That the City Council receive the Fiscal Year 2021-2022 Proposed Budget and direct staff regarding any revisions.

The COVID-19 pandemic has caused significant upheaval in the national, state and local economies over the past 18 months, and the City of La Habra was not immune to its effects.  Last June, the City Council was faced with adopting a dramatically reduced budget as the State of California shut down businesses and required lock downs in an attempt to control the spread of the virus. The most challenging aspect of budgeting for FY 20-21 was not knowing the depth or duration of the economic impacts being caused by the pandemic at that time.  As such, the City took a conservative approach geared towards ensuring that the organization could continue providing core services to the community and pivoting many of its operations to support for pandemic relief efforts for residents and businesses.

Now, more than a year removed from the onset of the pandemic, COVID-19 vaccines are being made available to almost all individuals who are interested in being vaccinated, and there has been a dramatic reduction in rate of new positive COVID tests and hospitalizations.  Based on information from the County and State, it appears that the transmission of the virus is quickly approaching manageable levels and Governor Newsom has announced his intention to fully reopen California's economy effective June 15, 2021.  These factors, along with a strengthening local economy, have allowed the City’s core revenue sources, sales and property taxes, to recover to pre-pandemic levels.  The resources these revenues provide will allow for the restoration of many of the FY 20-21 emergency budget reductions that were implemented last year, including the lifting of hiring freezes on many critical full time positions, re-starting recreation programs and special events, re-opening facilities for rental and community use, reducing the need to lay off part-time staff or furlough full time employees, and avoiding the use of the General Fund reserve to balance the budget.

Most economic forecasts indicate a quick return to a robust national, state, and local economy, which can already be seen in various business, recreation and travel sectors. Based on these forecasts, staff estimates that there will be sufficient recurring revenue growth in FY21-22 to fund the City’s core General Fund services, especially in the area of public safety and community activities, events and programs.  Budget appropriations are also being proposed to fund new infrastructure and park projects, to replenish reserves, and to contribute towards long term unfunded liability reserves.

Proposed FY21-22 Budget

The overall FY21-22 Municipal Budget totals $136,440,988, of which the City’s General Fund comprises $50,347,686.  This budget presentation includes the following:

• A comparison of the FY20-21 amended budget and the proposed FY21-22 budget;
• An overview of proposed budgets by department; and
• A summary of accomplishments and goals by department.

The proposed FY21-22 General Fund expenditure budget is $50,347,686, which is $4,671,913 (10.2 percent) higher than the FY20-21 amended expenditure budget.  This increase includes approximately $2.4 million in restored costs to the City operations that were frozen last year due to the pandemic.  The proposed FY21-22 General Fund revenue budget is $50,947,686, which is $5,725,629 (12.7 percent) higher than the FY20-21 amended revenue budget.  The year over year increase in revenue is significantly larger than normal as revenue projections last year were far lower than normal due to the pandemic.  Prior to the pandemic the City had been experiencing a 4.3 percent average annual growth in revenue over the past five years, and in March of last year, anticipated $47.6 million in revenue for FY20-21.  Had the City realized that level of budgeted revenue in FY 20-21, then the City's FY 21-22 budgeted revenue growth would have been closer to $2.8 million, or approximately 5.9 percent, higher than the prior year.

Property Taxes and Sales/Transaction Taxes
The City relies on two major sources of General Fund revenue to fund municipal operations: property taxes and sales/transaction taxes. Compared to the FY20-21 Amended Budget, secured property taxes, the largest source of General Fund revenue, are expected to grow by approximately $507,383, or 4.6 percent, in FY21-22.  Based on current and projected market conditions, secured property taxes are expected to remain strong during the coming fiscal year; however, there is some concern that growth in real estate values could level off in the near future as home prices reach new heights and historically low mortgage interest rates potentially start to rise. 

Sales/transaction taxes, the second largest source of General Fund revenue, are expected to rebound sharply from the impacts of the prior year state-mandated lock downs that were put in place due to the pandemic. Staff estimates that sales/transaction tax revenues will increase during FY21-22 by approximately $3,922,592, or 25.2 percent, compared to the prior year amended budget, and by $2.4 million, or 14.1 percent, more than the June 2020 actual tax receipts.  Up to the point that stay at home orders were issued last spring, local retail sales activity in La Habra was experiencing strong growth.  Data collected since then by the City’s sales tax revenue consultant indicates a sharp increase in online sales, to some degree at the expense of local “brick-and-mortar” retail stores. This trend has resulted in reduced sales activity at some local businesses, which could cost jobs, threaten the financial viability of some local businesses, and potentially reduce net tax revenues to the City in the future.  Depending on how quickly and broadly the Governor’s full reopening plan is implemented, sales tax revenues are anticipated to experience steady growth as the region recovers from the pandemic in the upcoming year.   

Proposed FY21-22 General Fund Expenditures and Budget Balancing Measures
In addition to providing funding capacity for labor negotiations in the proposed budget, there are numerous cost increases that have shaped the scope of the proposed FY21-22 General Fund budget as the City plans to resume "normal" activities, services and events, including the following:

• $1,079,000 to restore previously frozen positions and fund an increase in the State mandated minimum wage;
• $937,000 to fund increases in CalPERS normal and unfunded liability pension costs;
• $893,000 in restored labor costs due to the elimination of the emergency furlough program;
• $721,000 to fund an increase in Fire contract costs;
• $400,000 for unfunded liability reserves;
• $349,000 for restoration of recreation programs, facility rentals and special events;
• $215,000 to fund an annual increase in ambulance contract costs;
• $204,000 to fund merit-based salary increases for represented and non-represented employees;
• $100,000 to fund increased electricity costs;
• $98,000 to fund staff development and training budgets;
• $69,000 to fund a new Code Enforcement Officer position;
• $35,000 to fund a Digital Information Management System upgrade;
• $30,000 for appraisals, conceptual designs and other services related to Economic Development activities.

A summary of proposed FY21-22 General Fund budget balancing measures include the following:  

• Continued furlough of certain part-time staff positions;
• A continued hiring freeze for (4) vacant full-time positions, to include:
  • An Accountant in Finance;
  • A Management Analyst in Community Development;
  • A Recreation Specialist in Community Services;
  • A Clerk in the Engineering division of Public Works.
• Phased hiring of (3) vacant full-time positions and (1) vacant part-time position in the Police Department
  • A Police Lieutenant, a Police Sergeant, a Police Corporal and a part-time Animal Licensing Canvasser in the Police Department
• Reduce/eliminate non-critical spending;
• A partial reorganization of the Parks Division in Public Works;
• Defer Fleet Replacement charges;
• Use of federal American Rescue Plan Act (ARPA) funds for specific COVID-19 related eligible expenses.

Future Budgetary Challenges
While the City faces many future fiscal challenges, the most immediate is the degree to which the local economy will rebound from efforts at the federal, state, and local levels to curtail the spread of COVID-19.  As a result of public health directives, most local businesses either shut down or significantly scaled back operations during the past year, resulting in an immediate impact to their businesses, their employees, the community and the City’s tax and fee revenues. 

During the past year the City also incurred new and unanticipated costs related to COVID-19, such as additional facility sanitization; purchase of personal protective equipment for residents and staff; provision of new services to the community, such as delivering meals to homebound seniors; and development of business recovery programs to support local small businesses. The $15.8 million of new federal ARPA funds that the City of La Habra will be receiving over the next two fiscal years will help offset some of these new costs and may be able to replace some lost revenues, but this is not a permanent source of new recurring revenue; therefore, the funds are more suited for one-time capital costs or short term expenses, rather than for long term recurring operating expenses. The City has already received its first $7.9 million allocation of these funds and staff will be presenting a separate agenda report to Council this summer that will provide more information about the eligible uses for these funds, along budget allocation recommendations.

On a longer term horizon, and as has been previously reported, the City’s pension obligation costs, based on current projections, are expected to continue to increase each fiscal year through FY32-33, growing from approximately $9.8 million in FY21-22 to almost $16.6 million per year by FY32-33.  The portion of these costs paid by the General Fund will be approximately $7.8 million during FY21-22 and grow to approximately $13.5 million annually by FY32-33.  In addition, the impact of increasing pension costs will be magnified once the City’s locally adopted ½ cent transaction and use tax (Measure T) expires in December 2028. This key source of locally controlled revenue currently generates approximately $5.9 million per year for critical public safety services, programs and activities in the City’s General Fund.

Recognizing the impact of growing pension liabilities, the City Council over the past decade has directed staff to negotiate pension reforms with the City’s employee groups, which has resulted in lower pension formulas for newly hired employees, as well as having City employees pay towards their own pension costs and a portion of the City’s pension costs.  While these measures will have a combined positive impact on the City’s overall pension costs in the future, changes made by CalPERS to their actuarial assumptions and interest earnings estimates will continue to drive pension costs upward over the next 12 years to unsustainable levels based on current City resources.

Summary
The proposed FY21-22 General Fund operating budget is balanced through the use of line-item and one-time reductions, implementation of spending controls, deferred internal service charges, phased hiring, and proposed position freezes. Though some of these budget balancing tools are effective in the short term, they will not sufficiently address structural budget shortfalls due to ongoing operating cost increases, the imminent loss of Measure T tax revenues, and rising long term pension liability expenses in future fiscal years.

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.  It should be noted that growing unfunded pension liability costs are also impacting non-General Fund operating budgets, such as the Utility and Housing Authorities, and will continue to do so in the future.  An additional impact on the Utility Authority's water operations is the increased cost of purchasing water from regional and imported sources.  The cost of this water will likely continue to rise as the State faces another year of drought conditions and as the cost to adequately treat groundwater continues to climb.  These costs will be incorporated in the Utility Authority’s operating budget and water rate structure. 

Finally, there are certain non-operating special revenue or grant related funds that have specific cash flow patterns, such as delays in the receipt of grant funding or up front expenditures made at the start of new capital projects, which can impact the cash position of those funds.  The impact from COVID-19 last year also impacted funding for some of these grant and capital programs, such as gas tax or SB1 fuel taxes.  As the amount of tax collected by the state fluctuates, it impacts the amount that is distributed to cities, which in turn changes the number of potential projects that can be constructed.  Staff will continue to monitor these unique cash flows to ensure that sufficient funding is available and allocated for budgeted programs and projects.
 

None at this time.  Final fiscal impact will be calculated upon further direction by the City Council, and will be presented to Council for consideration and approval at a public hearing during the June 21, 2021 City Council meeting.  

ED 9.1 – Balanced Fiscal Practices