That the City Council:
A. Receive and file the Fiscal Year 2024-2025 Mid-Year Budget Update;

B.  Approve an appropriation in the amount of $218,000 from available General Fund revenues to the Community Development Department's professional services budget account 100402-52500; and,

C.  APPROVE AND ADOPT RESOLUTION NO. CC 2025-__ ENTITLED:  A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LA HABRA AMENDING RESOLUTION NO. 2024-18 PERTAINING TO A COMPENSATION PLAN FOR THE LA HABRA MUNICIPAL EMPLOYEES ASSOCIATION (FIELD/MAINTENANCE SERVICES EMPLOYEES’ GROUP).

The City's Bradley/Burns 1 cent sales tax revenues are anticipated to be 5.5% lower than what was budgeted for FY 24-25, while the City’s existing ½ cent Measure T Transaction and Use Tax (TUT) is projected to be lower than the budget by 3.8%. Based on information provided by the City’s revenue consultant, HdL, factors that are contributing to lower sales tax and TUT revenue, both in La Habra and regionally, include impacts from continued high interest rates, weaker consumer confidence, lower household discretionary spending and falling gas demand and prices. However, the adoption of Measure V by the voters in November 2024 at an updated 1 cent rate to replace Measure T is anticipated to take effect in April 2025 and will enable the City to help close the revenue shortfall. Additionally, forecasted year-end revenues for both Property Taxes and the Use of Money & Property revenue categories are projected to exceed budget estimates. Non-General Funds remain stable, and are expected to end the fiscal year on budget.

The anticipated collection of new Measure V revenue in the last quarter of this fiscal year (April through June) has also enabled the City to reverse a few key staff positions that were initially frozen to help balance the FY 24-25 budget. Despite unfreezing these positions, other vacancies that have occurred due to retirements and resignations continue to strain impacted departments and their ability to provide services. To be able to continue providing core services to the public some departments, such as Community Development and Engineering, have retained contract consultant staffing to meet increasing demands and prevent delays in processing both public and private projects. Staff vacancies have also resulted in additional overtime costs in some departments like Police and Community Services. Looking ahead, new revenue from Measure V will be available for Council appropriation during the FY 25-26 budget process to help continue restoring prior cuts and address continuing staffing challenges.

Mid-Year Budget Projections
The Mid-Year Budget review is an opportunity for the City to review projections for year-end budget performance and make adjustments as needed. Based on mid-year General Fund revenue performance and department revenue projections through the end of the fiscal year (June 30), which includes one quarter of additional anticipated TUT revenue from recently voter-approved Measure V, staff estimates General Fund revenues will close FY 24-25 approximately $925,000 more than the adopted budget, a positive difference of 1.5 percent compared to original budget estimates. General Fund Expenditures are expected to close the year approximately $953,000 below the FY 24-25 Amended Budget, reflecting a budget savings of 1.5%. Table 1 below compares the FY 24-25 Amended Budget with FY 24-25 Year-End Estimates for General Fund revenues.

Table 1: General Fund Revenues by Major Category
 

Major General Fund Revenue Categories

Property Tax: Revenues are estimated to end the year approximately $347,000 higher than budget.

Bradley/Burns 1 cent Sales Tax: Revenues are estimated to end the year approximately $784,000 lower than the amended budget; however, it should be noted that current sales tax projections are based on activity through the 3rd Quarter (July 2024 through September 2024). Data from the 4th Quarter (October 2024 through December 2024) will not be available until mid-April and, once posted, these results may impact the final sales tax revenue projections for the fiscal year.

Measure T and Measure V Transactions and Use Tax: TUT is projected to end the year approximately $9.2 million or $606,154 higher than budget. The City’s FY 24-25 Budget adopted in June 2024 budgeted $7.8 million for the TUT for the existing 1/2 cent Measure T. Similar to Sales Tax, the City’s Measure T Transaction and Use Tax (TUT) is projected to be lower than the budget by 3.8%. However, the California Department of Tax and Fee Administration (CDTFA) is expected to implement the recent voter-approved Measure V 1 cent TUT rate and begin collection in April 2025. The City Council approved an amended budget to take into account this new revenue at the December 2, 2024, meeting. At that meeting, Council also approved an appropriation of $770,246 from the new Measure V revenues to partially restore funding, which is reflected in the fiscal year end expense estimates, for the following positions previously frozen in the current budget:

Franchise revenue is projected to come in on budget at $2.5 million this fiscal year.

Fines & Licenses are anticipated to come in approximately $104,000 higher than budget estimates, primarily due to significant increases in permits for new residential construction and also new non-residential construction. The estimated annual construction for tax year 2024 increased significantly in valuation for both residential and non-residential new construction over tax year 2023.

Fees & Charges are anticipated to come in approximately $100,000 higher than budget estimates, primarily due to significant increases in various fees associated with residential new construction and also non-residential new construction. The estimated annual construction for calendar year 2024 increased significantly in valuation for both residential and non-residential new construction compared to calendar year 2023.

Major General Fund Expenditure Categories

With regard to budgeted expenditures, departments in total are estimating that their overall General Fund expenditures will end the fiscal year approximately $953,000 below their adopted expenditure budgets, representing a savings of approximately 1.5 percent compared to budget. Most of these savings are the result of a number of budgeted positions that are either currently unfilled or that were vacant for some period of time during the fiscal year. At fiscal year-end, it is estimated that Police, Fire and Ambulance costs (Public Safety) will comprise about 69 percent of what the City will spend this year in the General Fund.

Approximately 77% of the City’s general fund is dedicated toward staffing and contract labor to provide public safety, services, and programs to the community.

Major Non-General Fund Budgets

Other major budgets in the City, such as the Capital Improvement Projects (CIP), water and sewer funds, and others, are generally expected to end the fiscal year at or below their approved expenditure budgets, with associated revenues tracking to budget projections.

The CIP Budget includes funding from multiple sources, such as the General Fund, special revenue funds, and enterprise funds, and includes approximately $53.2 million in projects for this fiscal year. Projects already completed include:

 

Progress continues on other major public improvement projects, including:

both of which are expected to be completed and opened in the first half of this calendar year.

 

 
Below are projects that have either already been completed or are expected to be completed in FY 24-25.

Completed CIP	CIP Underway
Steve Simonian Old Reservoir Park	La Reinas Woman’s Club Park
Monte Vista Street Rehabilitation	Euclid Street Improvements Project
Children's Museum Roof/HVAC	Vin Scully Centennial Park
Euclid Water Main Line Project	Harbor/Arbolita Intersection Safety Improvements
Bishop Storm Drain Project	Coyote Creek and Imperial Channel Repairs
Euclid Emergency Water Main Repairs	Highway Safety Improvements (8 intersections)
Child Development Center Emergency Roof Repairs	Child Development Center Building Improvements

The City’s non-General Fund budgets have no notable changes from the FY 2024-25 Amended Budget and are expected to come in at or below the fiscal year budget. Tables 3, 4, and 5 illustrate projects for Agency/Authority Funds, Enterprise Funds, and Internal Service Funds respectively.

Table 3: Utility Authority Expenditure Budgets
 

Table 4: Enterprise Fund Expenditure Budgets

Table 5: Internal Service Fund Expenditure Budgets
 

The Water Operations and Sewer Operations utilities both enacted previously approved rate adjustments in January 2025 and are on track to meet their budgets by fiscal year end. Staff in the City’s Finance Department are currently working on a refunding bond for the Water Fund with the goal of reducing debt service costs and saving the ratepayers money each year by refinancing some existing debt at a lower interest rate.

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

Community Development Department: 

Approve an appropriation of $218,000 from available General Fund revenue to the Community Development Department’s professional services budget, account 100402-52500, to fund contract consultant costs associated with Building and Safety contract staffing through fiscal year end.

Public Works Department:

Approve the job title changes of Mechanic to Mechanic I and Sr. Mechanic to Mechanic II positions on the City's Compensation Plan for the La Habra Municipal Employees Association (Field/Maintenance Services Employees’ Group). No additional funding appropriation will be necessary as a result of this requested change.

Human Resources has met and conferred with the Association and the job title changes are consistent with industry standards and will provide the department flexibility to recruit and promote employees based on experience, capabilities and level of expertise.    

Current Position Title		Proposed Position Title
Mechanic	⇒	Mechanic I
Sr. Mechanic	⇒	Mechanic II

Future Fiscal and Operational Challenges

After slowly recovering from the impacts of the COVID pandemic, the City was faced with an unanticipated fiscal challenge over the past two years when the Los Angeles County Fire Department (LACFD) decided to end cost-sharing agreements in their cash contract cities due to their own financial pressures. This decision required cities to pay the full cost of fire services or, in the case of La Habra, face an unplanned early termination of the fire services agreement with LACFD. With Council direction and support, staff was able to negotiate with LACFD to continue fire services to the community, while maintaining a small portion of cost sharing. Despite these efforts, the City’s fire services costs grew, at the time, from $10 million per year to almost $15 million and resulted in the closure of a fire station, which was ultimately reconfigured for use as an ambulance operations facility and that now houses a division of the Police Department.

As a result of this significantly higher annual fire services contract cost, the City planned its FY 24-25 budget to address the unanticipated structural deficit. Since there was insufficient base General Fund revenue to pay for the higher cost of the fire contract as well as the City’s core operating budget in all other departments, Council approved $6.3 million in cuts to remain fiscally balanced. With these cuts impacting City services, La Habra voters considered and approved the passage of Measure V in November 2024 to help fill the structural gap created, in large part, by the higher fire service contract cost.

Although the new revenue generated from Measure V as a replacement of the City’s prior Measure T TUT will help address the City’s budget challenges, there continue to be strains placed on this category of General Fund revenue. Staff at HdL who track sales tax trends throughout the State have noted sluggish statewide third quarter 2024 tax filings and mixed short-term performance, causing them to revise sales tax expectations for many jurisdictions in FY 24-25, including La Habra.  

The eight major retail sales areas that HdL examines and that makes up the bulk of sales and transaction and use taxes are:

· Autos/Transportation	· Fuel/Service Stations
· Building/Construction	· General Consumer Goods
· Business/Industry	· Restaurants/Hotels
· Food/Drugs	· State and County Pools

Of the eight groups, Fuel/Service Stations was specifically noted by HdL as it has historically provided a significant amount of the City’s Sales and TUT revenue. There was a 13% decline in July to September payments in this category, indicating both a drop in fuel purchases, down 10% over the year ago quarter, as well reduced price per gallon of fuel. This sector is expected to continue experiencing significant downward pressure as the price for oil and fuel continues to decline from recent years, and as demand for fuel continues to drop due to an increase in the number of alternative fuel/electric vehicles sold in California. HdL anticipates a slow recovery in this category beginning in FY 2025-2026.

Another operational challenge for the City and its ability to continue providing quality service is the significant number of staff vacancies across virtually all departments. There are currently 36 full-time positions and 29 part-time positions vacant in the City. Similar to many local government organizations in the region, the City has been experiencing high levels of attrition over the past several years due to retirements and resignations. This has been compounded by the fact that unemployment rates have been low and many employers, both in the public and private sector, are offering significant compensation, incentives and signing bonuses to attract employees, creating a very competitive job market.

These vacancies have created a significant need to focus on recruiting, and the City’s Human Resources department has continually been streamlining and shortening the recruitment process wherever possible, while ensuring that the City continues maintaining a high standard for the quality and capability expected from new employees. Council’s approval to unfreeze certain positions in December has helped address staffing needs, but has also added to the growing list of new recruitments, especially as staff has prioritized filling vacant public safety positions. The short-term impacts of these vacancies include increased pressure on staff through overtime which, if excessively high, creates the risk of burnout and higher than anticipated labor costs. As an alternative to overtime, some vacancies have been temporarily backfilled through the use of contract consultants, which has been effective in providing timely and professional service to the public, but at a significantly higher cost than internal labor. That said, the benefits of using consultants in certain technical areas have improved the City’s ability to complete work assignments and projects, particularly for positions that are difficult to fill or for those that have experienced a high turnover rate. 

Staff is beginning to prepare the draft FY 25-26 budget with the City currently on stable financial footing, however, staff remains alert to the possibility of changes in the City’s revenue base due to market and economic uncertainties. Contributing factors in this uncertain economy include higher operating costs, the availability of labor, and the continued impact of high interest rates. Furthermore, future federal policy decisions could have unknown impacts on both prices and the broader economy. Staff will continue to monitor City budgets and will adjust projections as needed for both the balance of the current fiscal year, as well as in preparation of the FY 25-26 budget.

There is no impact to receive and file the FY 24-25 Mid-Year Budget Update.

It is recommended that the City Council approve the requested mid-year budget adjustments, including $218,000 to be appropriated from available General Fund revenue and assigned to the Community Development Department's professional services budget in account 100402-52500 to fund additional contract consultant costs associated with the City's Building and Safety Division.

The final determination and allocation of any potential year-end carry over will be made after the end of FY 24-25 when final revenue and expenditure performance for the fiscal year will be recorded and reported to the City Council.