RECOMMENDATION:

DISCUSSION:

At the City Council meeting on June 17, 2024, Council approved and adopted the Fiscal Year 2024-2025 (FY 24-25) General Fund Budget, which included $6.3 million in cuts and deferrals in order to maintain a balanced budget. While the City has had a long history of fiscal prudence and was able to balance the budget for FY 24-25 through a variety of cuts and deferrals, the unprecedented increase in the Los Angeles County Fire Department fire services contract has created a significant structural deficit in the City’s budget as the annual cost of fire/paramedic services has now increased by millions of dollars, and could potentially grow by up to 4% annually, or roughly $600,000 more per year. Because of these new fire contract costs, the City Council made the difficult decision of closing one of the City’s four neighborhood fire stations at the end of 2023.  Had that decision not been made, the City would have faced an additional nearly $5 million per year increase in new fire contract costs on top of the higher costs now being assessed.

Other General Fund budget balancing measures that were utilized included deferring internal service fund charges for vehicle replacement, IT system replacement, and risk management, as well as a transfer from the City’s Section 115 Trust fund that was established to help fund pension obligation costs. In addition to these deferrals, City Departments submitted $3.5 million in line item budget cuts, including over $2 million in the Police Department alone, and included freezing nine full-time positions and one part-time position. While these cuts and deferrals helped balance the City’s FY 24/25 budget, they are not likely to be sustainable in future years without a significant realignment of City programs and services, as the cost of providing public safety services and the cost of labor will continue to climb while, at the same time, the City must prepare for the sunsetting of the local voter approved ½ cent Measure T transaction and use (sales) tax in 2028 that has been in place since 2008.

At the same June 17, 2024 City Council meeting, recognizing these serious structural budget and revenue challenges, Council directed staff to return within 60 days and identify additional General Fund cost offsets, revenue opportunities, and budget balancing measures for further Council consideration and policy direction.

BACKGROUND

In preparation of this report, staff reviewed prior budget balancing measures that were enacted over the years, as well as prior recommendations submitted to previous City Councils by independent panels of residents and local business owners. In the mid-2000s, to help address the fiscal impacts caused by the pending expiration of the City’s then Utility User Tax, the City Council formed an Ad Hoc Fiscal Review Committee comprised of local residents and business owners, to evaluate the City’s budget and financial statements, analyze the City’s operations, and solicit public input and guidance on how to address the fiscal challenges facing the City at the time. A second Ad Hoc Committee was formed in 2019 to begin developing options for the City Council to consider as the City began planning for the approaching 2028 sunset of Measure T, the City’s local voter approved ½ cent Transaction and Use (sales) tax.

The 2005 Committee developed an extensive list of recommendations that can be found in Attachment A. After much discussion, the Committee recommended the following policy suggestions that could impact expenditures and revenues and prioritized them as “Primary” or “Secondary”. Primary policy suggestions are those ideas the Committee believed would be the most important and should be carefully considered for implementation by the City Council at the time. Secondary policy suggestions, while significant, were considered by the Committee to be a lesser priority or should be considered depending on changing fiscal conditions. The Status column in the table below is a current update on the actions that were taken over the years by the City in response to the Committee’s policy suggestions.
 

 

While this is not a comprehensive list of all the Committee's recommendations, many have been implemented, including:

 

 

 

The 2019 Committee held nine public meetings over a period of several months as they reviewed the City’s finances and fiscal challenges. Similar to the 2005 Committee, primary and secondary recommendations were provided and the full report is attached as Attachment B. “Secondary Plus” referred to suggestions that the Committee viewed as of slightly greater precedence in the secondary grouping. Based on the 2019 Committee’s recommendations, the City Council directed staff to implement a number of the proposed policy suggestions as seen in the tables below:

 

Immediate Recommendations
 

As can be seen above, City Councils over the years have approved the implementation of many of the recommendations made by both the 2005 and 2019 Ad Hoc Fiscal Review Committees. These recommendations have been instrumental in helping the City control and reduce certain costs and enhance the efficiency of certain City operations. While most recommendations have already been implemented, prior City Councils deferred on several other policy proposals.

In reviewing those deferred recommendations, and considering the City’s current and future fiscal situation, staff recommends the following for City Council consideration to implement immediately in order to provide fiscal stability to the City’s General Fund and to continue to be able to provide core services to the community. They include:
 

1) City Department operational efficiencies
 

The City currently allocates 70% of its General Fund budget to public safety operations, which includes police, fire/paramedic and ambulance services. This allocation of resources is up from 68% the previous fiscal year. The Police Department’s budget makes up 41% of the GF budget, while the City’s Fire and Ambulance contracts together make up 29%. The estimated gap between future expenditures and revenues is likely to be too large for future cuts to be borne entirely by the non-public safety departments, as those non-safety departments only comprise 30% of the General Fund budget.

 

Therefore, it is recommended that Council direct staff to continue evaluating potential operational efficiencies, alternate service models, and insourcing or outsourcing opportunities across all City Departments. This recommendation is consistent with the 2019 Committee’s recommendation to “Explore privatization of existing departments, including potential privatization of parks and animal control services”, as well as to “Place a greater emphasis on data analytics as a means to reduce operational costs” and to “Share public services with other municipal partners.”
 

2) Implement a targeted hiring freeze for certain full-time positions

 

Staff recommends that Council direct City Administration to work with the City’s Executive Team to determine which current or future vacant full-time positions may be considered for a targeted hiring freeze. If approved, this assessment will be made across all City Departments, to include vacant sworn Police Officer positions, not to exceed ten percent of the current authorized sworn staffing in the Police Department. This recommendation is consistent with the 2005 Committee’s recommendation for “across-the-board reductions” in budgets.

 

3) Fee study with goal of 100% cost recovery
 

If approved, staff will retain a consultant to perform an updated fee study to ensure the City is obtaining 100% cost recovery. There are a variety of fee-based services provided by the City to individuals and businesses seeking certain City services. City Council’s prior policy direction over the years has been to recover 100% of the City’s cost to provide certain services from fees that are charged for those services.

The City’s last comprehensive fee study was done in 2015 and included an annual escalator to adjust certain eligible fees by the Consumer Price Index (CPI) each year. It is generally recommended that an updated fee study be completed every five to ten years to capture any new services being provided, account for changes in processes, and to match fees to the cost of providing certain services. Additionally, the fee study can provide information for the calculation of indirect cost allocations that can be helpful for assessing administrative costs to grants and during audits.

This recommendation is consistent with the City Council’s adopted Goals and Objectives, and is consistent with the 2019 Committee’s recommendation to “Better align user fees with costs of services, such as administrative fees, business license fees, animal license fees, rental/vacancy fees, etc.”

4) Renew the City’s Existing Transaction and Use Tax at an Updated Rate

 

The City’s current Measure T tax is a locally controlled ½ cent Transaction and Use (sales) Tax that was approved by La Habra voters in 2008, in large part, to replace the City’s prior Utility User Tax that expired in 2007. The intent then was to have a continuing source of locally controlled tax revenues to support general City services and programs, including public safety. The Measure T funds stay in La Habra and cannot be diverted by the State for other uses. Measure T is scheduled to expire in December 2028 and is expected to generate approximately $7.8 million, or 13%, of the City’s General Fund revenues this fiscal year.

 

Staff recommends that the City Council approve the placement of a measure on the November 2024 ballot to reauthorize the City’s local Transaction and Use (sales) Tax for voter consideration at a rate sufficient to continue critical locally controlled funding for the City’s General Fund operations including police and 911 response, gang prevention and youth programs, fire/paramedic/ambulance services, street repairs and improvements, park maintenance and improvements, storm system repairs and replacement, help address homelessness, remove hazardous waste, as well as other general City services. These were the key areas identified in resident responses to the “Join the Conversation” outreach effort the City has undertaken over the past year to help identify and understand the highest service priorities of the City’s residents, businesses, and other stakeholders. To date, 517 survey responses have been received and the feedback has been used to help guide the budget process and staff recommendations.
 

After Measure T was approved by La Habra voters in 2008, the City Councils over the years did not treat this new source of funding as a windfall to be spent recklessly, but instead chose to keep staffing levels the same (FY 24/25 General Fund staffing is actually lower than the number of positions in the FY 08/09 budget), continued to find ways of operating efficiently, and continued to cut budgets and restrict spending during periods of economic downturns, such as the Great Recession. Some of the budget balancing measures used in the past included furloughs and layoffs when necessary, and included comprehensive pension reform efforts to lower the City’s pension liabilities and to pass a portion of the pension costs to employees to pay. Since Measure T was passed, its general purpose funding has been invested by the City Council in community priorities such as police, fire and ambulance services, maintaining and improving the City parks, creating robust business-friendly programs to support the local business community, and building fiscally responsible reserves for emergencies.

Staff is recommending that the proposed tax measure be set at a 1 cent rate (8.75% total sales tax rate) compared to the current ½ cent rate (8.25% total sales tax rate). The current ½ cent rate in place today is no longer sufficient to offset the higher cost of City services, evidenced by the fact that the City recently closed a fire station and had to cut and defer over $6 million in the General Fund budget to keep it balanced. In order to be able to meet the City Council’s Goals and Objectives for the City, as well as the service priorities indicated from the feedback provided by hundreds of residents who responded to community outreach efforts, a 1 cent tax could provide approximately $15.6 million per year, which would be approximately $7.8 million more per year than the current ½ cent Measure T tax generates. Subject to Council approval, the additional funds could be used to help reverse the deep budget cuts and deferrals made in the FY 24/25 budget, could help fund critically needed storm system repairs, could be used to continue making improvements to City parks, and could be used to support the City’s growing and diverse business community, among other general City programs and services.

In 2019, the Ad Hoc Fiscal Review Committee foresaw the impacts of Measure T’s expiration date and made the recommendation to consider increasing and extending the City’s ½ cent transaction tax beyond its current expiration date. La Habra, as a municipal government, has always been a City of modest means but prides itself on stretching its resources to provide a full complement of high quality and responsive services to support and improve the quality of life of its residents and to provide a safe and prosperous environment for its businesses. These services include full service policing, high quality fire/paramedic/ambulance services, responsive code enforcement and graffiti abatement, and now homeless outreach services, which had previously been a responsibility of the County.

Of the 34 cities within Orange County (OC), 24 cities currently have total sales tax rates of 7.75%. Of these 24 cities, there are notable differences among their revenue bases and spending responsibilities.
 
· 12 of those cities contract for police services instead of having their own full-service police departments.
· 13 of those cities are part of the Orange County Structural Fire Fund (SFF)[1] which assesses a separate parcel tax on property owners in those communities with the revenue dedicated to fund the Orange County Fire Authority fire/paramedic services in those cities. As a result, it does not appear that those local city governments have to pay for fire services from their General Funds.
· Only ten of these cities have independent, full-service municipal police departments and do not belong to the SFF. Those cities include Anaheim, Brea, Buena Park, Costa Mesa, Fullerton, Huntington Beach, Laguna Beach, Newport Beach, Orange, and Tustin, and many of these cities are either tourist destinations, coastal communities, or have large regional shopping malls or autoplexes that help support their General Fund budgets.

Many of these ten full-service cities also have a diverse or broader revenue base, often due to their locations. Many cities in Orange County also have substantial hotel taxes (transient occupancy taxes), especially in coastal and resort communities that host amusement parks, stadiums, large scale or high-end resort hotels and/or nationally branded hotel chains. Some other cities enjoy high value sales tax producers such as large freeway adjacent car dealerships in autoplexes, shopping centers, or large-scale online retail fulfillment centers and warehouses.

Staff also found that some cities in the County still have general purpose Utility User Taxes, or property-based parcel taxes (e.g. Community Facilities Districts, Landscaping and Lighting Districts, and even direct assessments) dedicated to funding public safety, employee pension costs, or other general government costs. More recently, some cities have heavily invested in storefront retail cannabis as a revenue source. While La Habra does permit and tax certain types of cannabis operations, storefront retail is not currently permitted and the overall level of taxes generated to date from other types of permitted cannabis operations in the City has been modest at best.  

La Habra’s three major local taxes include the ½ cent Measure T transaction and use (sales) tax, a Business License tax, and a Cannabis tax. In the FY 23-24 Amended Budget, Measure T was expected to generate an estimated $7.5 million, while Business License tax revenue was estimated at approximately $345,000, and the local Cannabis tax estimated at approximately $45,000.

Among the cities in Orange County that have a local transaction and use tax, La Habra, with voter-approved Measure T, is currently the only city in the County with a total sales tax rate at 8.25%. Six Orange County cities currently have a total sales tax rates at 8.75%, and three have a total sales tax rate at 9.25%. In addition, in neighboring Los Angeles County, the City of Whittier has a total sales tax rate of 10.25%, and the cities of La Mirada and La Habra Heights have a total sales tax rate of 9.50%.
 

As of the writing of this report, the City Council’s in several other Orange County cities have voted to place local sales tax measures on the March or November 2024 ballots in their communities, as shown in the table below:

In terms of other non-sales tax revenue measures, it has been reported that the Mission Viejo City Council approved placing a measure on the November 2024 ballot to increase their Transient Occupancy Tax (hotel tax) from 8% to 12%, while Huntington Beach self-imposed a 2% assessment on their hotels’ nightly rates to go toward the City’s tourism district for marketing.  The City of San Clemente has scheduled a Council discussion on August 6, 2024 to consider placing a 0.75% special tax to be used for sand replenishment for their beaches.

While La Habra doesn’t benefit from being a coastal community or have large professional sports stadiums or amusement parks, resort hotels, or even large indoor regional malls, it does have certain distinct advantages. La Habra is a very desirable community to raise a family and is well positioned in the most northwestern corner of Orange County and borders Los Angeles County on two sides. This creates a large pool of shoppers and customers who regularly visit La Habra businesses for goods, services, meals and recreation. Realizing this opportunity decades ago, prior City Councils invested heavily in establishing strong retail sales corridors in the City that now act as regional shopping hubs for tens of thousands of residents and visitors every day.

The City is also very fortunate to have major retail warehouse style businesses in the community, as well as a wide variety of national branded retailers alongside well known and long standing local small businesses. For this reason, the establishment of a local transaction and use (sales) tax in 2008 effectively utilized this unique opportunity La Habra has in its shopping districts to generate a reliable source of locally controlled, voter approved tax revenue to help fund programs and services for its community, some of which is paid for by those who visit and shop in La Habra. The recommendation to place a tax measure on the November 2024 ballot is consistent with the 2019 Committee’s recommendation to “Explore a sales tax measure, including potentially extending and increasing the half-cent transaction tax now in place”.

What the 2019 Committee could not have foreseen was how much the post-COVID economy has changed, especially in increased cost of labor, services and supplies. Moreover, the Committee could not have envisioned the unprecedented increase in the LA County Fire Department’s contract costs, which was a startling departure from the collaborative and mutually beneficial agreement the City had partnered with the LA County Fire on in 2005. Public safety spending continues to be the single largest cost in the City’s General Fund budget, now accounting for 70% of the General Fund, and is growing at a pace that may not be sustainable in the future without significant structural changes to the City’s operations and/or revenues.

The current FY 24/25 budget that was approved by Council includes $2 million in cuts to the Police Department, including freezing several non-sworn positions. Although the LA County fire contract was recently renewed, the City already closed one of its four neighborhood fire stations due to the higher cost for service. As a result, it is not recommended at this time to further reduce the City’s paramedic/ambulance services to the community. As the cost of fire and ambulance services is likely to increase in future years, as are the labor and operational costs associated with provide full service policing, it is unlikely based on current funding levels and with the upcoming expiration of Measure T in 2028, that future City budgets will be able to be balanced without deeper cuts to City departments, including certain public safety services and operations.

If placed on the ballot by Council and approved by voters, a 1 cent local tax would not only help offset the impacts of the higher fire contract and public safety costs, but would help enhance La Habra's readiness for emergencies and natural disasters by helping fund critical infrastructure improvements. The funding could also strengthen the services that have been identified as being important to the community's quality of life, including neighborhood parks, recreation facilities, and assisting the unhoused.

The City has contracted the services of long-time opinion research firm FM3 for over a decade to perform periodic Community Satisfaction surveys to receive feedback from La Habra residents about their priorities and service levels. The most recent survey was conducted over the past three weeks. Staff has been able to use survey information to ensure that funding recommendations are directed to areas of importance to the City’s residents and businesses, such as public safety, parks, and roads.

The recent survey results (Exhibit C) are consistent with the feedback the City has received from the community over the past year, and shows that as much as 65% of voters would be interested in renewing the existing voter-approved Measure T at an updated rate to address public safety and basic City services:

 

Vote On City Of La Habra One Cent Sales Tax Ballot Measure

 

 

Resolution and Ordinance Regarding La Habra Emergency Services/Neighborhood Safety/Community Protection Measure
 

The attached proposed Ordinance (“the La Habra Emergency Services/Neighborhood Safety/Community Protection Ordinance of 2024”) reauthorizes the City’s existing half-cent (0.5%) Measure T Transaction and Use (sales) tax, updating the rate to one cent (1%) until ended by the voters.  State law requires that in order for the tax to go into effect, the City Council must approve the ordinance by at least a two-thirds vote and the tax must be approved by the voters by a majority (50%+1) vote. The attached Resolution submits the Ordinance (and therefore the tax) to the voters for their consideration and approval at the November 5, 2024 election as the La Habra Emergency Services/Neighborhood Safety/Community Protection Measure. 

If the City Council desires to move forward with the proposed reauthorization of the tax, it should:
 

(i) Adopt the attached Resolution (Attachment D, which itself includes the Ordinance as an attachment) and,

 

(ii) Introduce the attached Ordinance (Attachment E).

If the Council takes these actions, the Ordinance will be returned to the Council for adoption by a two-thirds vote at a subsequent meeting. It should be noted that if the voters do not approve the measure at the November election, the City's existing 1/2 cent Measure T tax will continue to be levied through December 31, 2028.

Further Expenditure Reduction and Revenue Enhancement Considerations for FY 25/26

In the event that some or all of the immediately recommended actions are not approved by Council, or should a renewal of the City’s existing Transaction and Use (sales) tax at an updated rate not be placed on the ballot by Council or approved by the voters in November, staff will review and analyze additional potential budget reduction and revenue generating concepts as part of the FY 25/26 budget process next year. Many of these are similar to recommendations made by prior Fiscal Review Committees and include:
 

1. Consider the establishment of a field usage fee to be charged to youth sports leagues for the use of City maintained sports parks and fields.

2. Consider a policy to require all groups, including local non-profits and other governmental entities, to pay the standard rental rate for the use of City facilities.

3. Consider renegotiating building leases with some or all local non-profits currently leasing space in City facilities to establish market rate lease payments versus the $1 per year lease rate currently charged.

4. Update the analysis of how much the General Fund subsidizes for public and private civic events, programs and activities with the goal of eliminating those General Fund subsidies and either finding offsetting sponsorship funding and/or ticket sales, or recommend canceling those events.

5. Reconsider the establishment of a Community Services Foundation to help secure outside funding to support City programs and events as an offset to any reductions from General Fund subsidies for those activities.

6. Evaluate the cost/benefit of potentially offering an early retirement incentive to City employees in certain positions, with the intent of freezing or eliminating vacated positions.
7. Evaluate the feasibility and cost associated with controlling access to certain City parks and charging an admission or parking fee, as well as requiring and charging a reservation fee for large groups or parties.
8. Evaluate the feasibility of privatizing and leasing out the City’s Skate Park to a private operator.
9. Evaluate options regarding the future use of the City’s Tennis Center facility.
10. Evaluate reducing the maintenance frequency and landscaping for certain City parks.
11. Evaluate the elimination of City funded maintenance and weed abatement costs on the private Union Pacific Railroad (UPRR) property.
12. Evaluate the revenue potential and licensing of store front retail cannabis businesses.
13. Evaluate the feasibility and cost/benefit analysis for the potential sale of certain City owned assets.
14. Evaluate the feasibility and revenue potential of other types of local tax options for future voter consideration.

 

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[1] County of Orange, Grand Jury, Orange County Fire Authority – Financial Flames on the Horizon, 2017-2018, page 8, https://ochealthinfo.com/sites/hca/files/import/data/files/73963.pdf
Prior to Proposition 13 (1978), Orange County paid for fire protection through a property tax levied on properties in the participating cities and unincorporated areas. The County adjusted the amount of these taxes to reflect the estimated cost of providing services to each jurisdiction. This fire protection portion of Orange County’s property tax is known as the Structural Fire Fund (SFF) and the cities that receive fire services this way are called “SFF cities.” SFF cities have never had their own municipal fire departments. Proposition 13 locked the portion of SFF property taxes, estimated to be approximately 11.6% of the 1% basic levy, into statute (FY2015/16 OCFA Adopted Budget, 78.) Per the JPA agreement, the County is obligated to allocate all SFF funds it receives to OCFA to meet expenses and fund reserves

 

FISCAL IMPACT/SOURCE OF FUNDING:

GENERAL PLAN RELEVANCE/CITY COUNCIL GOALS & OBJECTIVES:

Attachments

• Attachment A - 2005 Ad Hoc Fiscal Review Recommendations
• Attachment B - 2019 Ad Hoc Fiscal Review Committee Recommendations
• Attachment C - City of La Habra Survey - Summary of Survey Results
• Attachment D - Resolution Submitting La Habra TUT Measure
• Attachment E - Ordinance Amending Chapter 4.10 TUT Tax