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 provide the La Habra community with high quality programs and services. The effort to develop budgets for both the current year and next fiscal year has been particularly challenging due to the dramatic and unforeseen social and economic impacts from the coronavirus pandemic.  City Administration and Finance Department staff, in cooperation with Department Directors, have prepared a proposed budget for City Council consideration that balances available resources with expected expenses, addresses the Council’s goals and objectives, provides resources for public safety and other critical services, and provides for the upkeep and improvement of the City’s public infrastructure.

The proposed $136,440,988 municipal expenditure budget for Fiscal Year 2021-2022 (FY21-22) is balanced and meets these fiscal and policy goals and provides both summary and line item budget detail for all funds. The proposed FY21-22 budget also includes $600,000 of revenue over expenditures that may be used for labor negotiations with the City’s various employee bargaining groups or other City Council direction.  While tentative agreements have been reached with all five of the employee bargaining groups, no formal authorization has been approved with these bargaining groups prior to the June 21, 2021 City Council meeting; therefore, line-item fiscal impacts of those tentative agreements have not been included in this budget submission.  Staff will prepare an amended budget later in FY21-22 that will allocate increased labor costs across all funds and budgets.

General Fund Budget Overview
On June 7, 2021 staff presented the proposed FY21-22 budget to the City Council.  The budget presentation provided the City Council an opportunity to review and discuss the proposed budget and provide direction to staff regarding any potential revisions. Council did not direct staff to make any revisions to the proposed budget at the conclusion of that presentation. While the proposed budget restores many of the pandemic related cuts and program reductions, staff proposes to use several budget balancing measures as part of the proposed FY21-22 General Fund operating budget, including:

Also during the June 7, 2021 City Council meeting staff presented, and the City Council approved, the annual Consumer Price Index (CPI) adjustment for CPI eligible City fees. The approved adjustment for eligible fees in FY21-22 will be 1.6%, resulting in an estimated increase in projected General Fund revenues of approximately $22,295.  This amount has been included in the updated proposed budget. At that meeting, Council also approved the adjustment of certain Engineering fees, which had been set at a 60% to 85% recovery rate of the actual cost for those services, to their full 100% recovery rate based on the City's most recent fee study, completed by MGT of America Consulting in 2016.

Review of Property Taxes and Sales/Transaction Taxes
The City has two primary sources of General Fund revenue: property taxes and sales/transaction taxes.  When compared to the FY20-21 Amended Budget, property taxes, which represent the largest single source of General Fund revenue, are expected to grow during FY21-22 by $507,383, or 4.6 percent.  Based on current and projected market conditions, revenue from secured property taxes are expected to remain strong during the coming 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.  In the event these fluctuations were to occur, they could impact this source of revenue for the City.

Revenue from sales/transaction taxes represent the second largest source of General Fund revenue for the City and is expected to rebound sharply from last year's revenue estimates and actual revenue losses sustained in FY20-21 due to the state-mandated "stay-at-home" order that was in effect during the pandemic. Staff estimates that sales/transaction tax revenues will recover during FY21-22 by approximately $3,922,592, or 25.2 percent, compared to the prior year pandemic adjusted budget, and by $2.4 million, or 14.1 percent, compared to June 2020 actual revenue receipts. Prior to the issuance of the “stay-at-home” order, the City’s local retail sales were strong and thriving, resulting in steady growth in local retail sales tax revenues.  However, data collected since that time indicates a sharp increase in consumer online shopping activity at the expense of local “brick-and-mortar” retail stores.  While this is not a new trend, the pandemic has hastened the shift to online shopping and has resulted in reduced sales activity at some local businesses, leading to the potential loss of local jobs and threatening the financial viability of some local businesses.  This could, in turn, impact future tax revenues to the City.

Nevertheless, with Governor Newsom's announcement to fully reopen California’s economy effective June 15, 2021, sales tax revenues are anticipated to experience growth over the coming fiscal year as the region recovers from the pandemic closures.  Furthermore, most economic forecasts indicate a quick return to a robust economic activity at the national, state, and local levels, which is already occurring to varying degrees in the general business, recreation, and travel/hospitality economic sectors. There are also several pending commercial projects in the community that are nearing completion, and once they begin business operations in FY21-22, could create new streams of revenue for the City.

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 the COVID-19 pandemic.  As a direct result of public health decrees and directives, most local businesses either shut down or significantly scaled back operations during the past year, resulting in immediate fiscal impacts to their business operations, their employees, and the community at large. The City has also incurred new and unanticipated costs related to COVID-19 during the past year, such as the need to conduct additional facility sanitization; purchase personal protective equipment for residents and staff; provide new services to the community, such as delivering meals to homebound seniors; and develop and administer business recovery programs to better support local small businesses. 

In an effort to accelerate and sustain the nation's economic recovery from the impacts of the COVID pandemic, the Federal Government enacted the American Rescue Plan Act which allocated $1.9 trillion of relief funding to virtually all sectors of the economy. Of this amount, state and local governments were allocated approximately $65 billion, of which the City of La Habra will receive approximately $15.8 million over the next two years. The City has already received the first $7.9 million allocation from ARPA funds, with the second half expected to be received in late FY21-22.  While ARPA funds can be used to help offset many of the direct COVID response related costs incurred by the City, as well as replace some of the City's lost revenues, this is not a permanent source of new recurring revenue and should be programmed much like other "one-time" funds.  ARPA funds are more suited to replace the City's revenue losses, apply towards qualified labor costs the City had incurred since the beginning of the pandemic, and/or be used for one-time capital costs, rather than to program for long term recurring operating expenses. Staff will be presenting a proposed plan with recommendations of how to allocate ARPA funds as part of a separate agenda report to Council in late summer.  The report will provide updated information regarding the permissible and eligible uses of these funds, along with budget allocation recommendations.

On a longer term horizon, and as has been previously reported, the City’s pension obligation costs 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 has, for the past decade, directed staff to negotiate pension reforms with the City’s employee groups.  That effort has been successful, resulting in lower pension formulas for newly hired employees, as well as resulting in City employees paying more towards their own pension costs and a portion of the City’s pension costs.  Council has also enacted other measures to address this critical issue, such as prepaying annual PERS payments, establishing a Section 115 Pension Trust fund, and directing staff to evaluate the viability of a Pension Obligation Bond financing.  While these measures, and others that may be enacted, will have a combined positive impact on the City’s overall pension costs in the future, the possibility remains that 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 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 scheduled sunset of Measure T, and rising long-term pension 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 have been 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 taxes or SB-1 fuel taxes.  As the amount of tax collected by the state fluctuates, it impacts the amount of revenue and grants distributed to cities, which in turn changes the number of potential projects that can be supported with that funding.  Staff will continue to monitor these unique cash flows to ensure that sufficient funding is available and allocated for budgeted programs and projects.

Despite the challenges the City is facing due to the pandemic and the impacts it has had on the economy, the proposed budget still provides a blueprint to build upon 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 FY21-22 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 to the extent possible, while taking into consideration continuing revenue uncertainty due to economic impacts from the COVID-19 pandemic and rising operating costs.