HomeMy WebLinkAboutCC 2025-01-28_11a Five Year Financial ForecastItem 11.a.
MEMORANDUM
TO: City Council
FROM: Nicole Valentine, Director of Administrative Services
SUBJECT: Five-Year Financial Forecast
DATE: January 28, 2025
RECOMMENDATION:
Review and discuss the Five-Year Financial Forecast (“Forecast”).
IMPACT ON FINANCIAL AND PERSONNEL RESOURCES:
The forecast provides an analysis of the financial impact of revenue and expenditure
changes in the current fiscal year and the following five years. Preparation of the forecast
required several hours of staff time, with additional review and input provided by the City’s
financial consultant.
BACKGROUND:
As shown in Figure 1, Step 1 in the Biennial Budget Process, the focus is on providing
information to the City Council and community on the state of the City’s finances. This
background sets the stage for goal-setting and budget development that will occur over
the next several months. Accordingly, this report provides an updated Five-Year Forecast
of General Fund operations, along with information on revenues and expenditures from
the recently approved local sales tax, Measure E-24, as well as Measure O-06. Here are
some key points regarding this Forecast:
Forecast is not a budget proposal, but rather a planning tool to facilitate a
discussion for the creation of the upcoming FY 2025-27 Biennial Budget;
Focuses on the General Fund and Measures E & O;
Assumes no enhancements to current service levels or increases in staffing
(Status Quo); and
Contains estimates based on the best information available at the time it is
prepared.
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Item 11.a.
City Council
Five-Year Financial Forecast
January 28, 2025
Page 2
Figure 1 – Biennial Budget Process
On June 11, 2024, City staff presented a 2024-25 Mid-Cycle Budget Update1 to the City
Council that showed a General Fund that was balanced overall with the use of an excess
available fund balance. The largest use of the fund balance in the FY 2024-25 budget
was for a $2.36 million transfer to the Capital Improvement Program2 for pavement
improvement. Repairing and maintaining the City’s 73 miles of roads was one of three top
priorities3 identified by Arroyo Grande residents in 2024 , and City staff believes that
community priority contributed to the passage of Measure E-24 in November of 2024.
Given this high priority identified by the community, in addition to the one-time General
Fund dollars included in the FY 2024-25 budget, this Forecast assumes all $6+ million
received annually from Measure E will be allocated to road infrastructure improvements.
Note that this is not a proposal from City staff at this time. The City Manager will make a
recommendation on the allocation of this funding to the City Council as part of the
upcoming budget process. However, as a starting point for purposes of forecasting the
City’s future finances, staff has assumed Measure E would be used to fund the large
infrastructure needs. It is also important to note that while this allocation would give a
1 https://pub-arroyogrande.escribemeetings.com/filestream.ashx?DocumentId=11090
2 https://pub-arroyogrande.escribemeetings.com/filestream.ashx?DocumentId=10770
3 https://pub-arroyogrande.escribemeetings.com/filestream.ashx?DocumentId=10915
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Item 11.a.
City Council
Five-Year Financial Forecast
January 28, 2025
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significant boost to the City’s road improvement program, it will not directly pay for City
services paid for by the General Fund in an ongoing manner.
ANALYSIS OF ISSUES:
As previously prefaced, below are some highlights of this Forecast:
Projected beginning fund balance of $7.7 million for FY 2025-26;
o $1.6 million higher beginning fund balance than the FY 2024-25 mid-cycle
budget update, primarily due to:
FY 2023-24:
o Revenues higher than estimate by $0.6 million;
o Expenditures lower than estimate by $0.5 million;
FY 2024-25:
o Revenues expected to be $0.5 million higher;
General Fund shortfall projected to an average of $1.4 million annually throughout
Forecast;
o Note: this shortfall does not include any impact from Measure E since that
new funding is allocated to only road improvement projects in this Forecast;
Fund balance drops below 15% minimum target by FY 2027 -28 and to only 2% by
FY 2029-30 as shown in Table 1.
Table 1: Status Quo Financial Forecast
For discussion and information only, staff made two adjustments to the above Forecast
scenario to give an example of how a portion of the $1.4 million annual shortfall could be
addressed. Currently, the General Fund pays for 75% of the cost of the Five Cities Fire
Authority (FCFA) contract and the Measure O Local Sales Tax Fund pays for 25%. In
addition, Measure O currently pays for one police officer position. The following table
includes two changes to these two safety budget items:
1. Change percentage split of FCFA contract from 75% General Fund/25% Measure
O to 65%/35%
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Item 11.a.
City Council
Five-Year Financial Forecast
January 28, 2025
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2. Add funding for one additional police officer position to Measure O, for a total of
two positions.
Table 2: Scenario - Increased Measure O Contributions to Public Safety
With the above two budgetary shifts in public safety funding, the average General Fund
shortfall for the Forecast period (FY 2025-26 through FY 2029-30) drops from $1.4 million
annually to approximately $740,000 annually over the same period. This is shown in
Table 2 by a larger fund balance at the end of the five-year period.
Again, this is not a budget proposal but is presented to the City Council for the purpose
of discussion. Of course, shifting even more public safety costs from the General Fund to
Measure O would change the budget picture further. For example, a 50/50 split of FCFA
costs between the General Fund and the Measure O Fund would result in an almost
$700,000 annual savings to the General Fund, bringing the average shortfall to almost
zero. This would limit what the Measure O Fund could spend on infrastructure
improvements. However, with the funding from the new Measure E, most of the road
improvement costs would be budgeted using that source.
Analysis of Major Revenues and Expenditures in Forecast
After an expected modest increase of 0.4% projected for FY 2024-25, revenues are
projected to increase 3.2% annually thereafter. Chart 1 shows major revenue projections
in the Forecast.
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Item 11.a.
City Council
Five-Year Financial Forecast
January 28, 2025
Page 5
Chart 1 – Major Revenue Projections
Property Tax
40% of General Fund revenue.
Key drivers: annual increase assessed by the County of up to 2%, home sales,
and home prices.
County Auditor-Controller’s office provided property tax estimates for FY 2024-25
and FY 2025-26.
Forecast includes growth of 4.25% annually.
Sales Tax
24% of General Fund revenue.
Key drivers: consumer confidence, unemployment, consumer spending, business
retention and development.
City’s sales tax consultant provided estimates of 1.5% in FY 2024-25 and 2.8% in
FY 2025-26.
Sales tax is projected to grow approximately 3% per year for remaining years of
the Forecast.
Transient Occupancy Tax (TOT)
7% of General Fund revenue.
Key drivers: lodging capacity, room rates, and occupancy rates.
TOT is forecasted to grow 3% annually throughout th is Five-Year Forecast.
Forecast does not factor in any increase in room capacity.
Expenditures
Chart 2 shows the major expenditure categories and projected costs throughout the
Forecast period. This assumes the two changes in public safety funding discussed above.
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Item 11.a.
City Council
Five-Year Financial Forecast
January 28, 2025
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Since cities are largely service agencies that provide general government services,
personnel-related costs represent the majority of expenditures.
Chart 2 – Major Expenditure Projections
Under the scenario noted above, that funding for public safety be allocated from the
General Fund to Measure O, an 8.7% decrease in General Fund expenditures would be
expected in FY 2025-26. This is primarily due to:
• Moving some public safety costs (greater FCFA funding and one additional police
officer funding) to the Measure O Fund;
• One-time expenditures in FY 2024-25 budget for pavement maintenance that are
not present in the FY 2025-26 Forecast;
• For the remainder of the Forecast period, expenditures are projected to increase
3.7% on average annually thereafter.
Salary and payroll taxes are forecasted to increase 4.3% in FY 2024-25 and 3.5% in FY
2025-26. The increase in FY 2025-26 would be 1.1% under the scenario that moved the
cost of one additional police officer to Measure O Local Sales Tax funding. For the
remainder of the Forecast salaries and taxes are projected to increase 3.5% per year.
The City’s unfunded accrued liability (UAL) is expected to increase 9% annually on
average according to projections from CalPERS. Employee benefits are projected to
increase on average 4.6% over the Forecast period. Health insurance costs alone
account for 85% of all employee benefit costs. Workers’ compensation costs are
forecasted to increase 8% per year over the Forecast period.
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Item 11.a.
City Council
Five-Year Financial Forecast
January 28, 2025
Page 7
After an expected 7.2% decrease in contractual and professional service costs in FY
2025-26, due to the completion of the General Plan update, these costs are expected to
increase 2% per year for the remainder of the Forecast. During the period of the Forecast,
the cost of services provided by Five Cities Fire Authority is projected to average $4.5
million annually.
General Fund, Measure O, and Measure E Consolidated Five-Year Forecast
Sales tax revenue received from Measures O and E are deposited into separate funds in
the City’s financial accounting system. This enhances transparency and allows for more
efficient reporting on how these voter-approved tax sources are being spent. However,
since sales tax funding from these two measures are designed to be used for programs
that are also funded by the General Fund (e.g. public safety and street and road
improvements), their budgets should be looked at as a whole when allocation decisions
are being made. Table 3 below is a consolidation of all three funds (General, Measure O,
Measure E) so the budgetary connection between the funds can be seen more clearly.
The numbers in Table 3 for the General Fund are the same as shown earlier in Table 2.
This can be seen most clearly in the FCFA expenditure line when the cost increases from
$995,000 in FY 2024-25 to $1,487,000 in FY 2025-26.
The impact of allocating all Measure E funding to pavement improvement can be seen
most clearly in the ending fund balance line for that fund, that shows a zero balance for
the entire five-year forecast. Note that this assumption (like the assumption moving public
safety costs to Measure O) has not been approved by the City Council. It is only a starting
point for discussion of the General Fund’s shortfall throughout the Forecast.
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Item 11.a.
City Council
Five-Year Financial Forecast
January 28, 2025
Page 8
Table 3 – General Fund, Measure O, and Measure E
Consolidated Five-Year Forecast
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Item 11.a.
City Council
Five-Year Financial Forecast
January 28, 2025
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ALTERNATIVES:
The following alternatives are provided for the Council’s consideration:
1. Review and discuss the Five-Year Financial Forecast “Forecast” and determine
that the Five-Year Financial Forecast is not a project subject to the California
Environmental Quality Act (“CEQA”) because it has no potential to result in either
a direct, or reasonably foreseeable indirect, physical change in the environment.
(State CEQA Guidelines, §§ 15060, subd. (c)(2)-(3), 15378); or
2. Provide other direction to staff.
ADVANTAGES:
Receiving and discussing the Five-Year Financial Forecast Report will assist in informed
discussions between the community, City Council, and staff about budgetary priorities as
the City develops the upcoming FY 2023-25 Biennial Budget. In future budget cycles, this
Report will be provided prior to the City Council’s goal-setting process.
DISADVANTAGES:
There are no disadvantages in relation to the recommended action .
ENVIRONMENTAL REVIEW:
No environmental review is required for this item. Review and discussion of the Five-Year
Financial Forecast is not a project subject to the California Environmental Quality Act
(“CEQA”) because it has no potential to result in either a dire ct, or reasonably foreseeable
indirect, physical change in the environment. (State CEQA Guidelines, §§ 15060, subd.
(c)(2)-(3), 15378.)
PUBLIC NOTIFICATION AND COMMENTS:
The Agenda was posted at City Hall and on the City’s website in accordance with
Government Code Section 54954.2.
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