That the Council:
A. Approve and adopt the City of La Habra Fiscal Year 2022-2023 Municipal Budget;

B. APPROVE AND ADOPT RESOLUTION NO. _____ ENTITLED: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LA HABRA ADOPTING A BUDGET FOR THE FISCAL YEAR COMMENCING JULY 1, 2022 AND ENDING JUNE 30, 2023, MAKING APPROPRIATIONS FOR THE CONDUCT OF CITY OF LA HABRA GOVERNMENT, ESTABLISHING POLICES FOR THE ADMINISTRATION OF THE ADOPTED BUDGET, AND FOR OTHER BUDGET RELATED PURPOSES;

C. APPROVE AND ADOPT RESOLUTION NO. _____ ENTITLED: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LA HABRA AMENDING RESOLUTION NO. 6023 PERTAINING TO A COMPENSATION PLAN FOR EXECUTIVE MANAGEMENT EMPLOYEES;

D. APPROVE AND ADOPT RESOLUTION NO. _____ ENTITLED: A RESOLUTION OF THE SUCCESSOR AGENCY TO THE REDEVELOPMENT AGENCY OF THE CITY OF LA HABRA ADOPTING A BUDGET FOR THE FISCAL YEAR COMMENCING JULY 1, 2022 AND ENDING JUNE 30, 2023;

E. APPROVE AND ADOPT RESOLUTION NO. _____ ENTITLED: A RESOLUTION OF THE HOUSING AUTHORITY OF THE CITY OF LA HABRA ADOPTING A BUDGET FOR THE FISCAL YEAR COMMENCING JULY 1, 2022, AND ENDING JUNE 30, 2023;

F. APPROVE AND ADOPT RESOLUTION NO. _____ ENTITLED: A RESOLUTION OF THE UTILITY AUTHORITY OF THE CITY OF LA HABRA ADOPTING A BUDGET FOR THE FISCAL YEAR COMMENCING JULY 1, 2022, AND ENDING JUNE 30, 2023;

G. APPROVE AND ADOPT RESOLUTION NO. _____ ENTITLED: A RESOLUTION OF THE CIVIC IMPROVEMENT AUTHORITY OF THE CITY OF LA HABRA ADOPTING A BUDGET FOR THE FISCAL YEAR COMMENCING JULY 1, 2022, AND ENDING JUNE 30, 2023; and,

H. APPROVE AND ADOPT RESOLUTION NO. _____ ENTITLED: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LA HABRA ESTABLISHING THE APPROPRIATIONS LIMIT IN ACCORDANCE WITH ARTICLE XIIIB OF THE CONSTITUTION OF THE STATE OF CALIFORNIA FOR THE FISCAL YEAR COMMENCING JULY 1, 2022, AND ENDING JUNE 30, 2023, AND AMENDING RESOLUTION NO. 6014.

Each year the City Council adopts a municipal budget that identifies the revenues and allocation of resources from all City funds to achieve the City Council’s goals and objectives, and to provide the La Habra community with high-quality programs, projects and services. City Administration and Finance Department staff, in cooperation with Department Directors and their staff, have prepared a proposed municipal budget for City Council consideration that balances available resources with expected expenses, addresses the City Council’s goals and objectives, provides resources for public safety and other critical public services, and provides for the upkeep and improvement of City facilities and public infrastructure.

The proposed $166,204,768 municipal expenditure budget for Fiscal Year 2022-2023 (FY22-23) meets these fiscal and policy goals and provides both summary and line item budget detail for all funds. The proposed budget also includes an estimated $472,776 General Fund unencumbered surplus that, based on prior City Council direction, will be placed into reserve and will remain available for future City Council appropriation.  

General Fund Budget Overview

On June 6, 2022, staff presented the proposed FY22-23 La Habra municipal budget to the City Council. The budget presentation provided the City Council with an opportunity to review and discuss the City’s proposed FY22-23 municipal budget and direct staff regarding any revisions. At the conclusion of the proposed budget presentation discussions, staff was not directed to make any revisions to expenditure budgets and City Council directed that the estimated $472,776 General Fund surplus be set aside in reserve, pending future City Council direction and/or appropriation.

The proposed FY22-23 General Fund budget is balanced and has been developed to help achieve the City Council’s goals and objectives for the organization. The proposed allocation of resources for FY22-23 are as follows:

*Administration & Support consists of the following Departments: City Council, Administration, City Clerk, Legal Services, Finance/IT, and Human Resources

As can be seen by this table, public safety (Police, Fire and Ambulance combined) continues to be the single largest spending priority in the proposed General Fund budget, accounting for 68% of resource allocation, with all other departments combining for approximately 32% of resource allocation. A variety of factors have shaped the scope of the proposed FY22-23 General Fund budget as the City resumes “normal” programs, services, activities, and events, following COVID-19 impacted years. Some of the more notable factors include:

• $925,000 allocated for previously negotiated and approved labor contracts, employee benefits, mandated increases in minimum wage salaries, and merit-based salary increases for all represented and unrepresented employee groups;
• $623,000 to fund new full-time and part-time staff positions, some of which includes additional Code Enforcement staff hours for weekend and evening inspections; two new Management Analyst II positions to support department operations and improve organizational effectiveness; a second Community Outreach Liaison to assist with outreach and support for the City’s seniors, at risk homebound residents, and homeless individuals; and an Associate Civil Engineer to assist with the processing and completion of capital projects;
• $583,000 for restoration of vehicle replacement charges to departments to provide sufficient resources for future fleet vehicle replacements;
• $266,000 of restored funding for community programs, facility rentals and special events previously suspended or canceled due to COVID-19 restrictions;
• $238,000 to restore funding for previously frozen staff positions;
• $150,000 for supplemental engineering plan check contract services;
• $119,000 for supplemental building plan check & inspection contract services;
• $107,000 to cover increased electricity costs; and,
• $103,000 to fund expenses related to the November 2022 General Municipal Election.

General Fund Revenues

The City has two major sources of General Fund revenue: property taxes and sales/transaction taxes. Property taxes account for 39% of the General Fund revenue. In comparison to the FY21-22 Amended Budget, secured property taxes (the largest single component of property tax revenues), are expected to grow by $748,524, or 6.5%, during FY22-23.  Despite this strong growth in revenue, regional real estate market conditions have begun to change due to persistently high property valuations and rising mortgage rates. As such, this source of revenue will likely be impacted as home sales cool or property valuations begin to drop. Revenues could also be affected by the pace and volume of any new home construction over the coming years.

Combined sales and transaction taxes represent the City’s second largest source of revenue, accounting for 39% of the General Fund (26% from sales tax and 13% from the City's Measure T local voter approved transaction tax). Both sales and transaction tax revenue are expected to grow in FY22-23. Staff, and the City’s revenue consultants, estimate that sales/transaction tax revenue will increase by approximately $2,064,191 or 10.5% during FY22-23, compared to the prior year FY21-22 Amended Budget. It appears that there remains a strong demand for retail goods, both in online sales and at traditional “brick and mortar” commercial and retail locations in La Habra; however, the rate of price inflation will likely have an impact on this source of revenue, as could a potential recession over the next fiscal year.

Future Budgetary Challenges

Although the proposed budget provides sufficient resources to restore normal municipal operations and provides for a modest surplus, there remain several issues that represent future budgetary challenges that warrant attention and planning. Some of these challenges are “internal” and concern matters that are, at least in part, controlled by the City or the community we serve; other challenges are “external” and are completely beyond the City’s or the community’s control.

By far the most critical future budgetary challenge facing the City is the potential loss of the City’s “Measure T” one-half cent voter approved locally controlled tax revenue, which is scheduled to sunset in December 2028. This key source of locally controlled revenue, which was approved by voters in 2008, is projected to generate approximately $7.2 million or 13 percent of the General Fund revenue budget in FY22-23. As a significant part of the General Fund revenue program, Measure T provides a critical source of locally controlled revenue to help augment capital project funding, support public safety services, and fund community programs and activities. Its loss, without a new offsetting long term revenue source, would represent a significant challenge for City operations and capital projects.

Another budgetary challenge continues to be the lingering economic impacts caused by COVID-19. While City revenues have rebounded from the severe decline experienced immediately after the onset of the pandemic in March 2020, COVID-19 has contributed to the rise of several other new challenges, including rising inflation, continued supply chain disruptions, and difficulty filling staffing needs.

Inflation is a budgetary challenge of significant concern that is entirely beyond the City’s control. As the cost of materials rises, the City has experienced unexpected increases in contractor bids for capital projects, delays in receiving necessary components for equipment and projects, increases in fuel costs, and increase in labor costs due to a very tight and competitive labor market. While this phenomenon has not yet caused the cancellation of capital improvement projects, the continuing increases in costs may cause the City to have to reevaluate the resources it has available for certain projects in the future to determine which can be completed and which may need to be delayed.

Another budgetary challenge beyond the City’s control is the ongoing conflict in Europe that has contributed to oil/fuel costs rising to unforeseen levels. This, taken in conjunction with inflation, has exacerbated supply chain problems, making budgeting and planning all the more difficult. While these factors have not yet had a long-term detrimental impact on municipal operations, staff continue to be mindful of them as the City continues its day-to-day operations.
 
Municipal Budget Summary

The proposed FY22-23 General Fund operating budget is balanced and allows for a return to “normal” pre-COVID-19 operating conditions. The budget also provides adequate resources to support programs and special events, restore full-time frozen staff positions, provides funding for some new full-time and part-time positions to improve service to the community and enhance department operations, all with the intent of achieving the City Council’s stated goals and objectives for the City.

Also included in the FY 22-23 budget is a proposed salary adjustment for the City Manager, pursuant to his contract for employment. The proposed salary increase of four percent is just below the Orange County average annual pay for this position and is consistent with the City Manager’s employment agreement which provides for Council's annual consideration of proposed salary adjustments. If approved by the City Council, the City Manager’s salary will increase by $10,000 to $260,000 per year.

Non-general fund operating and capital budgets, including enterprise funds, authority funds, and special revenue funds, reflect expenditures that are within available revenues or which intentionally draw upon fund balances for capital and other planned expenditures.
 
The FY22-23 capital project budget proposes the addition of 41 new projects funded by a number of sources, including the General Fund, totaling $13 million in new spending. When these projects are combined with the prior fiscal year projects that the City Council has already approved and appropriated funding for, City staff and consultants will be working on a total of 90 capital projects (streets, parks, storm drains, public facilities, etc.), totaling nearly $50 million. Currently, the most significant constraints on completing this ambitious capital improvement program include having sufficient staffing and project capacity in the City’s Engineering Division, being able to secure sufficient contract engineer/project management consultants to assist with completing projects as they are also heavily impacted by workload across the Southern California region, and securing qualified contractors who have the capacity to bid on and complete projects.

The proposed capital improvement budget also includes $250,000 for a pilot “Neighborhood Initiative Projects” program that was requested by City Council last year. At City Council’s direction, staff is developing proposed guidelines for this pilot program and, if the budget is approved, staff will present a future agenda report outlining the proposed program guidelines, application process and funding levels for the City Council review and approval at that time.

It should also be noted that the Utility Authority’s water operations has been impacted by the increasing cost of purchasing water from regional and imported sources. The cost of water will likely continue to rise as California faces another year of exceptional drought and as the cost to pump and treat groundwater continues to climb. These costs will be incorporated into the Utility Authority’s operating budget and water rate structure so that the City can continue to provide safe and reliable water service to its customers.

The proposed budget provides a blueprint to build on the City’s successes, to address the City Council’s and community’s goals, and to provide staff with the resources necessary to continue providing high quality programs, projects, events, services and public safety for the community. 

While much has been accomplished in prior years, notable goals for FY22-23 include:

The proposed budget has been prepared in accordance with the City Council's goals and objectives while controlling General Fund expenditures within available projected revenues. In keeping with prior City Council direction, the proposed budget has been developed to maintain City services and improve the quality of life in the community.