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Home My WebLink About14 - Fiscal Year 2023-24 Second Quarter Financial ReportQ �EwPpRT CITY OF s NEWPORT BEACH `q44:09 City Council Staff Report February 27, 2024 Agenda Item No. 14 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Jason AI -Imam, Finance Director/Treasurer - 949-644-3126, jalimam@newportbeachca.gov PREPARED BY: Shelby Burguan, Budget Manager - 949-644-3085, sburguan@newportbeachca.gov TITLE: Fiscal Year 2023-24 Second Quarter Financial Report ABSTRACT: The Finance Department prepares quarterly financial reports to review the status of revenues and expenditures for the City of Newport Beach General Fund and to monitor budgetary trends in other City funds. This report contains information on revenues, expenditures, and estimated fund balance for the second quarter of Fiscal Year 2023-24, which was reviewed and discussed with the Finance Committee on February 15, 2023. The FY 2023-24 second quarter financial report reflects a $7.7 million General Fund operating surplus based on analysis of the City's financial activity from July through December 2023. RECOMMENDATIONS: a) Determine this action is exempt from the California Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines because this action will not result in a physical change to the environment, directly or indirectly; b) Authorize the City Manager, or designee, to appropriate American Rescue Plan Act funds and to transfer related savings to the Facilities Financing Plan Fund consistent with the spending plan outlined within the staff report; and c) Receive and file the attached report of budget amendments for the second quarter. DISCUSSION: Economic Overview After 29 months of post -pandemic jobs growth in the State of California dating back to April 2021, employment growth in California was flat in September 2023 and declined in October 2023. Unemployment is rising, and California consumers and businesses are dialing back spending. Additionally, home sales continue to decline amid rising mortgage rates, which has resulted in higher home prices. 14-1 Fiscal Year 2023-24 Second Quarter Financial Report February 27, 2024 Page 2 The current median price of a single-family residence in Newport Beach is $3,050,000, which is the highest in Orange County. Although the City is projecting a decline in sales tax revenue that is largely due to a shift in consumer spending from taxable goods to nontaxable items, the economic outlook for Newport Beach remains bright, which is primarily due to consistent and vigorous demand for real estate in Newport Beach that drives assessed property values higher in spite of a slowdown in home sales. For example, the City has never seen a decline in assessed values over the last 20 years — even during the Great Recession, which is a significant contributor to the City's fiscal stability. General Fund Revenues Most revenue categories performed at or higher than their budgeted levels last year due to more favorable economic conditions than what was originally anticipated in the adopted budget. Growth in many areas has led to a $0.6 million projected increase in General Fund revenues than what is estimated in the current budget. Projections for property taxes, other taxes, and service fees are offset by a decrease in sales tax projections. The following table summarizes the changes to projected General Fund revenues versus the revised budget for FY 2023-24. Details highlighting the reasons for the material variances follow. FY 2023-24 Protected General Fund Revenues Property Taxes 138,358,730 142,715,981 143,556,945 840,964 0.6% Sales Tax 46,552,459 45,257,552 43,684,691 (1,572,861) -3.5% Transient Occupancy Tax 30,201,648 31,986,150 31,986,150 - 0.0% Other Taxes 10,079,710 8,937,999 9,922,292 984,293 11.0% Service Fees & Charges 25,187,124 24,429,291 24,629,291 200,000 0.8% Parking Revenue 7,420,314 7,900,099 7,900,099 - 0.0% Licenses and Permits 5,676,619 5,746,027 5,746,027 - 0.0% Property Income 7,530,393 9,425,682 9,565,682 140,000 1.5% Fines & Penalties 3,838,752 3,799,784 3,799,784 - 0.0% Intergovernmental 4,379,680 4,606,840 4,606,840 - 0.0% Investment Earnings 1,690,399 1,750,000 1,750,000 - 0.0% Misc Revenues 3,394,938 437,412 437,412 - 0.0% Operating Transfers In 18,428,263 21,2S1,267 21,251,267 - 0.0% Total Revenues 302,739,030 308,244,084 308,836,480 592,396 0.2% Property Tax - Property taxes are the City's single largest General Fund revenue and represent approximately 50% of all General Fund revenues. As reported in the first quarter budget update, property tax revenue was projected to grow to $142.7 million in FY 2023-24, which assumed $4.4 million in growth or 3.1 % over the prior year. However, property tax revenue for FY 2023-24 is currently projected to be $143.6 million, which projects $5.2 million in growth or 3.8% over the prior year. Therefore, property tax revenue is projected to be $0.8 million higher than forecasted, which is due to cash receipts for supplemental property taxes coming in higher than previously forecasted. 14-2 Fiscal Year 2023-24 Second Quarter Financial Report February 27, 2024 Page 3 Sales Tax - The second largest funding source for the General Fund is sales tax revenue, making up more than 15% of General Fund revenues. The City's sales tax base is largely generated from four industry groups — autos and transportation, general consumer good,; restaurants/hotels, and the State & County Pools. As reported in the first quarter budget update, sales tax revenue was projected at $45.3 million in FY 2023-24, which assumed a $1.3 million or 2.8% decline over the prior year due to a shift in consumer spending from taxable goods, such as new car sales, to nontaxable items, such as travel, leisure and entertainment. For example, sales from autos and transportation (the City's largest source of sales tax revenue) were projected to be down $0.8 million or 5.5% due to a decrease in demand for new vehicles, which is largely related to higher interest rates. However, sales from autos and transportation are currently projected to be down approximately 14% (compared to the previously projected decline of 5.5%), which is due, in part, to the temporary closure of a luxury automobile dealership while it is currently undergoing a construction renovation project. Overall, sales tax revenue for FY 2023-24 is currently projected to be $43.7 million, which projects a $2.9 million or 6.2% decline over the prior year. As previously stated, the decline in sales tax revenue is partly due to a decrease in the forecast for sales from autos and transportation. In addition, sales from the State & County Pools are projected to be approximately $0.6 million lower, which is largely due a decrease in the City's point of sales relative to point of sales for other agencies in the State & County Pools. Therefore, sales tax revenue is projected to be $1.6 million lower than previously forecasted. Transient Occupancy Tax (TOT) — The third largest funding source for the General Fund is TOT, making up more than 10% of General Fund revenues. Approximately three - fourths of TOT revenue is derived from hotels, with the balance coming from short-term lodging. While TOT receipts from short-term lodging more than doubled over the four- year period from Fiscal Year 2018-19 through Fiscal Year 2022-23, short-term lodging revenue is projected to be 1 % higher over the prior year, whereas 5% growth was reflected in the original forecast for both short-term lodging and hotels. However, TOT revenue from hotels is projected to be 7.8% higher, and is due in part to the Pendry, which opened in late September 2023. Therefore, the overall projection for the second quarter is in line with the budgeted revenues. All Other Revenue — This category includes all other revenue sources other than the top three (property tax, sales tax and TOT). All other revenue is made up of other taxes, service fees and charges, parking revenue, licenses and permits, property income, fines and penalties, intergovernmental revenues, investment earnings, and miscellaneous revenues. Material changes in projected amounts were made to other taxes and service fees and charges: • Other Taxes consists of real property transfer taxes, business license taxes, marine charter taxes and franchise fees. This category is anticipated to have increased revenues of $984,000 from business licenses and franchise fees based on prior year actuals and year-to-date cash receipts. • Service Fees and Charges consists of plan check fees, recreation classes, emergency medical services fees and numerous other cost -of -service fees. It is anticipated that fees will bring in an additional $600,000 in revenue above the adopted budget, largely from fees that were increased in the latest fee study approved by the City Council after the budget was adopted. This increased projection is offset by a projected decrease in Plan Check Fees of $400,000. 14-3 Fiscal Year 2023-24 Second Quarter Financial Report February 27, 2024 Page 4 General Fund Expenditures The FY 2023-24 General Fund expenditure budget totals $309.5 million. Spending trends in FY 2023-24 are generally consistent with prior years and do not indicate any cause for concern. Total expenditure savings of $4.7 million are projected at this time due to year-to-date savings from vacancies. The following table summarizes the changes to the adopted expenditure budget for FY 2023-24, as well as expenditure savings by budget category. Details highlighting the reasons for the material variances follow. FY 2023-24 Pro Salary & Benefits $179,228,885 $174,483,937 $4,744,947 2.6% Contract Services 33,774,340 33,774,340 - 0.0% Grant Operating 1,444,144 1,444,144 - 0.0% Utilities 4,365,888 4,365,888 - 0.0% Supplies & Materials 4,750,243 4,750,243 - 0.0% Maintenance & Repair 15,239,986 15,239,986 - 0.0% Travel &Training 868,771 868,771 - 0.0% General Expenses 3,949,158 3,949,158 - 0.0% Internal Svc Charge 29,422,570 29,422,570 - 0.0% Capital Expenditures 1,975,489 1,975,489 - 0.0% Operating Transfers Out 34,489,271 $34,489,271 - 0.0% Total Expenditures $309,508,745 $304,763,798 $4,744,947 1.5% The revised salary and benefits budget totals $179.2 million, an increase of $5.5 million over the adopted budget. The increase is primarily due to the appropriation of $5.0 million from the FY 2023-24 structural budget surplus as an additional discretionary payment to CalPERS to further reduce the City's unfunded pension liability. An analysis of salary and benefit activity for quarter one indicates that $4.7 million in personnel savings have been realized as of December 31, 2023. These savings are due to vacancies as well as lower than budgeted costs for employee benefits. General Fund Sources, Uses, and Projected Surplus The City continues to be in excellent financial health. Conservative budgeting and sound financial policies have resulted in a trend of General Fund operating surpluses and strong reserve levels for several years. The City is well positioned to continue delivering high levels of services to the community while targeting surplus resources to key priorities each year. It is currently projected that unrestricted General Fund resources will total $7.7 million at the end of FY 2023-24. As is the case each year, staff anticipates that additional budget savings will be realized, and the final year-end budget surplus will exceed this amount. 14-4 Fiscal Year 2023-24 Second Quarter Financial Report February 27, 2024 Page 5 The table below illustrates the prior year sources and uses of funds, current year activity, and the projected year-end results. FY 2023-24 Projected General Fund Sources, Uses, and Budget Surplus Beginning Fund Balance Reserves $ 15,254,999 $ 15,254,999 $ Operating Resources: 0.0% Operating Revenues 286,992,817 287,585,213 592,396 0.2% Prior Year Resources Carried Forward 5,465,426 5,465,426 - 0.0% Transfers In from Other Funds 21,251,267 21,251,267 - 0.0% Repayment of Advances 1,250,000 1,250,000 - 0.0% Total Operating Resources 314,959,510 315,551,906 592,396 0.2% Operating Uses: Operating Expenditures 275,019,474 270,274,527 (4,744,947) -1.7% Transfers Out 34,489,271 34,489,271 - 0.0% Total Operating Uses 309,508,745 304,763,798 (4,744,947) -1.5% Net Operating Surplus 5,450,764 10,788,108 5,337,344 97.9% Non -Operating Resources & Uses Transfers Out (18,293,751) (18,293,751) - 0% Transfer in ARPA Funds 5,226,643 5,226,643 - Transfer out to FFP (5,226,643) (5,226,643) - Total Non -Operating Resources & Uses (18,293,751) (18,293,751) - 0.0% Net Change in Fund Balance (12,842,987) (7,505,643) 5,337,344 -41.6% Ending Fund Balance Reserves $ 2,412,012 $ 7,749,356 $ 5,337,344 221.3% American Rescue Plan Act (ARPA) Funds The American Rescue Plan Act of 2021 (ARPA) was established in March 2021, which included $350 billion in aid for state and local governments. $10.1 million was allocated to the City, which must be obligated by December 31, 2024, and must be expended by December 31, 2026. An eligible use of ARPA includes, but is not limited to, providing government services to the extent of revenue loss due to the pandemic. The City had $18 million in lost revenue related to the pandemic. Therefore, the City may expend the full amount awarded to the City for the provision of government services, which can include but is not limited to maintenance of infrastructure, health services, and public safety services. The current spending plan includes $5.2 million that is allocated to the Junior Lifeguards Building Project (19F13) and the related parking lot improvements and $4.9 million that is allocated to the City Yard Fueling Station Project (20F14). The City Yard Fueling Station Project is not expected to be far enough along to allow ARPA funds to be obligated by December 31, 2024. In addition, a portion of the funds allocated to the Junior Lifeguards Building may not be fully expended. Therefore, the City needs to reallocate approximately $5.2 million to another eligible use. It is recommended that the $5.2 million of ARPA be allocated to reimbursing the City for public safety services incurred during the year on fire operations. Staff will execute a budget amendment to transfer a projected total of $5.2 million to the General Fund when the final amount of unspent funds is known from the Junior Lifeguard Building. 14-5 Fiscal Year 2023-24 Second Quarter Financial Report February 27, 2024 Page 6 General Fund operating savings that result from the reimbursement of ARPA funds will be transferred to the Facilities Financing Plan Fund (Fund 513) to be used for future capital projects. Approximately $127,000 of these funds will be needed to fund the remaining contingency for the Junior Lifeguard Building Project. A budget amendment will be prepared to effectuate the proposed changes to the ARPA spending plan. Other Funds Staff has evaluated the fiscal condition of the City's other major operating funds (Tidelands and Water). An analysis of the budget performance for these funds indicates that no budget adjustments are necessary and variances between budgeted and actual amounts are within reason. FISCAL IMPACT: As a result of the budget amendment that staff will prepare and process administratively once the final remaining ARPA amount is known, approximately $5.2 million will be transferred into the General Fund to reimburse the City for public safety services incurred during the year on fire operations. General Fund operating savings that results from the reimbursement of ARPA funds will be transferred to the Facilities Financing Plan Fund (Fund 513) to be used for future capital projects. ENVIRONMENTAL REVIEW: Staff recommends the City Council find this action is not subject to the California Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not result in a direct or reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change to the environment, directly or indirectly. NOTICING: The agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at which the City Council considers the item). ATTACHMENT: Attachment A — Budget Amendments for the Second Quarter 14-6 Attachment A Budget Amendments for the Second Quarter 14-7 City of Newport Beach Fiscal Year 2023-24 Budget Amendments Quarter Ending December 31, 2023 Net Effect on Fund Balance BA# Date Amendment Type Fund Revenues Expenditures Increase/(Decrease) Department Explanation CONTRIBUTIONS FUND 9,000.00 9,000.00 For Fund 135, the budgeted payment was lower than the actual payment received. The MOU with the JG Foundation directed that 026 10/05/2023 City Manager Public Works any additional donations collected would be remitted to the City. JR GUARDS CAPITAL PROJCTS 5,843.59 5,843.59 _ For Fund 531, a project for initial design was paid for, then later cancelled, which resulted in a partial refund of initial payment. To increase revenue estimates and expenditure appropriations to accept the 2024 State of California, Office of Traffic Safety (OTS) Selective Traffic Enforcement Program (STEP) Grant (#PT24131) 021 10/10/2023 City Council OTS GRANT FUND 376,000.00 376,000.00 Police for increasing DUI Enforcement and Awareness and funding additional traffic safety enforcement, as well as DUI Sobriety Checkpoints. Funds will be used to pay for overtime costs specifically used for this program, related costs for travel and training, and supplies. GENERAL FUND 19,500.00 (19,500.00) To increase revenue estimates and expenditure appropriations from the approval and acceptance of the State of California's 024 10/10/2023 City Council TIDE & SUBMERGED LANDS FUND 19,500.00 19,500.00 - Harbor Division of Boating and Waterways SAVE Grant. The SAVE Grant requires a 10 % match, which will come from Tideland's CONTRIBUTIONS FUND ,.. 17500000 175,00000 - Fund balance. GENERAL FUND 11,604,999.00 (11,604,999.00) To appropriate the FY 2022-23 year-end surplus. Funds will be GENERAL FUND CAPITAL PROJECTS 028 10/24/2023 City Council 2,901,249.75 2,901,249.75 Finance allocated to Other Post Employment Benefits (OPEB) trust, FACILITIES FINANCING PLAN 2,901,249.75 2,901,249.75 Facilities Financing Plan, and future Capital Improvement RETIREE IVIED FUND RES 5,802,499.50 5,802,499.50 Projects. WATER ENTERPRISE FUND 1,325,670.00 (1,325,670.00) To appropriate increased exoenditures from the Water Enterprise 029 10/24/2023 City Council Public Works Fund unappropirated balance to the Water Capital Fund for the Balboa Island Water Main Replacement - Phase 3 Project. WATER CAPITAL FUND 1,325,670.00 1,325,670.00 - CONTRIBUTIONS FUND 231,236.00 231,236.00 _ Appropriate new grant revenue and expenditures from the State 030 10/24/2023 City Council Public Works of California Department of Parks and Recreation and unappropriated Building Excise Tax Funds for the Newport Coast BUILDING EXCISE TAX FUND 58,364.00 (58,364.00) Pickleball Courts project (22P13). 032 11/14/2023 City Council TIDE &SUBMERGED LANDS FUND 22,306.00 22,306.00 Harbor To incorporate additional revenue estimates from the short-term licensing of City moorings. 033 11/14/2023 City Council GENERAL FUND 1,017,509.00 419,272.00 598,237.00 Fire Accept Medi-Cal IGT Program revenue and appropriate expenditure account. 035 11/14/2023 City Council NEIGHBORHOOD ENHANCEMENT Public Works To appropriate expenditure appropriations to the Landscape Enhancement Program, Project 231-01. To recognize revenues in the Library Administration Private 036 11/20/2023 City Manager GENERAL FUND 2,050.00 2,050.00 Library Donation account and increase expenses in the Literacy Progarmming and Literacy Materials accounts. 027 11/28/2023 City Council GENERAL FUND (622,472.21) 891,922.24 (1,514,394.45) Finance To adjust revenue estimates and expenditure appropriations relating to Fiscal year 2023-24 Q1 staff report. CASP TRAINING - 20,000.00 (20,000.00) FACILITIES FINANCING PLAN 1,066,701.00 1,066,701.00 EQUIPMENT FUND - (36,493.02) 36,493.02 IT STRATEGIC FUND - 238,205.17 (238,205.17) FIRE EQUIPMENT FUND 650,000.00 (650,000.00) To increase revenue estimates and expenditure appropriations 031 11/28/2023 City Council GENERAL FUND 46,594.00 46,594.00 - Library from the California State Library Literary Services (CLLS). Funds will be allocated to various Library Literacry Services accounts. GENERAL FUND CAPITAL PROJECTS 52,972.29 (52 g72,2g) To appropriate funds from the General Fund and Neighborhood 034 11/28/2023 City Council Public Works Enhancement Fund for the Alley Reconstruction work related to Assessment District 1Underground Utility District 22, and NEIGHBORHOOD ENHANCEMENT - 200,496.14 (200,496.14) Assessment District 124.24. To appropriate new revenues and expenditures from Irvine Ranch 037 11/28/2023 City Council CONTRIBUTIONS FUND 31,867.20 31,867.20 - Public Works Water District and Orange County Sanitation District to the Newport Coast Drive and Balboa Boulevard Pavement Rehabilitation Project (22R14). To appropriate expenses to the maintenance and repair NOC 039 12/08/2023 City Manager FIRE EQUIPMENT FUND - - - Fire account in order to fund the modifications to the dorm/locker room at Statuon 7 to accommodate the 2 new paramedics for the 4th ambulance. 14-8 City of Newport Beach Fiscal Year 2023-24 Budget Amendments Quarter Ending December 31, 2023 Net Effect on Fund Balance BA # Date Amendment Type Fund Revenues Expenditures Increase/(Decrease) Department Explanation 038 12/12/2023 City Council POLICE EQUIPMENT FUND - 27,500.00 (27,500.00) Police To appropriate funds for increased expenditure from the Police Equipment Fund for outfitting of new patrol vehicles. 14-9