TO:
Honorable Mayor and Members of the City Council
THROUGH:
Talyn Mirzakhanian, City Manager
FROM:
Libby Bretthauer, Finance Director
Emy-Rose Hanna, Financial Services Manager
Alexis Motonaga, Budget & Financial Analyst
SUBJECT:Title
Fiscal Year 2026-2027 First Quarter Budget Update and Consideration of Grant-Related Budget Appropriations (Partially Budgeted) (Finance Director Bretthauer).
(Estimated Time: 30 Min.)
A) RECEIVE REPORT
B) APPROPRIATE FUNDS
Body
_________________________________________________________
RECOMMENDATION:
Staff recommends that the City Council receive the Quarter 1 Budget Report, and approve a budget adjustment appropriating $95,643 in the Grants Fund and $10,627 in the Proposition A Fund for preventive maintenance on two Dial-A-Ride buses.
FISCAL IMPLICATIONS:
Fiscal implications are discussed in further detail within this report.
If approved, the proposed budget adjustment appropriates expenditures and adjusts revenues by $95,643 in the Grants Fund and a 10% local match of $10,627 in the Proposition A Fund, for a total of $106,270, for preventive maintenance on two grant-funded Dial-A-Ride buses. There is no financial impact to the General Fund.
BACKGROUND:
The City Council adopted the fiscal year (FY) 2027 Budget on June 2, 2026. In an effort to keep the City Council and community fully informed of the City's fiscal performance, staff is providing a presentation of financial information to the City Council ahead of the traditional mid-year report that will be presented in February 2027.
A preliminary year-end update for last fiscal year (FY 2026) was presented to the City Council on October 6, 2026. With all year-end transactions now complete, the estimated ending General Fund balance totaled $44.3 million as of June 30, 2026. Within this amount, the Financial Policy designation of 20% of General Fund expenditures totaled $21.1 million, the Economic Uncertainty Reserve totaled $4.0 million, Restricted Fund Balance was $1.5 million, and the balance of $17.6 million was unreserved.
The most significant change to the fund balance total for FY 2026 is due to a change in accounting methodology done in coordination with the City’s new audit firm. Historically, the City deposited funds restricted for specific purposes into individual “balance sheet accounts” to easily track and report on restricted fund balances. However, standard accounting practice is to record these receipts as revenue and then designate them separately within the fund balance as “Restricted” Fund Balance (per GASB 54). To transition to this accounting method, $1,562,771.62 was recorded as a prior period adjustment in the General Fund for FY 2026. A new category within the budgetary fund balance will now be reported to reflect the “Restricted Fund Balance”. Individual accounts within the Restricted Fund Balance will still be reported on with the Month-End Financial Reports. More information on the prior period adjustments and accounting change will be presented during the presentation of the Annual Comprehensive Financial Report in early 2027.
DISCUSSION:
The Budget is both a spending plan for the City’s available financial resources and the legal authority for the City’s various departments to spend available resources and meet the needs of Manhattan Beach residents. The City operates on a July 1 to June 30 fiscal year. This report identifies trends and updates after the first quarter of activity (July 1 through September 30).
The Citywide Revenue Budget adopted by Council was $199,569,438. As of the end of the FY2027 First Quarter, the amended budget is $240,034,688. The Citywide Expenditure Budget adopted by Council was $212,583,515. As of the end of the FY2027 First Quarter, the amended budget is $332,646,168. The Amended Budgets include carryforwards (unspent encumbrances for contracts, capital projects and grants) and City Council-approved adjustments.
FY 2027 First Quarter General Fund Activity
General Fund cash flows in the first quarter of each fiscal year are typically negative due to the timing of significant revenue sources such as Property Taxes, which are received in December, January, April, and May. Therefore, expenditure activity in the first quarter often surpasses revenues early in the fiscal year. However, by the end of the fiscal year on June 30, General Fund revenues typically exceed expenditures and conservative budget estimates.
The General Fund Revenues Budget was adopted at $119,112,514 and has since increased by $117,024 (0.1%) as of the first quarter of FY 2027 (Q1 2027). The Q1 2027 General Fund Revenues totaled $15,950,086. Compared to the prior year, FY 2026 (Q1 2026), revenues resulted in a decrease of $13,511,672 (-45.9%) due to one-time bond proceeds totaling $16,649,819 received in August 2025, which reimbursed the General Fund balance for the acquisition of property at 400 Manhattan Beach Boulevard and the purchase of replacement Public Safety Radios.
The General Fund Expenditure Budget was adopted at $127,937,806 and has since increased by $1,529,193 (1.2%) as of the first quarter of FY 2027 (Q1 2027), mainly due to encumbered contracts carried forward from the prior year. The Q1 FY 2027 General Fund Expenditures are higher than the first quarter of FY 2026, totaling $37,114,687, compared to $29,393,206 in the previous first quarter of FY 2026, an increase of $7,721,481 (26.3%). A significant factor in the General Fund expenditure variance from the prior year is that Budgeted Transfers Out were fully expended, totaling $11 million. Of this amount, $5 million was transferred to the CIP fund and $6 million was transferred to the Insurance Reserve Fund.
Revenues
First-quarter revenues for FY 2027 are $13,511,672 (-45.9%) lower than last year, which included the one-time bond proceeds of $16.6 million received in FY 2026. Ongoing Revenues, excluding Bond Proceeds and Budgeted Transfers In, are $3,081,957 (24.1%) higher than the previous year. The next section will detail General Fund revenues received from July through September 2026.
Property Tax is a primary source of the City's General Fund revenues. In the first quarter of FY 2027, total receipts for the Property Tax category increased by $69,115 (7.2%) compared to last year. HdL, the City’s Property Tax consultant, confirmed a 5.3% ($1.5 billion) rise in net taxable assessed values for FY 2027. With the increase in net taxable assessed values, the City’s estimated Secured Property Tax revenues are now projected to be nearly $40.8 million, about $200,000-$300,000 above budget, depending on the number of delinquencies. Approximately 88.2% of the City’s 2026/2027 assessed values are residential use, and the City continues to see Property Tax revenue increases from strong home sales and the resulting higher assessed values from transfers of ownership.
Sales & Use Tax received in the first quarter amounted to $907,041, which aligns with the sales tax projections provided by HdL. The Q1 2027 amount reflects an increase of $67,042 (8.0%) from the prior year, due to increases within the Restaurant/Hotels, Food/Drug, and Building/Construction retail categories. However, at the end of the fiscal year, Sales Tax revenues may fall approximately $375,000 short of the budgeted amount of $12.0 million due to a significant sales tax producer shifting operations to another City.
Local Transaction and Use Tax includes the City’s one-half cent Measure MMB Local Transaction & Use Tax (TUT) that went into effect on April 1, 2026. The TUT revenues increased by $201,801 (58.1%) in Q1 2027 when compared to the prior year. Based on the latest updates from HDL, the City’s TUT is performing better than the Sales & Use Tax category because the TUT is generated based on point of delivery, where the entire 0.50% TUT assessed in Manhattan Beach is remitted to the City. The standard Sales & Use Tax is generated based on point of sale, and that revenue is allocated across multiple agencies and county pools. At the end of the fiscal year, Measure MMB Local TUT revenues are expected to meet or exceed the budgeted amount of $6.6 million.
Transient Occupancy Tax (TOT) revenues collected by hotels in the first quarter of FY 2027 increased by $159,603 (10.7%) from the prior year. Based on insights from HDL, the Restaurants/Hotels retail category has increased in 2026. Additionally, the FIFA World Cup games increased tourism in the region within the months of June through July, which has contributed to increased TOT revenues for the City. Staff will continue to monitor TOT revenues through additional outreach to hotels and report updates during the FY 2027 mid-year budget update.
Short-Term Rental (STR) TOT is collected from STRs operating within the Coastal Zone. Compared to Q1 2026, revenue increased by $247,711 (107.9%) from the prior year. Additionally, the City observed a total of 246 licensed STR operators in September 2026, compared to 184 licensed operators in September 2025, reflecting a 34% increase in licensed STR operators. Similar to the hotel industry, the FIFA World Cup games held in Los Angeles contributed to increased Short-Term Rental TOT revenues for the City. These TOT revenues are expected to meet or exceed the budgeted amount of $1.4 million.
Business License Taxes received in the first quarter totaled $280,265, reflecting a $105,550 (-27.4%) decrease from the first quarter of the previous year. This decrease is attributable to the robust “Discovery” program payments that kicked off in FY 2026 and is now slowing down in FY 2027. The Discovery program was implemented using HDL’s additional resources, which identifies unlicensed businesses operating within the City. Typically at the beginning of the Program, a large group of unlicensed businesses are “Discovered” and brought into compliance. Following this initial process, the discovery payments wind down as fewer businesses are out of compliance. The Business License Tax revenues are expected to meet or exceed the budgeted amount of $5.9 million.
Building Permits and Plan Check Fees. The volume of issued building permits and processed plan checks both increased from the same quarter last year. Building permit revenues increased by $360,344 (56.7%), whereas plan check fees increased by $981,189 (97.4%). The substantial increase in building permit and plan check revenues results from increased development activity from large-scale residential and commercial projects currently underway. Another contributing factor is the annual adjustment to the Citywide User Fees, which are updated on July 1 of each year to reflect MOU increases. Overall trends indicate that revenues will exceed the projected budget at year-end. Staff will closely monitor these development-related revenues and will include any necessary budget adjustments during the next Mid-Year budget update.
Parking Citation revenues rose by $182,564 (36.3%) compared to the same quarter last year due to a combination of factors, including increased parking enforcement operations and increased parking citation fines that went into effect on August 1, 2026.
Interest Earnings increased by $405,772 or 123.3% compared to the previous year’s first quarter. This revenue increased partly due to higher yields on investments. For instance, the average annual Yield to Maturity (YTM) in September 2025 was 3.758%, whereas the YTM in September 2026 reached 4.030%, indicating a greater average yield on the City’s investment portfolio.
The increase in interest earnings can also be attributed to the “Sweep Account” that was implemented by the Finance Department last year. This sweep account works by having the City’s bank automatically move money from the City’s checking account into a higher-yield account overnight, resulting in increased interest earnings for the City.
The From Other Governments category includes grants and other reimbursements to the General Fund, including funds related to the implementation of State mandates. The amount received in the Q1 FY 2027 is $47,894 (42.7%) higher than the previous year. A majority of this variance stems from the timing of when the payments are received as the two major revenue sources under this category (Vehicle License Fee Penalties and State Mandated Reimbursements) were received much earlier this fiscal year than in the prior fiscal year. These revenues are difficult to predict and can fluctuate year-to-year.
Service Charges (excluding Plan Checks) increased by $3,714 (0.1%) compared to the corresponding quarter last year. This category encompasses service charges related to Parks and Recreation registration fees, as well as other cost recovery fees for ambulance transports, planning and building services, and public safety reimbursements. The City continues to see strong enrollments in recreation classes and activities with increases in Youth and Teen Programs, Tennis Operations, Enrichment Classes, and Facilities & Parks reservations. Notable decreases in Q1 2027 include Swimming Classes, Enrichment Classes, and Sports Classes. Increases in Ambulance Fees, Planning Filing Fees, and other Recreation programs impacted the overall category. Additional increases in Service Charges are due to the updated Citywide User Fees that adjust annually per MOU increases on July 1 of each year.
Operating Service Transfers are reimbursements from other funds to the General Fund. The Q1 FY 2027 resulted in an increase of $274,613 (22.4%) over the prior year, primarily due to increased Engineer Service Charges recovered from other funds based on capital project activity within FY 2027.
The Miscellaneous category increased by $184,770 (88.4%), which was largely due to increases in Workers Compensation Salary Continuation, Legal Settlements, Public Works Reimbursements, City Store Sales, and Miscellaneous Revenues, all of which had higher revenues in the first quarter of FY 2027 compared to the prior fiscal year. It is important to note that increases in Workers' Compensation Salary Continuation revenues reflect higher Workers' Compensation payouts and costs in the Insurance Fund.
Expenditures
General Fund Expenditures in Q1 2027 are $7,721,481 (26.3%) higher than last year due to the fully expended Interfund Transfers Out of $11 million to support the CIP Fund ($5 million) and Insurance Fund ($6.0 million). Ongoing General Fund expenditures are trending with FY 2027 Budget estimates, but $1,991,027 (8.3%) greater than the previous year’s quarter. The next section details General Fund Expenditures expended from July through September 2026.
Salaries and Wages are higher than the prior-year quarter by $219,515 (2.0%), mainly due to salary and wage increases approved through employee labor group Memoranda of Understanding (MOUs) and fewer unfilled positions than last year. Benefits expenses for insurance (Medical, Dental, Vision), Medicare, and CalPERS “Normal Cost” contributions for active employees are up by $239,880 (5.9%), mainly due to the increase in Workers Compensation internal service charges. Additionally, $2.5 million was paid to CalPERS for Unfunded Accrued Liability payments, which were fully expended in the first quarter to take advantage of early payment discounts. In the prior year, this payment was made from the Section 115 Trust Fund instead of the General Fund, resulting in the large General Fund variance over the prior year.
The Contract & Professional Services category is down by $1,066,968 (-26.1%) due to lower Contract Services and Legal Services than the prior-year period, driven by the timing of invoices and differences in the level of consultants and temporary staffing backfilling vacant positions. Additionally, the prior year included a significant one-time payment of $397,017 for legal services.
The Materials & Services category is lower than prior year overall by $310,182
(-25.3%), due to lower budgets for Departmental Supplies and Training/Conferences/Meetings, reflecting cost-containment strategies directed by the City Council during the FY 2027 Budget process.
Utilities increased overall by $61,182 (19.3%) due to higher electricity, telephone, and water costs posted in Q1.
Internal Service Charges increased by $397,445 (11.2%), driven by higher charge-outs budgeted to support internal service funds. This includes support for higher insurance premiums and claims/litigation expenses in the Insurance Fund as well as an increased Fleet Rental Allocation reflecting recent vehicle acquisitions. Higher costs for fuel, materials, services, supplies, and other factors have generally led to increased operational costs for Fleet Maintenance and Building Maintenance.
Other nonrecurring uses of General Funds include the Property & Equipment and Interfund Transfers Out categories. The Property & Equipment category includes minor equipment replacements; in FY 2026, this category included public safety radio replacements purchased for $3.4 million. Interfund Transfers Out includes a subsidy to fully fund Street Lighting Fund operations that will be transferred at year-end, the $5.0 million transfer to the CIP Fund, and the one-time $6.0 million transfer to the Insurance Fund.
General Fund Surplus / (Use of Reserves)
The FY 2027 Budget was adopted with a projected deficit of $8.8 million, while the Revised Budget includes new appropriations plus contract encumbrance carryforwards, bringing the revised deficit to $10.2 million. Excluding the necessary transfer to the Insurance Fund of $6.0 million, the General Fund has a gap of about $4.2 million or 3.5% of ongoing General Fund expenditures, which is likely to be mitigated by a combination of revenue increases and expenditure controls. Historically, General Fund revenues have ended higher than conservative projections and expenditures have ended lower than budgeted, so the projected gap of about $4.2 million will likely change with the year-end projections presented with the Mid-Year budget report.
General Fund Reserves in FY 2027
With positive results yielding an increase of fund balance in FY 2026, staff recommends maintaining the Economic Uncertainty Reserve at $4.0 million in FY 2027. Taking into account FY 2026 year-end results and the Adjusted Budget estimate for FY 2027, a preliminary estimate of General Fund budgetary fund balance at year-end is $34.0 million.
|
Reserve for Financial Policy* |
$23,249,764 |
|
Reserve for Economic Uncertainties |
4,000,000 |
|
Restricted Fund Balance (New) |
1,562,771 |
|
Unreserved Fund Balance |
5,236,463 |
|
General Fund Budgetary Fund Balance |
$34,048,998 |
*20% of Expenditures
Staff is preparing a comprehensive review of the City's Financial Policies, including Reserve Policies, for the Finance Subcommittee and City Council. Current guidance from the Government Finance Officers Association (GFOA) advises local governments to move away from relying exclusively on a fixed reserve percentage and instead adopt a risk-based approach that determines reserve levels according to the government's specific financial and operational risks. Although the City’s current financial policies will be a useful starting point, a comprehensive, risk-based Reserve Policy encompassing all significant General Fund burdens (e.g., the CIP Fund, Insurance Reserve Fund, IT Fund, Section 115 Pension Trust Fund and Fleet Fund), as well as establishing capital reserves in the Enterprise Funds, is necessary to guide future decisions on how the City will maintain, use, and replenish reserves. The refreshed Policies could also guide decisions on allocating any future one-time revenues as well as additional revenue from the recently approved Manhattan Country Club ground lease. Updates to the Financial Policies would then be incorporated into the FY 2028 Proposed Budget as approved by the City Council.
FY 2027 First Quarter Other Significant Funds Activity
Water Fund and Sewer Fund Revenues
Water Fund revenues are up overall by $343,429 (6.0%) from the previous year's quarter as a result of the pass-through volumetric rate adjustments and annual rate increases. Sewer Fund revenues are also up overall by $95,339 (6.8%) from the previous year's quarter. Water consumption increased by approximately 4.7% in Q1 of FY 2027 compared to Q1 of FY 2026 due to warmer, drier conditions between July and September 2026 relative to the previous year, which supported elevated irrigation demand. Similarly, Sewer Fund revenues increased, as sewer charges are directly tied to consumption levels.
Reserves in the Water Fund and Sewer Fund are not meeting the City’s current reserve policy. In January 2026, the City Council approved an agreement with Raftelis Financial Consultants, Inc. to complete a new Water and Sewer Rate Study to address the reserve shortfalls and funding needs for future infrastructure projects. The study is currently underway and is expected to be presented to City Council in early 2027.
Development Impact Fee Funds
Starting in FY 2027, the City began collecting Development Impact Fees (DIFs), which are one-time charges on new development and are used by the City to cover the cost of capital facilities, vehicles, and equipment required to serve new growth. The DIF Funds are comprised of eight separate funds for Administration, General Government, Police, Fire, Transportation, Water, Storm Drain, and Sewer. While no budget was adopted in the new DIF Funds, a total of $3,734 has been collected in Q1 2027. Staff will continue to monitor and report on these new impact fee revenues received throughout the fiscal year.
Parking Fund
Parking Fund revenues are down by $55,457 (-3.0%) compared to the prior year quarter. This temporary decrease is partially due to the variable parking rates that were adopted by City Council on July 7, 2026, and went into effect beginning September 2026, which set lower parking rates during the off-peak season (September through April) and higher rates during the peak season (May through August). These parking rate adjustments were recommended through the Citywide Parking Management Study and were designed to better align parking costs with seasonal demand, support turnover in high-traffic areas, and provide additional funding for ongoing maintenance and capital needs within the Parking Fund. Over time, these changes will strengthen the financial position of the Parking Fund and support reinvestment in parking infrastructure, technology upgrades and improved customer service initiatives, such as the Parking Pay Stations and Mobile App project.
The FY 2027 budget factors a $375,000 loss in Parking Fund revenue from the holiday meter bagging period for City lots and streets (the Pier, El Porto and Bruce’s Beach lots are not bagged). Per City Council direction on November 7, 2017, the meter-bagging period is for four weeks (28 days). This year, the 28 days will begin on November 27, 2026 (a City-closed holiday) and run through December 25, 2026, with bag removal on December 26, 2026 (a City-closed weekend). Since the meter bagging and removal would occur on City closure dates this year, an estimated $4,225 in overtime costs are expected. Additionally, the 28 days of free parking result in an estimated loss of $107,000 in parking citation revenue. Together, these result in a net impact of $486,225 based on the loss of Parking Fund revenue, parking citation revenue (General Fund) and overtime (General Fund).
Insurance Fund
The FY 2027 Insurance Fund Revenue Budget was adopted at $17,734,758, including a $6 million transfer from the General Fund. Expenditures in the Insurance Fund are currently budgeted at $13,779,009. Due to the full expense of the City’s insurance premiums in July of every year, Q1 expenditures are currently trending at 50% of budget.
As part of the broader Financial Policies and Reserves discussion, staff is preparing a report for City Council consideration with options to use actuarial valuations to budget for projected liabilities, rather than the City’s historic process for budgeting and funding workers’ compensation and liability claim expenses based on historical averages, which leads to funding gaps when costs are rising faster than past trends.
Proposed Budget Adjustment
In 2020, staff secured a $462,600 grant that subsidized 90% of the cost of purchasing and maintaining applicable Dial-A-Ride buses through the Federal Transit Administration’s (FTA) Section 5310 Program. In addition to the grant funds, the City earmarked $51,400 in Proposition A local return funds to utilize as a local match. In FY 2024, City Council approved the purchase of two grant-funded Dial-A-Ride buses at a cost of approximately $407,730. The purchase of the vehicles was executed in FY 2025; however, the remaining funds were neither encumbered nor included in subsequent carryforward processes and therefore are not currently included in the FY 2027 budget. As the grant funds were not fully expended on the purchase of the vehicles, the award allows the City to apply the remaining grant funds ($95,643) toward preventive maintenance, provided that the City provides a corresponding 10% local match ($10,627). Staff proposes appropriating $95,643 in the Grants Fund and a 10% match of $10,627 from the Proposition A Fund, for a total of $106,270, to subsidize preventive maintenance on the two eligible Dial-A-Ride buses that were purchased, alongside a matching revenues appropriation in both funds.
Next Steps
On September 22, 2027, staff presented a Cost Containment Strategies survey to the Finance Subcommittee, identifying budget-balancing tools already adopted in Manhattan Beach, as well as other strategies to consider. The Finance Subcommittee recommended staff bring the item to the City Council for further discussion, which staff will bring as a separate item.
Staff recommends the City Council receive the Quarter 1 Budget Report and approve the budget appropriation request. Further details on the City’s fiscal performance will be shared in February 2027 with the Mid-Year Budget Report.
PUBLIC OUTREACH:
After analysis, staff determined that public outreach was not required for this issue.
ENVIRONMENTAL REVIEW:
The City has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that the activity is not a “Project” as defined under Section 15378 of the State CEQA Guidelines because it consists of an administrative activity of government that will not result in direct or indirect physical changes in the environment. Therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines, the activity is not subject to CEQA. Thus, no environmental review is necessary.
LEGAL REVIEW:
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
ATTACHMENTS:
1. FY 2027 First Quarter Comparison Reports
2. PowerPoint Presentation