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Home My WebLink About09 - Year-End Budget Results and Surplus AllocationQ �EwPpRT CITY OF s NEWPORT BEACH `q44:09 City Council Staff Report November 4, 2025 Agenda Item No. 9 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Jason AI -Imam, Finance Director/Treasurer - 949-644-3126, jalimam@newportbeachca.gov PREPARED BY: Jessica Nguyen, Budget Manager — 949-644-3192, jnguyen@newportbeachca.gov TITLE: Year -End Budget Results and Surplus Allocation ABSTRACT - The Finance Department prepares quarterly financial reports to review the status of General Fund revenues and expenditures, as well as to monitor budgetary trends in the City of Newport Beach's (City) other major funds. This report presents revenue, expenditure, and estimated fund balance information for the fourth quarter of FY 2024- 25. In May 2025, an unrestricted General Fund operating surplus of $19.2 million was projected for FY 2024-25 based on revenues and expenditures through the third quarter. At the end of the fourth quarter, the projected unrestricted General Fund operating surplus is $13.8 million. Council Policy F-5 requires that 50% of the surplus be used to address long-term obligations and 50% be used to address infrastructure or neighborhood capital improvements. However, since the City pre -funded surplus funds at the beginning of the fiscal year toward paying down the pension liability, it is recommended that the entire unrestricted year-end surplus be allocated to infrastructure or neighborhood capital improvements. This report was reviewed and discussed with the Finance Committee on October 16, 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; b) Approve the one-time waiver of policy elements C and D of City Council Policy F-5 — General Fund Surplus Utilization; c) Approve Budget Amendment No. 25-088, authorizing the transfer of $2,789,008.85 from the Water Fund reserves to the General Liability Internal Service Fund (ISF); and d) Approve Budget Amendment No. 26-037, allocating the unrestricted operating surplus for Fiscal Year 2024-25. 9-1 Year -End Budget Results and Surplus Allocation November 4, 2025 Page 2 DISCUSSION: Economic Overview The Newport Beach housing market remains strong and continues to support the City's revenue base. FY 2024-25 recorded 737 detached single-family home sales, up 5% from the prior year. This modest increase follows the market's peak in 2021, when home sales exceeded 1,400. The median price of a detached single-family home remained largely stable at $4.2 million for the quarter ending June 30, 2025, just 0.9% below the prior year. This stability in home sales and home values is significant, as property tax revenue, the City's largest source of revenue, continues to benefit from the resilient housing market. Overall, Newport Beach's economy demonstrates stability, with rising home sales, steady prices, and continued strength in consumer spending. These trends reflect a resilient local economy supported by robust consumer activity, which is a key factor contributing to the City's fiscal stability. General Fund Revenues Overall General Fund revenue growth has outpaced projections that were incorporated into the adopted FY 2024-25 budget, as well as projections provided at the end of the third quarter. The following table summarizes the changes to projected General Fund unaudited actuals versus the amounts previously projected for the third quarter. Details follow highlighting the reasons for the material variances. FY 2024-25 Projected General Fund Revenues PropertyTaxcs $ 146,136,871 $ 162,682,263 $ 164,182,680 $ 1,600,327 1.0% SalcsTax 43,444,542 45,200,159 45,934,260 734,101 1.6% Trans ion tOccupancyTax 31,736,960 33,045,274 33,174,269 128,995 0.4% OthcrTaxcs 10,252,075 10,041,804 10,385,818 344,013 3.4% Sorvico Foes & Charpos 26,117,364 26,627,646 26,969,840 1,432,194 5.64 ParkingRevenue 9,431,973 8,127,414 9,184,436 1,057,021 13.0% LicenscsandPermits 5,567,848 5,999,425 6,350,278 350,853 5.8% Property Income 9,713,641 9,499,220 10,158,789 659,569 6.9% Fines & Pcnaltics 4,157,573 3,964,092 4,344,837 380,745 9.6% Intcrgovernmcntal 4,977,095 6,668,296 6,689,669 (878,638) -13.4% InvcstmcntEnrnings 4,863,062 1,904,926 4,900,890 2,996,966 167.3% MisC Revenues 1,401,783 680,310 2,000,468 1,320,148 194.1% 0peratingTransfers In 26,926,241 19,767,775 20,121,369 353,594 1.84 TotalRevenues $ 322,717,019 $ 322,908,594 $ 333,387,479 $ 10,478,885 3.29to *Gross TOT revenues total approximately $40.9 million. Through December 31, 2024, Visit Newport Beach (VNB) received 18% of gross TOT. Beginning January 1, 2025, VNB's share increased to 23% of hotel TOT and 0% of residential TOT. VNB received approximately $7.7 million, leaving projected net TOT revenues of $33.2 million after amounts remitted to VNB. Property Tax - Property taxes are the City's single largest General Fund revenue source and represent approximately 50% of all General Fund revenues. In the third quarter budget update, property tax revenue was projected at $152.6 million. Unaudited actuals 9-2 Year -End Budget Results and Surplus Allocation November 4, 2025 Page 3 exceeded the projection by $1.6 million, primarily due to higher than expected revenue from supplemental property taxes. Sales Tax - The second largest funding source for the General Fund is sales tax revenue, making up approximately 15% of General Fund revenues. The City's sales tax base is largely generated from four industry groups — autos and transportation, general consumer goods, restaurants/hotels and the State & County Pools. Sales tax revenue ended the year at $45.9 million, exceeding projections by $0.7 million or 2%. For the quarter ending March 2025, sales tax revenue was down 1.2% compared to the same quarter in 2024. In contrast, revenue for the quarter ending June 2025 increased 2.9% compared to June 2024. On an annualized basis, growth in sales tax revenue was largely driven by strong consumer spending in key industry groups, including restaurants and hotels, general consumer goods, and the pools, all of which experienced year -over -year increases of 8% to 9%. Transient Occupancy Tax — 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 remaining balance generated from short- term lodging. TOT revenue exceeded expectations largely due to hotel TOT, which was projected to grow 6% over the prior year but ultimately increased by 7.8%. 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 service fees and charges, parking revenue, fines and penalties, intergovernmental revenues, investment earnings, and miscellaneous revenues. • Service Fees and Charges consists of plan check fees, recreation classes, emergency medical services fees and numerous other cost -of -service fees. Services fees and charges exceeded projections by $1.4 million primarily due to higher paramedic service fees ($0.7 million), short-term lodging renewal fees ($0.2 million), and other miscellaneous fees. Paramedic service fees fluctuate annually; in recent years, they have ranged from $3.9 million to $5.2 million. For FY 2024- 25, $4.5 million was projected, but actual revenue reached $5.2 million. Short-term lodging permit renewal fees also came in higher, reflecting a fee increase approved by the City Council. • Parking Revenue is derived from General Fund related to metered parking fees that are collected across various parking zones throughout the City. Parking revenue outperformed third quarter projections by $1.1 million (13%), primarily due to higher parking rates and increased utilization. • Property Income consists of City -owned and managed income -producing properties, long-term ground leases with concessions, restaurants, hotels and other businesses and organizations, as well as rental of City facilities to the public. Property income exceeded projections by $0.6 million, in part due to several 9-3 Year -End Budget Results and Surplus Allocation November 4, 2025 Page 4 property transfers in the Beacon Bay area that resulted in higher rents. • Intergovernmental Revenues consists of federal, state and local grant revenues, which includes, but is not limited to, the City's portion of the '/2 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). Intergovernmental revenues came in $0.9 million (14%) below projections due to timing differences in grant expenditures and related reimbursements. • Investment Earnings represent income received from investment -related activities in accordance with state laws and internal policies. General fund investment earnings totaled $4.9 million for the year, $2.9 million above projections, driven by strong performance and a 4.96% rate of return. Earnings were consistent with the prior year and included $1.1 million in unrealized gains. • Miscellaneous Revenues include items not classified under other revenue categories, such as donations and insurance reimbursements for damage to City property. These revenues came in $1.3 million above projections. The largest variance relates to bad debt write-offs, which were budgeted as a $0.5 million reduction in miscellaneous revenue. In practice, receivables that were written off were recorded as reductions to the original revenue accounts rather than the bad debt account. As a result, fewer write-offs were recorded under miscellaneous revenue, contributing to higher -than -expected revenues. General Fund Expenditures The FY 2024-25 General Fund operating expenditure budget totals $324 million. Spending trends in FY 2024-25 are generally consistent with prior years and do not indicate any cause for concern. Total projected expenditure savings of $11.8 million are largely attributable to vacancy savings, as well as savings in contract services, maintenance and repair, general expenses, and operating transfers -out categories. The following table summarizes the expenditure savings by budget category. Details highlighting the reasons for the material variances follow. Year -End Budget Results and Surplus Allocation November 4, 2025 Page 5 Fiscal Year 2024-25 Projected General Fund Expenditures* Salary& Benefits $ 186,891,989 $ 181,284,564 $ 179,942,325 $ 6,949,665 3.72% Contract Sorvices 42,202,268 39,766,473 40,187,293 2,014,965 4.77% GrantOperating 1,961,104 1,863,141 1,273,344 677,760 34.74% UtiLities 4,692,909 4,497,303 4,838,099 (146,190) -3.09% Supplies & MaterinIs 5,798,089 5,1%,657 6,206,645 591,444 10.20% Mai ntenance&Repair 7,042,205 7,178,327 6,648,795 393,410 5.59% Travel&Training 990,970 887,178 924,611 66,459 6.71% GonOral Expenses 5,124,230 4,260,049 4,106,030 1,018,200 19.87% Internal Svc Chnrge 27,630,594 27,627,177 27,630,595 (0) 0.00% Capital Expenditures 2,424,031 1,800,339 2,167,610 266,421 10.58% OperatingTrnnsfers Out 39,265,611 39,266,611 39,266,611 - 0.00% Total Expenditures $ 324,003,990 $ 313,605,819 $ 312,180,857 $ 11,823,133 3.65% *Unaudited actuals include funds carried over to the next year. Significant expenditure budget variances are as follows: • The revised salary and benefits budget totals $187 million. Salary and benefit expenses for the fiscal year totaled $180 million, resulting in savings of $7.0 million. These savings were primarily due to position vacancies and unspent health benefit allocations. • The contract services budget shows savings of $4.0 million, however a portion of the savings in this category were encumbered contracts and purchase orders that were carried into FY 2025-26. These encumbrances have been incorporated into this table showing the true savings of $2.0 million. • The grant operating budget reflects $0.7 million in savings, largely due to delays in disbursements from federal agencies for the Buck Gully Hazardous Mitigation project. However, the funds are to be carried forward from FY 2024-25 to FY 2025- 26 and will remain available until they are received or the grant period officially lapses. • The utilities budget exceeded the revised budget by $0.1 million, primarily due to higher -than -expected water consumption. This overage is offset by savings within the Public Works department budget; therefore, no budget amendment is requested. • The supplies & materials and maintenance & repair categories generated total savings of $1 million. Savings in the maintenance & repair category were primarily in accounts related to automotive fuel and washing, maintenance and repair of damages, and other maintenance -related activities. Savings in the supplies and materials category were mainly due to library materials and S.W.A.T supplies. • The general expenses category shows savings of $1 million compared with the revised budget. These savings are largely related to operating overhead expenses for the Dove Street property. 9-5 Year -End Budget Results and Surplus Allocation November 4, 2025 Page 6 General Fund Sources, Uses, and Projected Surplus The City remains in excellent financial health. Conservative budgeting and sound financial policies have produced a consistent trend of General Fund operating surpluses and strong reserve levels over several years. The City is well -positioned to continue delivering high -quality services to the community while allocating surplus resources to key priorities each year. The following table illustrates the prior year sources and uses of funds, current year activity and the projected year-end results. Fiscal Year 2024-25 Projected General Fund Sources, Uses and Budget Surplus - - ■ Q3 Unaudited Variance % Variance Category Projection Actuals Beginning Fund Balance Reserves $ 16,762,276 $ 16.,752,275 $ - 0.00D/O Operating Resources: Operating Revenues 303140,819 313,266,110 10125,292 3.34% Prior Year Resources Carried Forward 6,786,845 6.786.845 - 0.00% Transfers In from Other Funds 19.767,775 2G.121.369 353.594 1.79% Repayment of Advances 1.250 000 1 250 000 - 0.00% Total Operating Resources $ 330,945,439 $ 341,424,324 $ 10,478,885 3.17% Operating Uses: Operating Expenditures 274,350,208 269.139.705 5,210,503 1.90% Transfers Out 39,255,611 39.255.611 - 0.00% Resources Carried to Next Fiscal Year - 3.785.866 (3;785,866) - Addition to 25% Contingency Reserve - 5.500.523 (5,500;523) Total Operating Uses $ 313,605,819 $ 317,681,705 $ (4,075,886) -1.30% Net Operating Surplus $ 17,339,620 $ 23,742,620 $ 16,281,723 93.90% Non -Operating Resources & Uses Transfers Out (1379247578) (13,780,807) 143.771 -1.03% Transfers In - - Total Non -Operating Resources & Uses $ (13,924,578) $ (13,780,807) $ 143,771 -1.03% Net Change in Fund Balance 3,415,042 9.961.813 6.546.771 191.70% Ending Fund Balance Reserves $ 19,167,317 $ 25,714,088 $ 6,546,771 34.16% A $25.7 million operating surplus for the General Fund is projected for FY 2024-25. This amount is net of non -operating activity, including one-time transfers out of the General Fund and the addition to the Contingency Reserve (pursuant to City Council Policy F-2). The City Council also approved a budget amendment in FY 2025-26 that allocates a portion of the projected year-end surplus. Budget Amendment 26-018 appropriated $11.9 million of the surplus for the purchase of real property at 3848 Campus Drive. This use of the General Fund surplus reduces the available unrestricted surplus to $13.8 million. Me Year -End Budget Results and Surplus Allocation November 4, 2025 Page 7 Fiscal Year 2024-25 Year -End Surplus $25,714,088 Purchase of Real Property at 3848 Campus Drive (11,936,500) Unrestricted Surplus $13,777,588 Council Policy F-5 requires that 50% of the surplus be used to address long-term obligations and 50% be used to address infrastructure or neighborhood capital improvements. However, since the City pre -funded surplus funds at the beginning of the fiscal year toward paying down the pension liability, it is recommended that the entire unrestricted year-end surplus be allocated to infrastructure or neighborhood capital improvements. Other Major Funds Staff have evaluated the fiscal condition of the City's other major operating funds (Tidelands, Water & Wastewater). Variances between budgeted and actual amounts are within reason. The City accounts for general liability claims through its General Liability Internal Service Fund (ISF). Recently, the ISF paid a large claim related to the Water Utility. Because this claim was paid in FY 2024-25, a transfer of $2,789,008.85 from the Water Fund to the ISF is required. This transfer will be recorded as an internal service fund charge to the Water Fund, moving the corresponding amount to the General Liability ISF. It is recommended that the transfer be made from Water Fund reserves, which totaled $19.3 million as of June 30, 2025. Preliminary Unaudited Amounts The City's financial records are undergoing a customary audit review. Therefore, the financial information presented in this report is preliminary in nature and subject to adjustments as the year-end close process continues through December. Any such adjustments are not anticipated to have a material impact on the financial information presented in this report. If any material adjustments related to FY 2024-25 are subsequently recorded, any such adjustments will be reported to the Finance Committee. FISCAL IMPACT: If the Budget Amendment No. 26-037 is approved, the FY 2024-25 unrestricted General Fund operating surplus, projected to be $13.8 million, will be transferred to the Facilities Financing Plan (FFP) Fund to be allocated in the future to infrastructure or neighborhood capital improvements. In August 2025, the City Council appropriated $11,936,500 for the potential purchase of real property located at 3848 Campus Drive. Should the City not proceed with the 9-7 Year -End Budget Results and Surplus Allocation November 4, 2025 Page 8 purchase or should the transaction not be completed, the unused appropriation will be returned to the FFP Fund. 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). ATTACHMENTS: Attachment A — Budget Amendment No. 25-088 Attachment B — Budget Amendment No. 26-037 .; �r+6V%PORr a � CyrI FO `fi`p Department: Finance Reguestor: Jason AI -Imam ATTACHMENT A City of Newport Beach BUDGET AMENDMENT 2024-25 ❑ CITY MANAGER'S APPROVAL ONLY 0 COUNCIL APPROVAL REQUIRED ❑� Yes ❑ No ONE TIME: BA#: 25-088 City Clerk: Date Finance Director: Date �( Budget Manager: Date t� EXPLANATION FOR REQUEST: To authorize the transfer of $2,789,008.85 from the Water Fund reserves to the General Liability Internal Service Fund (ISF). ❑ fmm existing budget appropriations ❑ from additional estimated revenues 0 from unappropriated fund balance REVENUES Fund # Org Object Project Description Increase or (Decrease) $ 751 75104 521295 GEN LIABILITY NON OP - GENERAL LIAB PREMIUM 7,789,008,85 Subtotal $ 2,789,008.85 EXPENDITURES Fund # Org Object Project Description Increase or (Decrease) $ 701 7019052 881012 WATER SYSTEM SERVICE - GENERAL LIABILITY INSURANCE 2,789,008.85 Subtotal $ 2,789,008.85 FUND BALANCE Fund # Object Description 300000 WATER ENTERPRISE FUND - FUND BALANCE CONTROL (2,789,008.85) 300000 GENERAL LIABILITY INS FUND - FUND BALANCE CONTROL 2,789,008.85 E51 Subtotal $ No Change In Fund Balance aEW"�Rr ATTACHMENT B City of Newport Beach u c,oRr`r BUDGET AMENDMENT BA#: 26-037 2025-26 Department: Finance ❑ No � Yes ONE TIME: Requestor: Jason AI -Imam Approvals ❑ CITY MANAGER'S APPROVAL ONLY City Clerk: Date / 0 COUNCIL APPROVAL REQUIRED Finance Director: Date �r z Z Budget Manager:q;?o �1 Date M 221 rd'-F EXPLANATION FOR REQUEST: To allocate the FY 2024-25 year-end unrestricted surplus. Funds will be allocated to the Facilities Financing Plan (FFP) Fund ❑ from existing budget appropriaocns to be used for future infrastructure or neighborhood capital improvement projects. ❑ from additional estimated revenues ❑ from unappropriated fund balance REVENUES Fund # Org Object Project Description Increase or (Decrease) $ 513 51399 691010 INTERFUND TRANSFERS - TRANSFER IN GENERAL FUND 13,777,588.00 Subtotal $ 13,777,588.00 EXPENDITURES Fund # Org Object Project Description Increase or (Decrease) $ 010 01099 991513 GENERAL FUND INTERFUND TRANSFR - TRANSFER OUT FFP 13,777,588.00 Subtotal $ 13,777,588.00 FUND BALANCE Fund # Object Description 300000 GENERAL FUND - FUND BALANCE CONTROL (13,777,588.00) E1-3 300000 FACILITIES FINANCING PLAN - FUND BALANCE CONTROL 13,777,588,00 Subtotal $ No Change In Fund Balance 9-10