Honorable Mayor and Members of the Hermosa Beach City Council
Regular Meeting of February 27, 2024
Title
MIDYEAR BUDGET REVIEW 2023-24
(Finance Director Viki Copeland)
Body
Recommended Action:
Recommendation
Staff recommends City Council:
1. Approve the revisions to estimated revenue, appropriations, budget transfers, and fund balances as shown herein and in the attached Revenue Detail Report, Additional Appropriations Report, Budget Transfers Report, and Budget Summary Report (Attachments 1, 2, 3, and 4);
2. Approve the following transactions from the General Fund:
a) Transfer $137,905 of unspent funds from 2023-24 Midyear to the assigned fund balance for Contingencies in order to maintain the City’s target of 20 percent of appropriations for this fund (Attachment 3);
b) Transfer $6,374 of unspent funds from 2022-23 to the Lighting/Landscaping District Fund to cover the deficit balance;
c) Transfer $1,419,308 of unspent funds from 2022-23 to the Insurance Fund to bring the fund up to the funding goal of $3 million;
d) Transfer $198,866 of unspent funds from 2022-23 to the Equipment Replacement Fund;
e) Transfer $1,076,441 of unspent funds from 2022-23 for use in the Capital Improvement Fund; and
f) Transfer $729,769 of unspent funds from the Midyear Budget Review 2023-24 from the unassigned fund balance category to the assigned fund balance category.
3. Receive and file the City Council Travel Summary (Attachment 6).
Body
Executive Summary:
With an estimated revenue increase of one percent or $541,971, overall reduction of expenditures requested at midyear of $183,430, and changes in the General Fund balance for restricted General Plan Maintenance Fees, Public Educational and Government (PEG) Grant, and Certified Access Specialist (CASp) fees, funds of $867,674 are available to cover an increase to the Contingency (Rainy Day Fund) of $137,905, leaving a remaining balance of $729,769 in the General Fund. Staff also recommends transferring the 2022-23 unspent funds to clear the Lighting/Landscape District Fund deficit, bring the Insurance Fund and Equipment Replacement Fund up to the funding goals, and replenish the Capital Improvement Fund.
Background:
The City has conducted an annual Midyear Budget Review since fiscal year 1981-82. The review is a tool to ensure that assumptions and estimates originally used to prepare the budget ten months earlier remain realistic. All revisions would be recorded as of January 31, 2024 so that midyear revisions for revenue and appropriations would reflect in the 2023-24 Budget worksheets used for preparation of the 2024-25 Budget.
The City Council Conference/Travel Summary was requested by City Council in 2014-15 and continues to be provided as an information item (Attachment 6).
Analysis:
OVERVIEW
The Midyear Budget Review estimates an increase in revenue of one percent or $541,971. The appropriation requests for the General Fund result in an overall reduction in appropriations of $183,430. Staff recommends adjusting the City’s Contingency (Rainy Day Fund) to the goal of 20 percent of appropriations for operations by adding $137,905. Staff recommends leaving remaining unspent funds of $729,769 from the 2023-24 Midyear Budget in the General Fund for potential use in the 2024-25 Budget. Due to the use of American Rescue Plan Act (ARPA) funds to balance the previous three annual budgets, staff recommends reserving the funds in the General Fund. Once the 2024-25 Budget estimates are reviewed, recommendations would be made regarding the midyear 2023-24 unspent funds. Use of these funds will be determined in conjunction with the 2024-25 budget requests.
Staff recommends that the $2,700,989 in unspent funds from 2022-23 be used as follows:
• Transfer $6,374 to the Lighting/Landscaping Fund to clear the deficit;
• Transfer $1,419,308 to the Insurance Fund to meet the funding goal of $3,000,000;
• Transfer $198,866 to the Equipment Replacement Goal to meet the funding goal of $3,559,204; and
• Transfer the remaining 2022-23 unspent funds of $1,076,441 to the Capital Improvement Fund to replenish the balance.
REVENUE
(Refer to Attachment 1, Midyear Revenue Detail Report, for individual revenue accounts.)
Revenue is estimated to increase one percent over the 2023-24 Budget estimate. The following table shows revenue by category and the following graphs show trends for the largest tax revenue sources:
TAXES
Property Tax
The estimate for overall property tax revenue is increased by 2.1 percent. The midyear estimate for the secured portion of the property tax or “real property,” which is land and personal property located upon that property of the same owner, is 0.9 percent over the original estimate or eight percent over FY 2022-23. The new estimate is $19,508,335. Growth for the prior four years was six percent, five percent, seven percent, and six percent, respectively.
Sales Tax
The sales tax revenue estimate is unchanged at Midyear. The original estimate is an increase of three percent over the prior year.
The following chart compares sales tax on major accounts for only the first quarter of this year to the first quarter of last year for the top ten business classes and by geographic area. Detailed information on sales tax is only available for the first quarter due to the one quarter lag in information from the State.
Sales tax for the most recent quarter, which is July-September 2023 is 0.8 percent higher than the same quarter last year.
As shown in the chart on the following page, the category with the highest sales tax overall continues to be Eating/Drinking Places, which grew by 0.32 percent over 2022-23, followed by the County/State Pool, which grew by 14.9 percent. This category reflects internet sales from shopping remotely. The Auto Dealers & Supplies category had the highest dollar increase at $27,027.
Comparison of Sales Tax by Class FY
First Quarter (Q1) 2022-23 vs. 2023-24
Sales Tax Comparison by Geographic Area
Transient Occupancy Tax
Transient Occupancy Tax (TOT) receipts for the first half (through November) are consistent with the original budget, therefore no change is recommended. Receipts for the prior year were higher than expected at $5,151,135. Occupancy for hotels is 78.6 percent for the first half of this year vs. 78.1 percent for last year. Short Term Vacation Rentals (STVR) occupancy for the same period is 72.4 percent this year vs. 81.5 percent last year.
In November 2019, the voters passed Measure H which increased the Transient Occupancy Tax from 12 percent to 14 percent, effective January 1, 2020. A new hotel and two short-term vacation rental properties with a total of 10 rental units have been added this fiscal year.
Utility User Tax
The estimate for Utility User Tax (UUT) revenue is increased by 7.9 percent from the original budget and an increase of 0.7 percent over 2022-23 revenue. Revenue for the first half is up 1.9 percent. The largest increases for the first half are in electric and phone services at 11 percent and five percent, respectively. The pie chart depicts the UUT by type.
Other Tax
The 4.4 percent increase in the Other Tax category is primarily due to an increase in refuse franchise fees, which are up 40 percent for the first half of the year, as a result of a rate increase and a seven percent increase in business licenses.
Licenses and Permits
This category is reduced by 38.2 percent, primarily due to a decrease in building permits. The revised is based on actual building permit revenues from first half of the fiscal year.
Fines and Forfeitures
This category is reduced by $125,500 or 7.2 percent due to a decrease in Court Fines/Parking. Community Services Officers have been utilized for multiple quality of life issues such as animal control (dogs on the beach and dogs off leash at city parks) which have impacted time spent on their other duties. One full time position was held vacant while a CSO attended the police academy. Upon graduation from the police academy and promotion to Police Officer, the CSO position was filled. The unfilled position and duties other than parking contributed to the decrease.
The City has collected $145,712 in nuisance abatement fines since 2016. An additional $17,500 in revenue is estimated for 2023-24. The fines are restricted for restroom related projects. Staff recommends using the estimated balance of $163,212 for CIP 669 City Restrooms and Renovations and replacing $163,212 of the $247,389 in unrestricted revenue from the General Fund with restricted nuisance abatement fines, also in the General Fund. This is a change in the funding source only and does not change the overall amount appropriated to CIP 669.
Use of Money and Property
This category is increased by 7.2 percent due to an increase in interest rates, Community Center rental revenue, and beach/plaza promotion revenue.
Intergovernmental/State
This category is increased by 107.9 percent due to estimated mandated cost claims for two years.
Current Service Charges
The estimates for user fees or service charges are up by 0.2 percent. There are many accounts in this category, some increase and some decrease. Parking Meter revenue is up due to the change in meter rates. General Plan Maintenance Fee revenue is estimated to be down based on the first half of the year. Utility Trench Service Connect Permit revenue is down to less utility work and fewer permits pulled. Annual Parking Permit revenue is down due to the change in residential permit policies.
Other Revenue
Funds received in the General Miscellaneous, Reimbursement/Refund and Contribution (donations) accounts are included in the midyear revenue estimates. No revenue is assumed in the original budget for these revenue sources. Appropriations have already been added where a donation is intended to be spent. The increase in this category is primarily due to $52,856 for solid waste contract administrative fees left out of the 2023-24 budget.
ADDITIONAL APPROPRIATIONS
Additional appropriations requested by departments are shown on the attached spreadsheet, 2023-24 Additional Appropriations Report (Attachment 2). Overall appropriations in the General Fund decreased by $183,430. The City Clerk’s Department requested a reduction in Conferences and Training due to no longer needing funds for tuition reimbursement purposes. Community Development requested a decrease in appropriations for several contracts, adjusting the budget to reflect the amount needed through the end of the current fiscal year. Due to the September 2024 date of the Summer Concert series, funds will not be needed until the FY 2024-25 Budget.
The City Clerk’s Department requests a full-time Office Assistant in place of one part-time Office Assistant and one intern. The City Manager’s Department requests reinstatement of an intern position to assist with development and implementation of City programs, public communications, research and analysis, and special projects for all City Departments. The Finance Department requests a part-time Senior Finance Analyst to replace the part-time Senior Account Clerk position that was eliminated due to COVID-19 budget reductions. This role would assist with the ongoing needs of the department, including budget, reporting, audit, and special projects. The Public Works Department requests a salary range adjustment for the three Senior Engineer positions.
Several grants have been awarded to the City. Revenue estimates have been adjusted and additional appropriations have been requested accordingly.
Funding on several Capital Improvement Projects (CIPs) has been adjusted on the following projects:
• CIP 105 Annual Street Improvements
• CIP 112 Annual City Sidewalk Improvements
• CIP 195 City Sidewalk Improvements
• CIP 417 Annual Storm Drain Improvements
• CIP 502 Greenbelt Pedestrian Trail
• CIP 692 14th Street Restroom Rehabilitation
• CIP 699 Parking Structure Lot C
• CIP 760 Tree Well Grates
See attached revised project sheets (Attachment 7).
RESULT OF CHANGES
As a result of changes to estimated revenue, appropriation revisions, General Plan Maintenance Fees, CASp fees and the PEG Grant, a balance of $867,674 is available in the General Fund.
Staff recommends that those funds be used in the following manner:
• Assign additional funds of $137,905 from the balance available in the General Fund to bring the Contingency up to the goal amount of 20 percent of General Fund operating appropriations;
• Leave the remaining $729,769 from the balance available in the General Fund and assign the balance for use in the upcoming budget. Staff will bring back recommendations for use with the FY 2024-25 Budget.
FINANCIAL POLICIES
The City Council’s adopted fund balance policies are:
General Fund
Any funds remaining unspent at year-end in the General Fund transfer equally to the Contingency Balance, Insurance Fund, Equipment Replacement Fund, the Capital Improvement Fund, and Capital Facility Reserve. The City Council may change these transfers annually as necessary.
Contingency Balance
The goal is to maintain an amount equal to 20 percent of the General Fund operating appropriations to be used in the event of economic uncertainties or unforeseen emergencies. The goal was increased from 16 percent t0 20 percent with the FY 2023-24 Budget.
Compensated Absences Balance
The goal is to maintain 25 percent of the funding needed for accrued liabilities for employee vacation, sick, and compensatory time.
Retirement Rate Stabilization Balance
These funds were set aside in the 2004-05 Budget for use during times of rate volatility. The 2018-19 Budget approved that the existing balance of $1 million be used for the creation of a retirement trust however that action was on hold due to COVID-19. The current balance is $1,021,575. An additional $829,060 was set aside for a retirement trust when the CalPERS police side fund paid off.
Insurance Fund
The goal is to maintain $3,000,000 in net position for claims above recorded claims liabilities or catastrophic losses.
Equipment Replacement Fund
The goal is to maintain net position equal to the accumulated amount calculated on the equipment replacement schedule for all equipment, based on replacement cost and useful life.
2022-2023 Unspent Funds
For 2022-23, the unspent funds of $2,700,989 were left in the General Fund for potential use in the 2023-2024 Budget and are currently unassigned.
Staff recommends that the unspent funds from 2022-23 be used as follows:
• Transfer $6,374 to the Lighting/Landscaping Fund to clear the deficit;
• Transfer $1,419,308 to the Insurance Fund to meet the funding goal of $3,000,000;
• Transfer $198,866 to the Equipment Replacement Goal to meet the funding goal of $3,559,204; and
• Transfer the remaining 2022-23 unspent funds of $1,076,441 to the Capital Improvement Fund to replenish the balance.
Progress on Funding Goals
Due to the annual adjustment to the workers’ compensation and liability claims liabilities, ongoing litigation costs, settlements, and additional appropriations recommended at Midyear, the balance in the Insurance Fund is under the $3,000,000 goal. Claims liabilities will be adjusted in the Insurance Fund at year end based on actuarial reports typically received in May for Workers’ Compensation and General Liability Claims. Staff recommends transferring $1,419,308 of the 2022-23 unspent funds in the General Fund to the Insurance Fund to bring the balance back up to the funding goal of $3,000,000. Staff also recommends transferring $198,866 of the 2022-23 unspent funds in the General Fund to bring the Equipment Replacement Fund up to the target funding goal of $3,559,204.
As shown in the Over/(Under) Goal Amount column, the Compensated Absences balance is above the funding goal. The Contingency Balance, Insurance Fund, and Equipment Replacement Fund goals are at the target amounts after the recommended changes.
UPCOMING/ONGOING CHALLENGES
With approval of the Midyear changes by the City Council, staff would move forward with preparation of the 2024-25 Budget. Staff will remain conservative in its approach to the budget process for next year due to the many uncertainties present in the economy.
2024-25 BUDGET WORKSHOP
The Capital Improvement Plan Study Session is planned for April 18, 2024. The Budget Study Session is scheduled for June 5, 2024, with adoption planned for June 19, 2024.
General Plan Consistency:
PLAN Hermosa, the City’s long-range planning document, was adopted by the City Council in August 2017, and envisions a future where “Hermosa Beach is the small town others aspire to be; a place where our beach culture, strong sense of community, and commitment to sustainability intersect.” One of the guiding principles to achieve the vision is to make decisions and take actions that help contribute to the City’s economic and fiscal stability.
This report and associated recommendations have been evaluated for their consistency with the City’s General Plan. Relevant policies are listed below:
Governance Element
Goal 1. A high degree of transparency and integrity in the decision-making process.
Policy:
• 1.1 Open meetings. Maintain the community’s trust by holding meetings in which decisions are being made, that are open and available for all community members to attend, participate, or view remotely.
Infrastructure Element
Goal 1. Infrastructure systems are functional, safe, and well maintained.
Policy:
• 1.2 Priority investments. Use City Council established priorities and the Capital Improvement Program (CIP) to identify and allocate funding for projects identified in the infrastructure plan.
Public Safety Element
Goal 5. High quality police and fire protection services provided to residents and visitors.
Policy:
• 5.2 High level of response. Achieve optimal utilization of allocated public safety resources and provide desired levels of response, staffing, and protection within the community.
Fiscal Impact:
Midyear budget revisions increase revenue estimates in the General Fund by $541,971 and reduce appropriations by $183,430. The Contingency (Rainy Day Fund) meets the 20 percent funding goal and the Compensated Absences balance, Insurance Fund and Equipment Replacement funds are also at the target funding goals. $729,769 in unspent funds from midyear remain available for use in the 2024-25 Budget if necessary.
Attachments:
1. 2023-24 Revenue Detail Report
2. 2023-24 Additional Appropriations Report
3. 2023-24 Budget Transfers Report
4. 2023-24 Midyear Budget Summary Report
5. Link to City Council Adopted Fund Balance Policies
6. 2023-24 City Council Travel Summary
7. Updated Capital Improvement Project Sheets
Respectfully Submitted by: Viki Copeland, Finance Director
Approved: Suja Lowenthal, City Manager