That the City Council receive and file the Proposed Fiscal Year 2022-2023 (FY22-23) Budget Presentation and direct staff regarding any revisions.

The Finance Department, working in close collaboration with the City Manager’s Office and management staff from all City departments, has prepared the FY22-23 Proposed Budget for City Council review. For the past three years government agencies, including the City of La Habra, have struggled with fiscal and operational uncertainty caused by the Coronavirus pandemic (COVID-19). While that fiscal uncertainty, along with the lingering effects of the pandemic and other factors such as rising inflation and interest rates and the conflict in Europe, has made budgetary planning more challenging, the local and regional economy remains strong, and the City’s core revenue sources, specifically property and sales/transaction tax, continue to grow. 

Revenue projections for FY22-23 anticipate that property tax and sales/transaction tax revenues, which combine to account for approximately 78% of the City’s FY22-23 General Fund revenue, will increase by 6.5 percent and 10.5 percent respectively over FY21-22 budget estimates. This anticipated revenue growth will provide sufficient resources to allow City departments to restore previously frozen budgeted positions, fund new full and part-time positions to enhance services and programs to the community, and restore funding for a full schedule of planned community programs and special events. In addition, revenue growth supplemented by federal funding made available through the American Rescue Plan Act (ARPA) will provide resources to support targeted investments in the community that are intended to protect public health and expedite the City’s capital improvement program.

Proposed FY22-23 Budget

The overall FY22-23 Municipal Budget totals $166,204,768, of which the General Fund comprises $54,644,095.  The budget presentation includes the following:

As noted in the table below, the proposed FY22-23 General Fund revenue budget is $55,116,871, which is $4,169,185 (8.2 percent) higher than the FY21-22 amended revenue budget. Likewise, the proposed FY22-23 General Fund expenditure budget is anticipated to grow, amounting to $54,644,095, which is $3,696,409 (7.3 percent) higher than the FY21-22 amended budget. The proposed expenditure budget includes over $2 million to fund restored costs to City operations that were frozen last year due to COVID-19 and to fund previously negotiated labor and employee benefit costs. It also includes $1.3 million in funding for unfunded liability reserves, per City Council policy. After taking into account funding necessary to provide sufficient resources for normal municipal operations, the proposed budget still includes a surplus of $472,776 in unencumbered funds available for allocation by the City Council, which staff recommends transferring to the Capital Projects fund for park improvement projects.
 

Property Taxes and Sales/Transaction Taxes
The City relies on two primary sources of General Fund revenue to fund municipal operations: property and sales/transaction taxes. Secured property tax, which is the largest single source of General Fund revenue, accounts for approximately 39% of the City’s General Fund revenue, and is expected to grow by approximately $748,524 (6.5 percent) in 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 could be impacted if home sales cool or property valuations begin to drop, or could be affected by the pace of new home construction. While the future is not clear, these factors could result in a softening of the local real estate market, which could affect the growth rate of future property tax revenue. 

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 Measure T local transaction tax). Both sales and transaction tax revenues are expected to continue to grow in FY22-23. Staff, and the City's revenue consultants, estimate that sales/transactions tax revenue will increase by approximately $2,064,191 (10.5 percent) 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" retail locations in La Habra. The rate of price inflation will also have an impact on this source of revenue.

Proposed FY22-23 Budget Overview

The proposed FY22-23 General Fund Expenditure budget has been developed with the intent to achieve the City Council’s goals and objectives. The proposed allocation of resources for FY22-23 is 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, account 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 these factors include the following:

· $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 positions. Notable proposed positions include a Permit Services Supervisor; additional part-time 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 delayed 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 Municipal Election.

Future Budgetary Challenges

Although the proposed budget provides sufficient resources to restore normal municipal operations and provide 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 ½ cent local transaction and use tax (Measure T), 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 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 and the “stay-at-home” orders that followed shortly thereafter, COVID-19 has contributed to the rise of several other new challenges, including inflation, supply chain disruptions, and difficulty filling staffing needs.  Inflation is a matter 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 increases 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 reevaluate the resources it has available for projects to determine which can be completed and which may need to be delayed. 

Another challenge beyond the City’s control is the ongoing conflict in Europe and elsewhere that has caused oil/fuel costs to rise 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 detrimental impact on municipal operations, staff continue to be mindful of them as the City continues its day-to-day operations. 

Summary

The proposed FY22-23 General Fund operating budget is balanced and allows for a return to “normal” pre-COVID-19 operating conditions. The proposed FY22-23 budget also provides adequate resources to support programs and special events, restore full-time and part-time frozen staff positions, provides funding for 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. 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 projects 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 this is combined with the prior fiscal year projects that the City Council has already approved and appropriated funding for, the City will be working on a total of 90 capital projects (streets, parks, facilities, etc.), totaling almost $50 million. Currently, the biggest constraint on completing this ambitious capital improvement program is sufficient staffing and project capacity in the City's Engineering Division, the availability of contract engineer/project management consultants, and the willingness and capacity of contractors to bid on projects, considering the large volume of public works projects currently in design and construction throughout the Southern California region.

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

It also should be noted that an additional impact on the Utility Authority’s water operations is 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.

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 for consideration and approval at a public hearing scheduled to occur during the June 20, 2022 City Council meeting.