That the City Council receive and file the Proposed Fiscal Year 2023-2024 (FY23-24) Budget Presentation and direct staff regarding any revisions.

The Finance Department, working in close collaboration with City administration and management staff from all City departments, has prepared the FY23-24 Proposed Budget for City Council review. After several challenging years dealing with the fiscal and operational uncertainty caused by the Coronavirus pandemic (COVID-19), the lingering effects of COVID have considerably faded, allowing the community and City government to return to a more normal status. One of the unanticipated effects of coming out of the pandemic; however, has been a rapid and sustained increase in inflation, followed by the Federal Reserve quickly raising interest rates to try to control this situation. These factors, along with certain other economic indicators, have fueled talk of a potential recession that could occur sometime in FY23-24. While the local and regional economies still appear to be strong, a potential economic downturn has made fiscal planning more challenging. 

Revenue projections for FY23-24 anticipate that the City's General Fund property tax and sales/transaction tax revenues, which combine to account for approximately 78 percent of all General Fund revenues, will increase by 8.2 percent and 4.1 percent respectively over FY22-23 budget estimates. This anticipated revenue growth will provide sufficient resources to allow City departments to continue providing programs and services to the community, recruit and fill vacant positions, fund increases in negotiated pay and benefits for the City's labor groups, and provide funding to address additional anticipated increases in the City's fire contract with the Los Angeles County Fire Department (LACFD).

The overall FY23-24 Municipal Budget totals $187.4 million across all funds, of which the City's primary operating fund, the General Fund, current comprises $55.4 million. It should be noted that there is an additional $3 million of unencumbered General Fund resources set aside for future budget appropriation by the City Council, as the City continues to negotiate labor agreements with its bargaining groups, and attempts to negotiate an extension to its fire services contract with LACFD.

As indicated in the table below, the proposed FY23-24 General Fund revenue budget is $58.5 million, which is $3.4 million (6.0 percent) higher than the FY22-23 amended revenue budget. Likewise, the proposed FY23-24 General Fund expenditure budget is proposed at $55.4 million, which is approximately $400,000 (0.7 percent) higher than the FY22-23 amended budget. The current proposed expenditure budget; however, does not include additional labor costs that will be incurred as the City continues to negotiate with its employee labor groups. In addition, while the proposed budget does include normal anticipated increases in the City's fire contract, it does not include the potential for additional higher costs that may be negotiated as part of a new long-term contract extension with LACFD. To provide sufficient resources for these additional costs, staff has reserved approximately $3 million for future allocation by City Council.

The City relies on two primary sources of General Fund revenue to fund general municipal operations: property and sales/transaction taxes.  Secured property tax, which is the largest single source of General Fund revenue, accounts for approximately 40% of the City's General Fund revenue, and is expected to grow by approximately $1.7 million (8.2 percent) in FY23-24. Despite strong growth in revenue over the past several years, regional real estate market conditions have changed significantly since last year. While home prices remain close to record highs, the number of homes available for sale have reduced significantly. These factors, when combined with significantly higher mortgage rates, may reduce the amount of growth in the local home buying market. As such, City property taxes could be impacted if home sales or property valuations level off or decline.
 
Combined sales and transaction taxes represent the City's second-largest source of revenue, accounting for 38% of the revenue budget for the General Fund (25% from the 1 cent Bradley-Burns sales tax, and 13% from the City's local 1/2 cent Measure T transaction tax). Both sales and transaction tax revenues are expected to continue to grow in FY23-24. Finance staff, and the City's revenue consultants, estimate that sales/transactions tax revenue will increase by approximately $877,000 (4.1 percent) during FY23-24, compared to the prior year FY22-23 Amended Budget. It appears that there remains a strong demand for retail goods, both in online sales and at traditional "brick and mortar" retail locations in La Habra; however, prior year double-digit growth rates are not expected to continue, as the City is estimating a 4.1% growth in this revenue source in FY23-24. While inflation has had an impact on this revenue source in the short term, the largest long term threat to this source of General Fund revenue is the approaching sunset of Measure T in December 2028.

The proposed FY23-24 General Fund expenditure budget has been developed to achieve the City Council's goals, priorities and objectives. The proposed allocation of resources, by Department, for FY23-24 is as follows:

As indicated in 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 69% of total General Fund resource allocation, with all other non-safety departments combining for approximately 31% of resource allocation. Notable changes in the proposed budget include:

Although the proposed budget provides sufficient resources for normal municipal operations and has reserved funding for future appropriation by the City Council, there remain several issues that represent future fiscal challenges that warrant attention and planning. Some of these challenges can be considered and addressed by the City Council and the community; whereas others are largely beyond the City's or the community's control.

The most critical fiscal challenge facing the City today is the pending loss of the City's ½ cent local transaction and use tax (Measure T), which is scheduled to sunset in December 2028. This critical source of locally controlled revenue, which was approved by voters in 2008, is projected to generate approximately $7.7 million or 13 percent of the General Fund revenue budget in FY23-24. As a significant part of the General Fund revenue program, Measure T provides a key source of locally controlled revenue to help fund public safety, City programs and events, capital projects, and other City Council and community priorities. Its loss, without an equivalent offsetting revenue source, would significantly impact the City's ability to continue providing the types of programs, services and projects that the La Habra community has come to expect.
 
Other challenges facing the City including rising costs due to inflation, difficulty filling staffing needs, continued supply chain disruptions, and the looming possibility of a recession. Inflation and the tight labor market are matters of significant concern as they have combined to drive up the cost of construction, materials, and supplies to unsustainable levels. Over the past year, the City has experienced significantly higher increases in contractor bids for certain capital projects, which exceeded the amount of funding that had been previously programmed for those projects. These increases, when combined with delays in receiving necessary components for equipment and projects, increased fuel costs, and increased labor costs, have required staff to reevaluate the viability of certain capital projects. While these impacts have not yet caused the cancelation of any capital improvement projects, the rising costs has caused staff to propose the re-allocation of certain available resources to help fund the highest priority projects, while delaying other medium priority projects until additional funding becomes available.
 

The proposed FY23-24 General Fund operating budget is balanced and provides sufficient resources to fund anticipated municipal operations, programs and services based on City Council goals and objectives. The proposed budget includes $3 million of unencumbered funding reserved for future City Council appropriation, depending on the results of current labor negotiations, and fire contract negotiations. 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 projects and other planned expenditures.

The FY23-24 capital projects budget proposes the addition of 25 new projects funded by a variety of sources, including the General Fund, totaling $15.8 million in new spending. When this is combined with the prior fiscal year capital projects that the City Council has already approved, City staff will be working on a total of 90 capital projects (streets, parks, facilities, etc.), totaling almost $62 million. Currently, the biggest constraint on completing this ambitious capital improvement program is the cost and availability of qualified contract engineer/project management consultants, the capacity of qualified contractors to bid on projects at price points the City can afford, and the capacity of City engineering staff to oversee this number of projects.

Staff recommends that the City Council receive and file this report and presentation, and direct staff regarding any modifications to the proposed FY23-24 municipal budget.

None at this time.

Final fiscal impact will be calculated upon further direction by the City Council and will be presented to the City Council when it considers and approves the City's FY23-24 municipal budget at a public hearing that will be scheduled at the June 19, 2023, City Council meeting.