TO:
Honorable Mayor and Members of the City Council
THROUGH:
Talyn Mirzakhanian, City Manager
FROM:
Onyx Jones, MPA, Interim Finance Director
Libby Bretthauer, Financial Services Manager
Julie Bondarchuk, Financial Controller
Marcelo Serrano, Budget and Financial Analyst
SUBJECT:Title
Fiscal Year 2024-2025 First Quarter Budget Update (Interim Finance Director Jones).
(Estimated Time: 15 Mins.)
A) RECEIVE REPORT
B) APPROPRIATE FUNDS
Body
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RECOMMENDATION:
Staff recommends that the City Council receive the report and appropriate funds in FY 2024 as described in the “Discussion” section.
FISCAL IMPLICATIONS:
Fiscal implications are discussed within this report.
BACKGROUND:
The City Council adopted the fiscal year (FY) 2025 Budget on June 4, 2024. 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 2025.
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. The fiscal year ending June 30, 2024 (FY 2024) has concluded and staff is now finalizing the audit and preparing the Annual Comprehensive Financial Report (ACFR).
FY 2024 Year-End Results and Budget Adjustments
Results of the FY 2024 audit and ACFR financial statements will be presented and discussed with the Finance Subcommittee before being presented to the City Council in January 2025.
The City’s Financial Policies state in Section 9 - Operating Budget Policies that “in no case may total expenditures of a particular fund exceed that which is appropriated by the City Council without a budget amendment.” From time to time, extraordinary events cause total fund expenditures to exceed budgeted appropriations. Per the City’s Financial Policies, City Council approval is required if the expenditures exceed the appropriation in a fund. After the conclusion of FY 2024, expenditures in two funds exceeded appropriations requiring a year-end budget adjustment.
In the Insurance Fund, an appropriation of $771,804 is needed due to an unanticipated increase in insurance claim reserves. Accounting standards dictate that claim expenses are recognized in the period in which the claim is incurred. The Fund has sufficient fund balance to absorb these additional expenditures.
In the Pension Fund, an appropriation of $6,481 is needed for increased retiree medical costs caused by a higher than anticipated number of employee retirements. All retiree medical costs are reimbursed by the City’s California Employers’ Retiree Benefit Trust (CERBT) plan.
FY 2025 First Quarter General Fund Activity
Fiscal Year (FY) 2025 commenced on July 1, 2024. It is common for General Fund cash flows in the first quarter of each fiscal year to be negative due to the timing of significant revenue sources such as Property Taxes, which are typically received in December, January, April, and May. Consequently, expenditure activity in the first quarter often surpasses revenues, which is an anticipated occurrence early in the fiscal year. Nevertheless, it is usual for revenues to exceed expenditures by the end of the fiscal year on June 30.
When comparing the first quarter of FY 2024 (Q1 2024) to that of FY 2025 (Q1 2025), General Fund revenues appear lower than those of the previous fiscal year. This discrepancy results from a recent change in accounting accrual methodologies. To align with best practices and ensure consistent reporting, revenues such as Property Tax, Sales Tax, Transient Occupancy Taxes (Hotel and Short-term Rental), and Leases/Rents received in July and August should be attributed to the prior fiscal year and reversed from the first quarter.
Previously, revenues for Sales Tax, Transient Occupancy Tax, and some leases/rents were not reversed until the current fiscal year ended, and the subsequent year's July/August revenues were accrued. Moving forward, all prior year revenues will be reversed from Q1, and future trends will normalize after this one-time adjustment in methodology.
General Fund Expenditures are higher overall in the first quarter compared to the previous fiscal year quarter, primarily due to an additional payroll period occurring in Q1, as well as increased Fire Department Overtime expenses related to mutual aid deployments.
Revenues
Due in most part to recent changes in accounting accrual methods, first-quarter revenues for FY 2025 are $3,410,618 (22.0%) lower than last year, excluding the net change of $448,420 for unrealized investment gains/losses. The next section will detail the General Fund revenues received from July through September 2024.
Property Tax is a key source of the City's General Fund revenues. In the first quarter of FY 2025, total receipts increased by $61,403 (6.9%) compared to last year. HdL, the City’s Property Tax consultant, confirmed a 5.2% ($1.3 billion) rise in net taxable assessed values for FY 2025. With this increase, the City’s estimated secured Property Tax revenues are projected to be $36.7 million, about $120,000 above budget. Increased home sales from January through July and higher assessed values from those recent parcel sales will contribute to this increase.
Sales & Use Tax received in the first quarter amounted to $1 million, which aligns with the sales tax projections provided by HdL. Furthermore, if the adjustment for accruals was applied in FY 2024, revenues would have totaled $842,375. This indicates that if the methodological change had been implemented in the prior year, revenues would have actually increased by $205,341 (24.4%). At the end of the fiscal year, Sales Tax revenues are expected to meet the budgeted amount of $11.3 million.
Transient Occupancy Tax (TOT) revenues are also lower than the prior year due to the change in accounting accrual procedures between fiscal years. Total receipts from Hotels in the first quarter were $440,881 or 21.1% lower than the prior year period. However, when compared to FY 2024 revenues adjusted for prior year accruals, FY 2024 revenues would have totaled $1,520,787. With the first quarter of FY 2025 totaling $1,647,417, revenues increased by $126,630 or 8.3%, indicating that revenues at fiscal year-end will meet or exceed the budget of $7.4 million.
Separately, TOT collected from Short-Term Rentals operating within the Coastal Zone increased by $32,791 or 14.7% from the prior year. Although the same accounting methodology change impacted FY 2025 revenues, consistent growth in operations resulted in a year-over-year increase. The City now has over 150 licensed short-term rentals, with about 85 highly active over the summer months.
Business License Taxes received amounted to $164,940, which reflects a 33.8% decrease compared to the first quarter of the previous year. This decline was partly attributable to a one-time increase in the prior year due to enhanced collection efforts for businesses that remained delinquent following the Covid-19 pandemic. Additionally, there was a reduction in overall gross receipts reported by businesses this fiscal year, impacting the tax calculations and associated payments.
Building Permits. The volume of issued building permits and processed plan checks both decreased from the same quarter last year. Building permit revenues declined by $99,051 or 14.9%, whereas plan check fees increased by $109,512 or 23.5%. Such variations can occur when large projects boost revenues in a particular month. Overall trends do not suggest that revenues will deviate from the projected budget at year-end. The number of demolition permits was slightly higher than the prior year, and once rebuilt, these properties generally have higher assessed values than before. Building record requests also increased by 4.6% year-over-year, indicating potentially higher home sales in the first quarter compared to the previous year. However, it is important to note that the number of building record requests remains approximately 18.0% lower than the historical five-year average, reflecting the impact of higher mortgage interest rates and continued low inventory.
Other Service Charges (excluding Plan Checks) decreased by $174,417 or 5.0% 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. Despite strong enrollments in recreation classes and activities with increases in Swimming Classes, Enrichment Classes, and Facilities & Parks reservations, a decline in ambulance fees impacted the overall category. In the previous year, the City’s new ambulance billing vendor significantly boosted revenues through enhanced efforts to collect delinquent accounts in 2023.
The Interest and Rents category indicates a decrease of $498,955 (51.5%) compared to the previous year’s first quarter, primarily due to quarterly hotel rent payments of $465,757 received in July that were accrued to the prior year. Similar to taxes, these payments are made after each quarter ends, and an accounting entry is necessary to adjust the payments to the prior fiscal year. If FY 2024 revenues had been adjusted for accruals in the same manner as FY 2025, the Interest and Rents category would have totaled $509,199, resulting in a variance of -$39,817 or -7.8%. This smaller decline is attributable to the removal of a wireless communication tower from the Parking Lot 3 structure in late 2023, resulting in a monthly revenue loss of $6,679, and lower Covid-19 business loan repayments due to loan payoffs in the last year.
The Unrealized Investment Gain/Loss has been identified separately from the Interest and Rents category due to big market swings in the last few years. At the end of every fiscal year, an accounting entry is required to “mark-to-market” the City’s investments. Governmental Accounting Standards Board (GASB) Statement No. 31 states that “all investment income, including changes in the fair value of investments, should be reported as revenue.” As such, on June 30, the City’s investments were “mark-to-market” and a loss on investments of $1,141,441 was posted in FY 2023-2024. Then, since the City carries investments at cost (“book value”) throughout the year, the June 30 loss was reversed on July 1, which created the significant positive amount in Fiscal Year 2024-2025. This amount will be adjusted at the end of this fiscal year, when investments are again marked to new market values on June 30, 2025.
Parking Citations revenues rose by $94,660 (30.0%) compared to the same quarter last year, due to hiring three Lead Community Services Officers in FY 2024 and increased parking enforcement.
Operating Service Transfers are reimbursements to the General Fund from other funds per the February 2020 Cost Allocation Plan. Engineering staff time on capital projects and grants decreased slightly, causing a relative drop of $48,797 (4.5%).
The From Other Governments category includes grants and other reimbursements to the General Fund related to the implementation of State mandates. The amount received in the first quarter of FY 2025 is $251,307 (98.0%) lower than the previous year. A majority of this variance stems from payments received in FY 2024 related to two completed grants, the implementation of a Housing Element Update from the State and a passthrough grant for homelessness outreach from the County through the South Bay Cities Council of Governments (SBCCOG). The remainder of the difference is tied to a higher number of reimbursements received in the previous fiscal year for the implementation of mandates under the State’s Property Tax Relief Act of 1972 (Senate Bill 90).
Miscellaneous There was a $175,335 or 139.7% increase in revenues, which was largely from Workers Compensation Salary Continuation revenues reimbursing the General Fund for Injury-On-Duty leave. Although this is an increase in General Fund revenues, this also reflects higher payouts and costs in the Insurance Fund.
Expenditures
General Fund expenditures are in-line with FY 2025 Budget estimates; however, in total expenditures are $2,092,305 or 10.3% higher than the previous year’s quarter.
Salaries and Wages increased by $1.4 million (15.3%) due to an extra payroll date in this quarter as well as accrued leave payouts for retired employees. The Fire Department's overtime costs for Mutual Aid deployments also rose but will be reimbursed by the California Governor’s Office of Emergency Services (Cal OES). Other increases align with approved salary and wage increases per employee labor group Memoranda of Understanding (MOU) and additional authorized full-time positions. Benefits expenses for insurance (Medical, Dental, Vision), Medicare and CalPERS “Normal Cost” contributions for active employees are up by $241,977 (6.6%).
At the end of September, about 30 General Fund positions remain unfilled, similar to last year. Unfilled positions across departments are expected to result in year-end savings. However, a seven percent vacancy factor was included in the FY 2025 budget to account for these savings upfront. If any department remains fully staffed throughout the fiscal year, that department may exceed the budgeted salaries and benefits.
Contract & Professional Services expenditures have increased by $218,773, or 6.9%, due in most part to the utilization of consultants while vacant positions are being filled. There is typically an offset in salaries when this occurs. Additionally, higher rates for legal services contributed to this variance.
Materials & Services expenditures are down by $28,294 (3.1%) due to reduced use of training and conference budgets, including POST Trainings, in the first quarter. Moreover, utility costs decreased by $16,800 (4.8%) because of fluctuations in electricity and natural gas prices.
Internal Service Charges saw an increase of $65,796, or 2.3%, driven by higher charge-outs budgeted to support internal service funds. This includes slightly higher insurance premiums in the Insurance Fund, essential equipment replacement purchases in the Information Technology Fund, and an increased Fleet Rental Allocation reflecting recent acquisitions. Higher costs for fuel, materials, services, supplies, and other factors have generally led to increased operational costs for Fleet Maintenance and Building Maintenance.
With ongoing inflationary pressures, cost containment and efficiency improvements will remain a priority as staff prepare next year’s budget. Additionally, the recovery of costs for discretionary services through user fees is under review, with staff expected to seek further direction from City Council in early 2025.
Key Enterprise Fund Revenues
Revenues in two enterprise funds are being closely monitored for impacts from extraordinary events:
Water Fund
Water Fund revenues are up by $86,275 (1.6%) from the previous year's quarter. Excluding the Unrealized Investment Gain/Loss adjustment of $548,333, revenues have increased by $634,608 (13.9%). The heavy rainfall from Hurricane Hilary in August 2023 affected water consumption patterns. Over the past two years, increased rainfall and water conservation have led to lower water consumption and revenues, falling short of projections for FY 2022 and FY 2023 despite rate increases. The Water Fund is also not meeting the City’s reserve policy. Staff will present solutions to the City Council in early 2025 to address the revenue shortfall.
Parking Fund
Parking Fund revenues are down by $6,558 (0.5%) compared to the prior year quarter. The emergency demolition of Parking Lot 3 was expected to significantly affect revenues. However, some parking has shifted to other Downtown lots and street parking and the overall revenue loss likely will not reach the previously projected $600,000 by year's end. Current parking meter rates are insufficient for upcoming infrastructure projects. A Citywide parking study is currently underway to consider pricing strategies to recover the cost of operations and provide long-term infrastructure funding. Staff will report back to City Council in 2025 with the results of the ongoing parking study and funding options.
Further details on the City’s fiscal performance will be shared in February 2025 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 2025 First Quarter Comparison to Prior Year - By Category
2. FY 2025 First Quarter Comparison to Prior Year - By Department
3. FY 2025 Q1 Statement of Revenues and Expenditures - All Funds
4. FY 2025 Q1 General Fund Revenue Trends
5. PowerPoint Presentation