Recent trends show inflation has cooled, although they have not yet hit desired Federal Reserve targets. This has resulted in interest rates remaining high, which continues to impact borrowing costs for homes, transportation, and equipment compared to 2022. Some economists now predict that interest rates, and related financing costs, will begin a gradual descent in the latter half of 2024, assuming the Federal Reserve begins to cut rates in the coming months.

Although borrowing costs are significantly higher today than over the past several years, local housing market values remain elevated. That said, the amount of available supply remains tight and sales activity has diminished. If the current housing market cools or declines in both valuation and/or sales activity, the City could see its future property tax revenues level off or decline as well.

It should be noted that for every $1 of property taxes that are paid in La Habra, the City’s General Fund receives just under 18 cents, with the remaining 82 cents distributed to other taxing entities.

As combined sales and transaction taxes, and property tax comprise over 75 percent of the City's General Fund, any long term or persistent impacts to either source of tax revenue could cause significant financial constraint for the City's general operations. This is especially notable considering that the City’s local voter approved Measure T ½ cent transaction and use tax, which currently generates approximately 13 percent of the General Fund's total revenue, is scheduled to expire in December 2028.

A mid-year analysis of General Fund revenue performance and end of year estimates indicate that:

General Fund Expenses

With regard to budgeted expenditures, based on department estimates overall General Fund expenditures are anticipated to end the fiscal year approximately $1.5 million below their adopted expenditure budgets, representing an overall savings of approximately 2.6% compared to budget.
 

Most of these projected savings are the result of a number of budgeted positions that are either currently unfilled or that have been frozen in anticipation of significant budget cuts that will be necessary in FY 24/25. There are currently 16 vacant and/or frozen positions funded by the General Fund across several departments. Short term savings are also being realized this fiscal year due to the unanticipated closure of Fire Station 193; however, fire/paramedic costs are expected to significantly increase in FY 24/25.

Despite these budget challenges, the City of La Habra has been on firm financial footing over the past decade and was able to recover from the economic impacts of the Great Recession and, more recently, the COVID-19 pandemic, through its history of conservative fiscal prudence and economic development efforts that brought in and fostered key consumer businesses. The City has been strategic with its use of funds, including leveraging grant funds whenever possible, and working to reduce pension obligation costs through a host of pension reforms, including reduced pension formulas, cost sharing with employees and, most recently, the issuance of low fixed interest rate pension obligation bonds (POB) along with a pension funding policy.

In the past, this fiscal prudence has allowed the City to balance its budgets and weather periods of fiscal uncertainty. This fiscal stability, and the long-term sustainability of the City, however, will be challenged as the City is facing unprecedented, severe and systemic increases to the Los Angeles County Fire Department (LACoFD) fire services contract, while also facing a multi-million dollar loss of General Fund resources in a few short years when Measure T expires. Because of past cost cutting  measures, this additional significant loss of General Fund resources will impact existing local services, as many budget reduction strategies that have minimized impacts to services have already been implemented in the past.

Grant Funding

To help leverage local taxpayer funding for community priorities, the City continues to aggressively pursue grant funding opportunities, when available. Over the past three fiscal years, the City has successfully applied for and been awarded over $60 million in grant funding. This has been comprised of a combination of federal, state, county, and other grants, including a significant funding allocation from the American Rescue Plan Act (ARPA), which provided $15.8 million in funding in FY 20/21. Even without the COVID-19 related funding, the City managed to secure over $41 million in grants over the past three fiscal years.
 
With this funding, the City has been able to implement a wide variety of programs, services and projects, including resources dedicated to support vulnerable youth and seniors during COVID, local businesses coming out of COVID, and programs focused on child care, public safety, community services, and capital projects. Securing these grants has helped preserve General Fund revenues for other core operations and capital needs, or helped construct projects that the City would otherwise not have been able to fund on its own. It should be noted that many of these grants are one-time funding sources only, and an alternate source of local funding will be required to address certain programs and services in the future if the Council and community wish to see those services and programs continue.

GRANT FUNDS

	COVID-19 Grants	Other Grants	Total Grant Funds
FY 20/21	$         18,278,273	$  10,911,659	$           29,190,552
FY 21/22	$               765,270	$  18,684,054	$           19,449,324
FY 22/23	$               360,941	$  11,495,531	$           11,856,472
Total	$         19,409,242	$  41,087,106	$           60,496,348

Pension Obligation Reforms

Public pension costs have been a significant fiscal challenge for most local governments in California for the past twenty years. To address the impacts of these costs, the City of La Habra was an early adopter of a variety of pension reform measures and sought to stabilize its unfunded CalPERS liability in the most cost-efficient manners possible. Unfunded Accrued Liability (UAL) represents the unfunded costs to provide retirement benefits, as well as costs related to changes in CalPERS investment performance, pension benefit levels, and actuarial assumptions, such as retirement ages and estimated lifespans. UAL payments are fixed dollar amounts adjusted annually by CalPERS and charged to cities and other public agencies in the CalPERS system.

In 2010, recognizing these rapidly growing pension costs, the City Council authorized the negotiation of lower pension formulas for newly hired employees, as well as having City employees pay more towards their own pension costs and some of the City "employer" pension costs. The State of California followed this effort with a broad statewide pension reform that further lowered pension formulas for all new public sector employees hired by CalPERS agencies througout the state.

In addition to these cost control measures, on June 4, 2018, the City Council approved establishing a Pension Rate Stabilization Fund (PRSF) to specifically help offset future pension cost increases, which is also referred to as pension rate stabilization. Prior to this, the only option available for the City to reduce unfunded pension liabilities was to try to fund additional discretionary payments to CalPERS beyond the required annual contributions. These optional payments, however, were subject to the same market volatility risk and investment restrictions as the other funds invested with CalPERS. Through the establishment of the PRSF, and the subsequent Pension Funding Policy adopted by the City Council, the City has been able to set aside over $10 million in a reserve to specifically help address current or future UAL obligations.

The most recent of the City’s pension reform efforts occurred in 2021 when the City Council approved the issuance of a POB in an amount equal to 100% of the City’s UAL at that time. This allowed the City to capitalize on very low interest rates at the time by refinancing its UAL debt, that had been accruing interest expense at approximately 7 percent, with POB’s that were sold at an interest rate just over 3 percent. This ultimately decreased the City’s unfunded liability expense by $22,000,000 over a twenty-year period and provided a more consistent annual cost for budgeting.

At that time, the City Council also enacted an additional key pension reform, the adoption of a pension funding policy. Among other things, this policy required that half of the annual savings realized as a result of issuing the POB’s to be set aside in the PRSF to be available to help fund future UAL’s. As noted above, the trust currently has approximately $10 million available in reserves for current and future pension payments.

Every year, CalPERS issues a new actuarial valuation report and recalculates the City of La Habra’s pension liability as of the new valuation date, which will be further discussed below in the Fiscal Impact section. This calculation is a snapshot in time, and if the value of the funded assets is above the City’s liability amount, the City would be considered “super-funded”. If the value of the funded assets are below the new liability amount, the City will incur a new UAL at that point in time. The UAL may, and likely will, increase or decrease from year to year, due to the following factors:

CalPERS does not always meet its investment return target, and the City’s most recent UAL is approximately $38 million due to recent CalPERS under-performance. The City’s pension costs would have been $22 million higher and annual costs would have been less predictable had the City not issued the POB at the very low rates that were available in 2021.

Los Angeles County Fire Department Contract Cost Increases and Reduced Services

While FY 23/24 General Fund expenses are anticipated to close at or below the adopted budget, there are immediate fiscal challenges outside the City’s control that are contributing to a significantly more difficult budget environment in the upcoming fiscal year and beyond. After a mutually beneficial cost-sharing partnership dating back to 2005, and much to the City’s shock, the Los Angeles County Fire Department (LACoFD) notified the City in January 2023 that they would no longer be able to support the cost sharing arrangement that has been in place for almost two decades due to their own fiscal challenges, and that the City would need to fund 100 percent of fire/paramedic service costs at all four stations within La Habra.

Under the prior fee sharing arrangement, the City paid for approximately 49 percent of the fire resource costs in La Habra while LACoFD paid for approximately 51 percent of the costs. This allowed the City to benefit from the service quality and resources provided by LACoFD and gave the fire department immediate access to fire stations adjacent to key service areas in Los Angeles County adjacent to La Habra, which allowed LACoFD to enhance their fire service provision to nearby LA County jurisdictions.

Under this prior cost sharing arrangement, the City’s costs for FY23/24 fire services would have been approximately $10.65 million. Based on the negotiating stance taken by LACoFD, the City was expected to pay more than double that prior cost, to $21.9 million per year, or approximately $5.5 million dollars per year for each of the City's four stations, or face an early termination of the agreement.

After months of negotiations, the City was able to partially reduce this unprecedented increase in fire and paramedic services cost as it worked to negotiate a new 10-year extension with LACoFD. Unfortunately, this involved having to close Fire Station 193, with projected costs of approximately $15 million per year for the three remaining fire stations, representing an almost 50 percent yearly increase in cost compared to FY22/23.
 
Despite the difficult negotiations, staff was able to secure two important concessions, including the upgrade of paramedic capabilities at Station 192 to help balance out the reduction in services from the closure of Station 193, and the continuation of some cost sharing with LACoFD for Station 194.

 

 
FY 23/24 Budget Highlights to Date

In spite of the fiscal challenges facing the City, La Habra has prudently targeted maintaining and improving services that residents have indicated are important. The Community Services Department has been organizing numerous well-attended and popular community events so far this fiscal year, while also beginning to plan for the City's Centennial Celebration in 2025; the Community Development Department has been busy processing permits and commercial/residential project applications, while also marketing the City to prospective businesses; the City's Police and Fire Departments continue to provide outstanding public service every day to the community.

Of particular note, the City’s Public Works Department and Engineering Division have remained exceptionally busy this past year as they have worked on a number of key Capital Projects throughout the City.

So far this fiscal year the Public Works Department has completed several Capital Projects, including the following:

In addition, several major Capital Projects are currently underway, or anticipated to begin in the next several months, including:

Non-General Fund

Non-General Fund operating budgets are expected to end the fiscal year at or below their approved expenditure budgets, with associated revenues tracking to budget projections. The Risk Management Fund, an Internal Service Fund, is the only fund that expects to end the FY 23/24 with expenditures higher than the FY 23/24 Amended Budget due to workers’ compensation related costs.

Mid-Year Budget Summary

The General Fund, which supports most of the City’s core public services, is projected to end FY 23/24 in a positive position, with a year-end carryover of approximately $1.2 million. Revenues overall decreased primarily due to Sales Taxes and Franchises coming in almost $1.2 million below budget. These decreases were partially offset by Property Taxes and Contracts/Reimbursements coming in above budget estimates by approximately $500,000 and $217,000 respectively. The General Fund year-end carryover is primarily the result of positions remaining unfilled or frozen positions in anticipation of significant budget cuts, and temporary savings due to the unanticipated closure of Fire Station 193.  Non-General Fund operating budgets are expected to end the fiscal year at or below their approved expenditure budgets, with associated revenues tracking to budget projections.

Recommended Mid-Year Budget Adjustments

After careful review of revenues and expenditures, staff recommends the following mid-year budget adjustments:

Human Resources Department

Staff requests $464,000 be transferred from the Risk Management Fund Balance to cover increases in expenses related to workers’ compensation program costs. Specifically, $150,000 for Legal Fees (account 164151-7859), $158,000 for Medical Claims (account 164151-7862), and $156,000 for Temporary Disability Claims (account 164151-7863).
 

Staff requests the reclassification of one Permit Tech I position to Permit Tech II. The position will be responsible for assisting with front counter and permitting operations. The employee who will be reclassified has taken on additional responsibilities due to staff vacancies and employees on leave, which has enabled the department to continue to provide excellent customer service.

 

No funding appropriation is necessary or being requested at this time, as salary savings from the vacant positions will fund the cost of the reclassification for the balance of the fiscal year.           

Staff requests the reclassification of the Housing Specialist position to Economic Development Project Manager. Housing and Economic Development work closely together and the Housing Specialist and Economic Development Project Manager often work on similar projects such as assisting residents with resources for housing programs and assisting businesses with resources.  Both positions complete business outreach regularly and respond to residents’ requests about housing issues.
 

This reclassification will have no impact on the General Fund. The Community Development non-General Fund budget can absorb the additional costs of the reclassified position. If this reclassification is approved, staff will immediately begin the reclassification process.
 

Upcoming Fiscal Challenges

Even with reducing critical public safety services by having to close Fire Station 193 in October 2023, the unprecedented increase in fire/paramedic service costs resulting from the LACoFD demand for a full fee for service contract will have a serious and ongoing impacts to the City’s budget, as well as its ability to maintain core service levels in the future. As discussed earlier in this report, the annual fee for fire/paramedic services is estimated to increase by almost $5 million per year from FY 22/23 to FY 24/25, despite the closure of a fire station, which means that the City will be paying almost 50 percent more per year for a 25 percent reduction in fire/paramedic services.

Furthermore, the prior agreement between the City and LACoFD included a fee cap structure that would somewhat control how much the annual contract cost could increase on a year to year basis, which helped prevent huge unaffordable annual spikes and allowed the City time to budget increasing annual fire services costs. With the new Full Fee for Service model being put forth by LACoFD, this fee cap structure may no longer be offered, which may further impair the City’s future budgets if fire/paramedic costs continue to rise.

The unanticipated increases of fire/paramedic service costs by itself would constitute a major fiscal impact for almost any city; however, this issue is now paired with an equally, if not more, impactful fiscal challenge…the pending loss of the City’s voter-approved transaction tax (Measure T). This critical General Fund revenue source is scheduled to sunset in December 2028, and currently generates over $7 million in revenue per year for the City’s General Fund. This local tax was approved by La Habra voters in 2008 as a partial replacement for the loss of the City’s previous local Utility User Tax. Currently, Measure T accounts for approximately 13 percent of the total General Fund revenue and is a critical source of revenue helping fund the City's public safety programs and services, which accounts for approximately 68 percent of the General Fund’s operating budget, as well as other General Fund departments and programs.

 

As the date approaches when this critical local tax is scheduled to expire, decisions will need to be made, starting in the upcoming FY 24/25 budget process, that will very likely impact the programs and services the City currently provides to the community. The chart below is a breakdown of how General Fund resources are allocated in the City’s budget and, as can be seen, it will be unlikely that any department, including Police and Fire, will be able to avoid significant reductions in funding in order to continue to maintain a balanced budget, both in FY 24/25 and once the tax expires in FY 28/29.