinance (CAN) requiring that 5.0 percent of General Fund revenues fund Capital Improvements; the 1.5 percent transfer to the Information Technology Replacement Fund ($3.1 million) for the planned replacement of the City’s aging technology and software systems; and the Equipment Replacement Fund ($3.2 million) to support the replacement of the City’s diverse fleet and large machinery, as well as ongoing maintenance costs. The remaining $1.1 million Transfer Out of the $14.2 million is from the American Rescue Plan Fund, consisting of a transfer into the General Fund for ($869,000) as revenue replacement and into the Housing Authority Fund ($232,000) to support homeless prevention and supportive services.
American Rescue Plan Fund (ARP)
A transfer of $869,000 from the ARP Fund to the General Fund will be made from the second tranche of $13.2 million. These monies were received as a result of the City’s revenue loss due to the COVID-19 worldwide pandemic. After this proposed transfer, the Fund will have a remaining unallocated balance of $7.2 million. However, there are numerous City Council priorities that can be financed with the remaining funds, and will be appropriated at the time of Council approval, such as a second Project Homekey Motel Conversion, a 15-bed expansion of the City’s Bridge Shelter for unhoused individuals, among other proposals.
Information Technology Replacement Fund
Includes the transfer of $232,000 from the ARP Fund to the General Fund from the second tranche of $13.2 million, for a total transfer of $3.1 million into the ITRF to fund year 4 of the Information Technology Strategic Plan (ITSP). The Proposed Budget includes the funding of a Cyber Security Analyst position. This is a realignment from the ITSP, where a Network Administrator position was identified. Many governmental jurisdictions have recently been hijacked of their data systems, and the addition of a Cyber Security Analyst position to focus on protecting the City’s technological systems is crucial. Additionally, staff is requesting a one-year reprieve of transferring prior year’s funded positions from the ITSP to the General Fund. As a result, the Program Analyst II and an IT Manager remain in the ITRF proposed budget.
Capital Budget
The All-Funds Capital Budget of $31.1 million reflects the City’s annual Capital Improvement Program (CIP) Budget that contains an increase of $5.8 million. A comprehensive detail of the Proposed CIP Budget was presented at the April 11, 2023, Study Session and will be contained in further detail in the CIP section of the FY 2023-24 Proposed Budget Book. A few key projects include:
• Fairview Road at Belfast Avenue New Traffic Signal;
• Costa Mesa Country Club Modernization and Grounds Improvements;
• Ketchum-Libolt Park Expansion;
• Lions Park Café;
• Tewinkle Skate Park Expansion, and;
• Fairview Park Restoration and Improvement.
CIP revenues were amended due to a higher projected revenue estimate of $385,000. Staff recommends to allocate these funds to a Westside Park acquisition fund.
FY 2023-24 Proposed General Fund Budget Overview
The Proposed FY 2023-24 General Fund expenditure budget is a structurally balanced budget and totals $180.3 million. This reflects an increase of $16.4 million or 10 percent, from the FY 2022-23 Adopted Budget of $163.6 million. Table 2 is a summary of the FY 2023-24 General Fund Proposed Revenue and Expenditure Budget.
Table 2
FY 2023-24 GENERAL FUND PROPOSED BUDGET
|
|
Proposed FY 2023-24 |
Adopted FY 2022-23 |
Increase/(Decrease) |
|
|
|
|
Amount |
Percent |
|
Estimated Revenues |
$179,458,144 |
$163,627,541 |
$15,830,603 |
10% |
|
Transfers In |
868,898 |
- |
868,898 |
(100%) |
|
Total Resources |
$180,327,042 |
$163,627,541 136,637,270 |
16,699,501 |
10% |
|
Operating Budget |
$167,229,453 |
$152,999,551 |
$14,229,902 |
9% |
|
Transfers Out |
13,097,589 |
10,627,990 |
2,469,599 |
23% |
|
Total Appropriations |
$180,327,042 |
$163,627,541 |
$16,444,563 |
10% |
General Fund Revenue Highlights
Recurring General Fund Revenue is expected to favorably increase in categories such as Sales and Use Tax, Licenses and Permits, Use of Money and Property, and Fees and Charges, consistent with increases experienced to date this fiscal year and in prior fiscal years. General Fund revenues are typically used to cover public safety, parks and community services, development services, and other activities and programs known to residents. Additionally, a transfer from the American Rescue Plan (ARP) Fund provides for additional funding to Capital Improvement and Information Technology Replacement Funds to ensure compliance with the City’s Municipal Code for the second tranche of $13.2 million received. The Proposed Budget for the fiscal year commencing July 1, 2023, is structurally balanced without the use of General Fund reserves.
Sales and Use Tax: Sales tax is the largest revenue category in Costa Mesa, and is estimated at $82.5 million, or a 10 percent increase, over the FY 2022-23 Amended Budget; and $9.8 million over the FY 2022-23 Adopted Budget. Strong job numbers and low unemployment rates allowed consumption spending to remain solid in FY 2022-23.
Property Tax: All combined Property Tax revenues are estimated at $54.3 million, reflecting a three percent growth over the prior fiscal year. Despite a slight decline in home sales, the competitiveness in the housing market continues to intensify as home are selling faster and the sales to price ratio is improving.
Transient Occupancy Tax (TOT): Hotel tax revenues are projected to surpass pre-pandemic levels, with an estimated $9.6 million anticipated next year versus the FY 2022-23 Adopted Budget of $7.4 million. As a result of an increase in leisure travel, revenue is on an upward trend. Due to the shift from consumers spending less on tangible items and more on experiences, spending on travel and leisure is expected to continue its steady rise.
Fees and Charges: Fees and Charges are showing signs of recovery at $9.7 million, an increase of $1.3 million or 15 percent increase. Approximately $600,000 is attributed to an increase in paramedic fee, and $640,000 are revenues anticipated from plan fees.
Measure Q Retail Cannabis Business Tax: On November 3, 2020, voters approved the “City of Costa Mesa Retail Cannabis Tax and Regulation” Measure, also known as Measure Q, which allows cannabis retail storefront and delivery uses. City Council voted to adopt a seven (7) percent tax on cannabis retail businesses. The FY 2023-24 Proposed Budget includes an estimated $2.9 million in cannabis taxes, as the City has already approved over 20 retail storefront and non-storefront businesses. Staff anticipates that with these businesses, the projected retail tax revenue will be realized in FY 2023-24. Also, as previously approved by the Council, the Proposed Budget has two restricted special revenue funds that are financed by the cannabis retail tax: the Arts and Culture Master Plan Fund and First Time Homebuyers Fund.
1/2 Percent for the Arts: Of the total seven percent cannabis tax rate, half a percent is dedicated to the Arts and Culture Master Plan in the FY 2023-24 Proposed Budget. The Arts and Culture Master Plan Fund was set up to record the ongoing expenses of the Arts and Culture Master Plan, including the Arts Coordinator position. As the City is still completing its implementation of the Retail Cannabis Program, there is little funding in the Arts and Culture Master Plan Fund at this time to support the items contained in the approved Master Plan for Year 3. In order to fully support the City’s arts program and goals, staff recommends a change to the financing strategy to simply fund each year’s costs from available Cannabis Retail Tax receipts as needed to fully implement the Plan, versus a ½ percent for the Arts as that amount will be insufficient to fund the Master Plan’s implementation even when the $2.9 million in estimated retail tax revenue comes to fruition.
1/2 Percent for a First Time Homebuyers Program: The FY 2023-24 Proposed Budget also includes funding for the first-time homebuyer program for current City residents as well as graduates of the Newport Mesa Unified School District. The first-time homebuyer program is intended to provide mortgage assistance to qualified lower-income homebuyers to encourage homeownership for those who otherwise cannot qualify or afford to purchase a home in Costa Mesa without assistance. It is anticipated this Fund will be able to support this initiative once cannabis retail tax revenues are received at projected levels in the City’s coffers.
While the estimated increase in General Fund revenue is projected at 10 percent next year as compared to the current year’s Adopted Budget, please note that the most recent estimates of current year General Fund revenue, as reflected in the FY 2022-23 Amended Budget is $175 million, reflecting a three percent increase year over year.
FY 2023-24 General Fund Budget Expenditure Highlights
The Proposed General Fund Budget for FY 2023-24 reflects total expenditures of $180.3 million. Of this amount, $167.3 million in operating costs represents an increase of $14.2 million, or nine percent, from the current year adopted operating budget of $153 million. The remaining $13.1 million represents the Transfers Out to the Capital Improvement Fund, the Information Technology and Equipment Replacement Funds described earlier. The FY 2023-24 Proposed Budget for expenditures includes the following significant items:
• A Table of Organization reflecting 586 full-time employees and 102.84 part-time employees for a total of 688.84 as detailed below.
§ Approved a net of 6.91 FTEs during the mid-year budget report, an increase to 682.22 from the current year adopted budget.
§ Added a net of 6.62 full-time equivalent (FTE) employees. Proposed positions include:
• An increase of $187,471 for software contractual increases and additional licenses in the Information Technology Department;
• $1.0 million as seed money for the anticipated annual bond debt payment for the replacement of Fire Stations 2 and 4, Fire Station 2 was built in 1966 (57 years old), and Station 4 was built in 1967 (56 years old);
• $3.1 million for the Council approved Five-Year Information Technology Strategic Plan (Year 4) and also in compliance with the City’s municipal code;
• Transfer of $3.2 million to the Equipment Replacement Fund to acquire the replacement of vehicles and equipment;
• $250,000 increase in Internal Rent allocation to all departments for the Self Insurance Fund
• A $2.4 million increase in the annual required CalPERS contributions;
• An additional $1.0 million in funding for medical, dental and vision benefits as per contractual MOU requirements;
• The continuation of the $4.0 million vacancy factor (negative appropriation); and
• No use of General Fund Reserves or ARPA funds to balance the General Fund
Commitment to Public Safety:
The FY 2023-24 Proposed Budget includes $94 million designated for the City’s commitment to public safety comprised of the Police and Fire and Rescue Departments. The public safety budgets make up more than 52 percent of the General Fund Proposed Budget at 33 percent and 19 percent, respectively. Of the 586 Citywide full-time personnel, approximately 41% are sworn which is the highest level since the Great Recession.
The Police Department budget now contains 142 full-time sworn personnel, reflecting one Deputy Police Chief position approved at mid-year. Staff is requesting a reallocation of three part time positions to full time, resulting in an additional 1.0 FTE and $155,605. Further, the Police Department’s maintenance and operations budget increased by $278,449, primarily for contractual services. The total increase to the Police Department’s General Fund budget is $434,054. As part of the City’s approach to balance the Department’s General Fund budget, a vacancy factor of approximately $3.7 million in the FY 2023-24 Proposed Budget continues to be applied.
The Fire and Rescue Department contains 85 full-time sworn personnel. City staff is requesting to update the Fire Division Chief position to Assistant Fire Chief, sworn, and the Fire Marshal position to Assistant Fire Chief, non-sworn. There will be no impact to the full-time personnel count for the department, and an estimated $56,797 annually. Additionally, the Proposed Budget includes a $500,000 increase in the department’s overtime budget to better align to the actual expenditures.
The FY 2023-24 Proposed Budget for the Equipment Replacement Fund includes funding to replace public safety aging vehicles and equipment including the financing of a 2003 American LaFrance Pumper with a replacement cost of $1.5 million, and a 2004 American LaFrance Combination Pumper for $1.2 million with partial funding from the Community Development Block Grant, and the purchase of multiple fleet items, including sixteen police vehicles with replacement costs totaling $1.05 million.
Diversify, Stabilize, and Increase Housing to Reflect Community Needs
To support affordable housing, $700,000 is recommended to be allocated from the current fiscal year’s salary savings towards consulting services for the community visioning and rezoning work to comply with Measure K.
Advance Environmental Sustainability and Climate Resiliency
In an effort to achieve environmental sustainability, the Proposed Budget includes funding for hybrid and electric vehicles; additional funding for tree planting and maintenance costs; and a full-time management analyst (Solid Waste Coordinator) to address solid waste regulations.
Transfers Out
Transfers Out from All Funds total $14.2 million. Of the total, $13.1 million are Transfers Out from the General Fund and into three funds, the Capital Improvement Fund ($6.8 million) to support the Capital Assets Needs Ordinance (CAN) that requires five percent of General Fund revenues; the 1.5 percent transfer to the Information Technology Replacement Fund ($3.1 million) for the planned replacement of aging technology and software systems throughout the City, the Equipment Replacement Fund ($3.2 million) to support the replacement of the City’s aging fleet and ongoing fleet maintenance costs. The remaining $1.1 million of the total $14.2 million in Transfers Out are from the American Rescue Plan Fund into the General Fund ($869,000) and the Housing Authority Fund ($232,000) to support homeless prevention services.
Finally, the proposed budget includes a realignment of the City’s constituent services into the City Manager’s Office to reflect the legal reporting structure and to improve the collaboration with other City departments under the City Manager’s purview for enhanced customer service and speedy response times. This results in an adjustment of the City Council’s budget.
Consolidated Master Fee and Charges Schedule
Staff has been diligently working over the past year to consolidate the City’s current fees into one master schedule. Consolidating the City’s current fees into a consolidated schedule will allow for more effective annual review and periodic update of fees. Accordingly, staff recommends a consolidated schedule of fees and an annual review of all fees as part of the City’s normal course of business operations. Typically, a cost of service study is anticipated to be completed every three to five years, with incremental updates occurring in the years in between comprehensive studies.
ALTERNATIVES
The City Council can provide alternative direction to staff on the Proposed Budget for FY 2023-24 through June 30, 2023.
FISCAL REVIEW:
Staff is requesting City Council provide feedback and direction in advance of final adoption of the FY 2023-24 Proposed Budget. Staff will be bringing the FY 2023-24 Proposed Budget forward to a Public Hearing on June 6, 2023, for additional feedback or final adoption. An additional Study Session can be held on Tuesday, June 13, 2023, if needed, with a second alternative final adoption date of Tuesday, June 20, 2023, if desired.
LEGAL REVIEW:
The City Attorney’s Office has reviewed and approved this report as to form.
CITY COUNCIL GOALS AND PRIORITIES:
This item supports the City Council goals:
• Strengthen the Public’s Safety and Improve the Quality of Life;
• Achieve Long-term Fiscal Sustainability;
• Recruit and Retain High Quality Staff;
• Diversify, Stabilize, and Increase Housing to Reflect Community Needs, and;
• Advance Environmental Sustainability and Climate Resiliency.
CONCLUSION:
The overview of the Proposed General Fund expenditure and revenue projections for FY 2023-24 was fully vetted by staff, being prudent in any proposed increases.
To continue providing essential services to the community coupled with the City Council goals in mind, staff recommends that the City Council discuss and provide feedback on the FY 2023-24 Proposed Budget.
The strong commitment of our City Council, residents and community partners for healthy, sustainable neighborhoods and balanced economic activity, both facilitate and aid us to continue the quality of services we provide.
The high degree of professionalism, commitment, and effort of City staff to our community, our neighbors, and our businesses has provided us the ability to meet our overall goals, objectives, and programs, of which we are proud to serve.
It is our hope and belief that the FY 2023-24 Proposed Budget creates a solid foundation for “The Art of Collaboration.”