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Home My WebLink About18 - Fiscal Year 2024-25 Second Quarter Financial ReportQ �EwPpRT CITY OF s NEWPORT BEACH `q44:09 City Council Staff Report April 29, 2025 Agenda Item No. 18 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, Deputy Finance Director - 949-644-3085, sburguan@newportbeachca.gov TITLE: Fiscal Year 2024-25 Second Quarter Financial Report ABSTRACT - The Finance Department prepares quarterly financial reports on the status of the City of Newport Beach's General Fund revenues and expenditures 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 2024-25. The FY 2024-25 second quarter financial report provides an analysis of the City's financial activity from July through December 2024. Based on information currently available for the end of the second quarter, $17.5 million in unrestricted General Fund reserves is projected for FY 2024-25. Recommended budget adjustments for revenues and expenditures are outlined in this report and will be reflected in the proposed second quarter budget amendment (Attachment A.) This report was reviewed and discussed with the Finance Committee on March 13, 2025. 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; and b) Approve Budget Amendment No. 25-057, adjusting revenue estimates and expenditure appropriations for the Fiscal Year 2024-25 budget as further outlined in this report. DISCUSSION: Economic Overview The city's assessed property values continue to increase, providing a strong revenue base for the City. Recent reductions to sales tax revenue have caused concerns for the broader economy, however, staff estimates that in FY 2024-25, sales tax will begin to rebound. Revenue for hotels continues to grow as tourism remains a strong source of revenue to the City. 18-1 Fiscal Year 2024-25 Second Quarter Financial Report April 29, 2025 Page 2 The City is well positioned to withstand the impacts of a potential recession and is expected to maintain long-term fiscal sustainability. 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 $5.6 million projected increase in General Fund revenues over what was estimated in the budget. Projections for property taxes, other taxes, such as business tax license and franchise fees, service fees and charges, licenses and permits, and intergovernmental revenues have been increased. The following table summarizes the changes to projected General Fund revenues versus the revised budget for FY 2024-25. Details highlighting the reasons for the material variances follow. FY 2024-25 Proiected General Fund Revenues Property Taxes 149,296,403 152,582,253 3,285,850 2.20% Sales Tax 45,299,626 45,200,159 (99,467) -0.22% Transient Occupancy Tax* 32,625,873 32,670,435 44,562 0.14% Other Taxes 9,587,638 10,171,883 584,245 6.09% Service Fees & Charges 25,351,657 25,856,609 504,952 1.99% Parking Revenue 8,271,651 8,271,651 - 0.00% Licenses and Permits 5,952,271 6,230,295 278,024 4.67% Property Income 9,633,853 9,661,159 27,306 0.28% Fines & Penalties 3,996,299 3,978,089 (18,211) -0.46% Intergovernmental 5,538,739 6,514,083 975,344 17.61% Investment Earnings 1,904,925 1,904,925 - 0.00% Misc Revenues 594,097 610,716 16,619 2.80% Operating Transfers In 19,767,775 19,767,775 - 0.00% Total Revenues 317,820,807 323,420,032 5,599,225 1.76% *Gross Transient Occupancy Tax (TOT) revenues amount to approximately $40.2 million. Visit Newport Beach (VNB) receives 23% of Hotel TOT on a gross basis and up until December 2024, received 18% of both Hotel TOT and Residential TOT, which brings projected TOT revenues to $32.7 million, net of amounts remitted to VNB. Property Tax - Property taxes are the City's single largest General Fund revenue and represent approximately 50% of all General Fund revenues. When the FY 2024-25 budget was developed in the spring of 2024, assumptions were based off the citywide assessed valuation reaching $77.4 billion. However, the actual assessed valuation reached $79.9 billion. Property Tax revenue is now projected at $152.6 million, which is a 4.4% increase over prior year actuals. The increase is largely due to the inflation adjustment indexed at the 2% cap allowed by Proposition 13 and due to changes in ownership. 18-2 Fiscal Year 2024-25 Second Quarter Financial Report April 29, 2025 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 three industry groups — autos and transportation; general consumer goods; and restaurants/hotels. In FY 2023-24, the City saw a decline in sales tax revenue. This was primarily attributed to an 18% decline in the autos and transportation category compared to FY 2022-23. Sales tax revenues are projected to increase by approximately 5% over the FY 2023-24 amounts, which will still be below the FY 2022-23 actuals. The first quarter budget update projected the autos and transportation industry would grow by 3.5%, however projections have been revised and the growth is adjusted to 1.6%. This decreases revenue projections by $99,467. Transient Occupancy Tax (TOT) — The third largest funding source for the General Fund is TOT, making up more than 10% of General Fund revenues. Staff's projection for quarter two is $44,562 higher than budgeted, a 0.14% increase. Through staff's analysis, results in short-term lodging agent remittance show a decrease from FY 2023-24 year-to-date actuals by 7.4%. It is anticipated that this is a result of numerous property owners switching to other property management companies or opting to manage their rentals independently, which would result in an increase in revenue from owners, which is remitted annually in October. This decline in revenue from short-term lodging is offset by TOT revenue from hotels which is projected to be 5% higher than budget. Staff will continue to monitor TOT trends and will provide additional updates to projections as necessary in future quarterly financial reports. 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. Changes in projected amounts are proposed in the following categories: • Service Fees and Charges — plan check fees, recreation classes, emergency medical services fees, and numerous other cost -of -service fees. The Fire Department's fee schedule update in 2022 revised the collection of inspections and added additional costs for multistory buildings. As these fees begin to level out, the Fire Department is on trend to receive revenues $108,910 higher than budgeted for annual fire and special permit payments. Additionally, increases in water quality inspection fees and fire plan checks are projected to be $96,609 higher than budgeted. These increased projections are offset by a projected decrease in Police Emergency Response of $40,000. Revenues collected in this account are delayed due to redesigning the billing process. A budget amendment for an on -going $391,500 increase to various revenue accounts for Recreation and Senior Services fee -based classes, OASIS Classes, and OASIS personal trainer fees is recommended due to continued growth at the facility. These revenues are offset by a corresponding increase in expenditures. • Other Taxes — real property transfer taxes, business license taxes, marine charter taxes, and franchise fees. This category is anticipated to have increased revenues of $584,245 from business licenses and franchise fees based on prior year actuals and year-to-date cash receipts. 18-3 Fiscal Year 2024-25 Second Quarter Financial Report April 29, 2025 Page 4 • Licenses and Permits — fees charged to process building -related permits, street closure permits, dog licenses, and police tow franchise fees are expected to come in $278,024, or 4.7% higher than budgeted. Police tow franchise fees are projected to be $78,792 less than budgeted primarily due to reduced amounts of tows overall. This decrease in police tow franchise fees is offset by the demolition permits program that transitioned from the Public Works Department to the Community Development Department. Revenues for the program are expected to be $275,000 more than projected. • Intergovernmental Revenues — federal, state and local grant revenues, which includes, but is not limited to, the City's portion of the half cent sales tax revenue paid to the County for public safety, state mandate reimbursements, reimbursement for strike teams sent to assist with fires, and revenue sharing with the County of Orange under the Waste Disposal Agreement (WDA). The City participates in the California Fire Service and Rescue Emergency Mutual Aid system, which reimburses agencies for their emergency assistance to the State of California and to federal fire agencies. The City is expecting to receive approximately $900,000 from the State for staff assigned to strike team deployment, which is offset by an increase in overtime expenses. A budget amendment will accompany this report to recognize the revenue received for Mutual Aid and increase the overtime budget for the Fire Department accordingly. The Police Department participates in a State 911 program that is administered through Cal OES for the software maintenance phone contracts. The program has transitioned from receiving direct billing towards reimbursement -based collection. Additionally, the Newport Beach Police Department has received funds in the amount of $14,276 from a County -managed Prop 69 DNA Fingerprint, Unresolved Crime, and Innocence Protection Act to fund equipment and related training that will be expensed into the supplies and materials category that is further explained in this report. General Fund Expenditures The FY 2024-25 General Fund revised expenditure budget totals $321.5 million. Spending trends in FY 2024-25 are generally consistent with prior years and do not indicate any cause for concern. Total expenditure savings of $5.6 million are projected at this time due to year-to-date savings from vacancies, offset by expenses that are addressed in Budget Amendment No. 25-057 (Attachment A) and are explained in detail below. The following table summarizes the changes to the adopted expenditure budget for FY 2024-25, as well as expenditure savings by budget category. Details highlighting the reasons for the material variances follow. 18-4 Fiscal Year 2024-25 Second Quarter Financial Report April 29, 2025 Page 5 FY 2024-25 Proiected General Fund Expenditures Salary & Benefits 188,373,543 182,867,855 5,505,688 2.92% Contract Services 32,256,670 32,833,408 (576,738) -1.79% Grant Operating 1,925,125 1,951,104 (25,979) -1.35% Utilities 4,446,732 4,431,334 15,399 0.35% Supplies & Materials 4,879,957 4,877,085 2,873 0.06% Maintenance & Repair 15,861,496 15,141,207 720,290 4.54% Travel &Training 909,513 890,040 19,473 2.14% General Expenses 4,354,557 4,360,509 (5,952) -0.14% Internal Svc Charge 27,630,594 27,630,594 - 0.00% Capital Expenditures 1,575,128 1,587,270 (12,142) -0.77% Operating Transfers Out 39,255,611 39,255,611 - 0.00% Total Expenditures 321,468,927 315,826,017 5,642,911 1.76% Significant expenditure budget variances are as follows: • The revised salary and benefits budget totals $188.4 million. An analysis of salary and benefit activity for quarter two indicates that $5.5 million in personnel savings have been captured to date. These savings are offset by an expenditure appropriation of $760,000 in Fire Department overtime to align with additional revenues from the California Fire Service and Rescue Emergency Mutual Aid System. • The contract services category will be increased by $251,500 for the Recreation and Senior Services instructor payments for classes associated with the OASIS Senior Center. The OASIS facility is currently fully staffed and is experiencing continued growth. This expenditure increase for Recreation and Senior Services is fully offset by a $391,500 revenue increase as explained in the General Fund's revenue service fee and charges section of this report. A budget amendment will be included for consideration to appropriate these on -going funds along with fully offsetting additional on -going revenues. These amounts are built into the projected revenue and expenses included in the tables in this report. • In the supplies and materials category, the Police Department will receive revenue from the Prop 69 DNA committee as mentioned in the revenues section in this staff report under the intergovernmental category. A budget amendment will recognize $14,276 in additional revenue in the Prop 69 from County of Orange account 01035352-431055 and increase expenditures by $14,276 in the Detective's Division for related expenditures in 01035355-841015. • Savings in the maintenance and repair category are related to the residential refuse agreement, which included an assumed 5% growth for CPI in the adopted budget, however, the option for a CPI adjustment was not exercised resulting in 18-5 Fiscal Year 2024-25 Second Quarter Financial Report April 29, 2025 Page 6 budget savings in this category. 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 $17.5 million at the end of FY 2024-25. 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. The table below illustrates the prior year sources and uses of funds, current year activity, and the projected year-end results. FY 2024-25 Projected General Fund Sources, Uses, and Budget Surplus Beginning Fund Balance Reserves Operating Resources: Operating Revenues Prior Year Resources Carried Forward Transfers In from Other Funds Repayment of Advances Total Operating Resources Operating Uses: Operating Expenditures Transfers Out Total Operating Uses Net Operating Surplus Non -Operating Resources & Uses Transfers Out Total Non -Operating Resources & Uses Net Change in Fund Balance Ending Fund Balance Reserves Q2 BudgetRevised Variance % Variance $ 15,752,275 15,752,275 - 0.0% 298,053,032 303,652,257 5,599,225 1.9% 6,786,845 6,786,845 - 0.0% 19,767,775 19,767,775 - 0.0% 1,250,000 1,250,000 - 0.0% 325,857,652 331,456,877 5,599,225 1.7% 282,213,316 276,570,406 (5,642,911) -2.0% 39,255,611 39,255,611 - 0.0% 321,468,927 315,826,017 (5,642,911) -1.8% 4,388,725 15,630,860 11,242,135 256.2% 13,924,430 13,924,578 148 0% (13,924,430) (13,924,578) (148) 0.0% 9,535,705 1,706,283 11,241,988 -117.9% $ 6,216,570 17,458,558 11,241,988 180.8% Non -Operating Transfers Out A one-time transfer out from the General Fund to the Office of Traffic Safety Fund (Fund 110) in the amount of $147.50 is included to offset the difference of an invoice that was incorrectly charged to the wrong account. Accurate reporting in the OTS Fund is important in order to claim reimbursement. 18-6 Fiscal Year 2024-25 Second Quarter Financial Report April 29, 2025 Page 7 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 Budget Amendment No. 25-057 (Attachment A), $4.53 million in additional revenue and $1.02 million in expenditures will be appropriated to the accounts listed in the amendment. Approvals of these budget amendments is included in the "Q2 Projection" for Fiscal Year 2024-25 column of the General Fund and Sources & Uses table above. 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 Amendment No. 25-057 18-7 Attachment A Budget Amendment :: 4-w po"y 01 City of Newport Beach u ° x BUDGET AMENDMENT 202425 BA#: 25-057 Rt`'P Department: Finance ONE TIME: 0 Yes ❑ No Requestor: Shelby Burguan Approvals ❑ CITY MANAGER'S APPROVAL ONLY rr�� Finance Director: a4wsw Date ` l)25 El COUNCIL APPROVAL REQUIRED JCity Cleric: Date EXPLANATION FOR REQUEST: To adjust revenue and expenditure appropriations based on the Fiscal Year 2024-25 Quarter 2 Staff Report. 0 from existing budget appropriations 0 from additional estimated revenues 0 from unappropriated fund balance REVENUES Fund # Org Object Project Description Increase or (Decrease) $ 010 01003 412005 GENERAL FUND MISC NON OP - SALES AND USE TAX (99,467.00) 010 01003 411000 GENERAL FUND MISC NON OP - PROPERTY TAX CURRENT SECURED 2,915,948.96 010 01003 411010 GENERAL FUND MISC NON OP - PROPERTY TAX CUR UNSECURED 455,634.04 010 01003 411025 GENERAL FUND MISC NON OP - PROP TAX HOMEOWNERS EXEMPT (85,723.33) 010 01003 413000 GENERAL FUND MISC NON OP- UTOT RESIDENTIAL CVB PAYMENTS 544,561.33 010 01003 413005 GENERAL FUND MISC NON OP - UTOT RESIDENTIAL TAX (1,056,888.00} 010 01003 413010 GENERAL FUND MISC NON OP - UTOT HOTEL TAX 1,484,484.00 010 01003 413020 GENERAL FUND MISC NON OP - UTOT HOTEL CVB PAYMENTS (927,595.33) 010 01040404 431246 EMERGENCY MEDICAL SERVICES - MEDI-CAL IGT 900,000.00 010 0107011 521425 FEE BASED CLASSES - FEE BASED CLASSES 35,000.00 010 0107012 521435 ADULT SPORTS - RACKET SPORTS 15,000.00 010 0107021 521425 COMMUNITY YOUTH CENTER - FEE BASED CLASSES 55,000.00 010 0107031 521640 OASIS - OASIS CLASS FEES 150,000.00 010 0107032 521500 OASIS FITNESS CENTER - PERSONAL TRAINER FEES 136,500.00 110 11099 691010 INTERFUND TRANSFERS - TRANSFER IN GENERAL FUND 147.50 010 01035352 431055 POLICE SUPPORT SERVICES - PROP 69 FROM COUNTY OF ORANGE 14,276.00 Subtotal $ 4,536,878.17 EXPENDITURES Fund t# Org Object Project Description Increase or (Decrease) $ 010 0107011 911036 FEE BASED CLASSES - CONTRACT RSS INSTRUCTORS 65,000.00 010 0107012 811050 ADULT SPORTS -TENNIS CONTRACT INSTRUCTORS 10,000.00 010 0107021 811D36 COMMUNITY YOUTH CENTER - CONTRACT RSS INSTRUCTORS 20,000.00 010 0107031 811036 OASIS - CONTRACT RSS INSTRUCTORS 65,000.00 010 0107032 911036 OASIS FITNESS CENTER - CONTRACT RSS INSTRUCTORS 91,500.00 010 01040404 921008 EMERGENCY MEDICAL SERVICES - MEDI-CAL IGT 760,000.00 010 01099 991110 GENERAL FUND INTERFUND TRANSFR - TRANSFER OUT OTS GRANT FUND 147.50 010 01035355 941015 DETECTIVES - SPECIAL DEPT SUPPLIES NOC 14,276.00 Subtotall 1,025,923.50 18-9 Fund # Object Description D10 300000 EGENERALFUND- FUNDBALANCECONTROL 110 1300000 OTS GRANT FUND - FUND BALANCE CONTROL Increase or (Decrease) $ 3,510,807.17 147.S0 I ' Subtotall $ 3,510,954.67 Fund Balance Change Required 18-10