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  2.       
Meeting Date: 03/15/2021  
Submitted By: Mel Shannon, Director of Finance

RECOMMENDATION:

That the City Council:

A.  Receive and file the Fiscal Year 2020-2021 Mid-Year Budget Update; and

B.  Approve the recruitment of a Senior Civil Engineer position in the Public Works Department; and

C.  Approve the recruitment of a Police Sergeant, Police Corporal, Police Officer, Community Services Officer II, Crime Analyst, Communication Operator, and two Police Trainee positions in the Police Department; and

D.  Approve the reclassification of a Community Service Officer in the Police Department to a Court Liaison Specialist at pay range P19.
DISCUSSION:
In a year of unprecedented uncertainty stemming from the Coronavirus pandemic (COVID-19), the Finance Department has prepared the FY2020-21 Mid-Year Budget Update for City Council review and discussion.  In summary, the General Fund, which supports most of the City’s core services, is projected to end FY2020-21 with revenues over expenditures of approximately $4,100,000, mainly due to mid-year actual and projected year-end revenues exceeding conservative budget estimates, especially in revenues from Property Taxes, Sales/Transaction Taxes, Permits, and Fees & Charges.  Additionally, budget savings were realized due to a number of unfilled budgeted positions.  A conservative FY 2020-21 budget was developed and adopted by the City Council last year as a precaution due to the economic uncertainty associated with the COVID-19 pandemic.

As a result of projected year-end budget savings for the General Fund, staff is not anticipating that it will be necessary to reinstate budgeted employee furloughs for the remainder of this fiscal year, nor will it be necessary to draw on General Fund reserves that had been budgeted this fiscal year. It should also be noted that a substantial contributing factor to the projected year-end carryover were freezes placed on a number of vacant positions last year, along with employee furloughs and other temporary expenditure reductions.  The projected net savings would have been significantly less if many of these temporary budget reduction measures had not been approved.  This will be a key consideration as proposed FY 2021-22 budgets are developed for Council consideration during the upcoming budget process, and some of these temporary expense reductions restored.
 

Based on mid-year revenue performance and department projections through the end of the fiscal year, staff estimates General Fund revenues will close FY2020-21 approximately $2,400,000 more than the adopted budget, a positive difference of 5.3 percent.  While the COVID-19 pandemic continues to have a detrimental budgetary impact for many cities that rely upon revenue generated by tourism, a significant portion of La Habra’s revenue is generated through more traditional retail activity, such as sales tax revenues from discount and building material stores.  As such, the City has benefited from better than anticipated performance by local big box retailers, discount department stores, and building material stores, such as:
  • Costco
  • Sams Club
  • Walmart
  • Target
  • The Home Depot
  • Lowe’s Home Improvement
These and other similar retail businesses have outperformed budget expectations based on revenue data received and analyzed by the City’s Finance staff and external revenue consultants.  The City has also received a significant boost from the countywide use tax pool as a result of the sharp increase in online shopping and the associated local sales taxes that are now being calculated, collected, and distributed through the State of California to countywide sales tax pools as a result of the Wayfair court decision.
   
In the area of recurring revenues:
 
  • Property tax revenues are projected to end the year approximately $800,000 (4.3 percent) higher than budget.
 
  • Combined sales tax and the City's local transaction tax revenues are projected to generate $1,950,000 (12.4 percent) more than budgeted.  However, it should be noted that current sales tax projections are based on activity through the 3rd Quarter (July through September) of last year.  Data from the 4th Quarter (October through December) will not be available until mid-April and, once posted, these results may impact the final sales tax receipts for the fiscal year.

Sales and transactions tax revenue projections for the 4th Quarter reflect a second COVID-19 shutdown that was put in place by the Governor that occurred from mid-December 2020 through February 2021, affecting non-essential retail businesses, as well as indoor and outdoor dining in restaurants.  Those revenue losses were partially offset by the rise in countywide use tax pool receipts.  Some economic analysts predict that, at least for some consumers, the behavioral shift from buying goods in traditional “brick and mortar stores” to online purchasing will become permanent.  Should this occur, it is not immediately known what, if any, impact this may have on the City's local businesses and associated sales tax revenue streams.

In another positive change, the autos and transportation sector statewide grew slightly from a year ago and the City benefited from an increase in revenues from auto supply stores and used automotive dealer receipts.  Other solid tax revenue growth was realized from grocery and convenience stores, discount department stores, family apparel, specialty stores, and quick service restaurants.
 
Although major tax revenues have performed better than anticipated, other General Fund revenue sources have been adversely impacted by the pandemic.  Fines and Forfeiture revenues are anticipated to come in significantly below budget estimates, by approximately $189,000, primarily due to the temporary suspension of parking citations for violation of overnight parking and street sweeping ordinances.  This revenue decline was anticipated, as the City Council took action during FY20-21 to relax parking enforcement rules and extend the suspension of the issuance of citations for overnight parking and street sweeping violations due to the various "stay at home" orders issued by the Governor.  As efforts to "slow the spread" of COVID-19 transmission have begun to yield positive results, the City has incrementally resumed enforcement of its parking ordinances. The temporary suspension of the City's overnight parking enforcement ended on January 3, 2021, and street sweeping parking enforcement is scheduled to resume in early April 2021.
 

Licenses & Permits revenues are anticipated to end the year approximately $250,000 higher than budget estimates. The original budget estimates for building permit fees were conservative due to the uncertainty of COVID-19; however, the building permit fees collected through mid-year is exceeding the projected budget estimates.  This favorable variance represents additional unanticipated revenues.  Additionally, revenues from Fees & Charges are anticipated to come in approximately $140,000 higher than budget estimates, primarily due to an increase in home improvement remodeling projects during the pandemic.

With regard to expenditures, staff anticipates General Fund expenses to end the fiscal year approximately $1,700,000 below the amended expenditure budget, which represents a savings of approximately 3.8 percent.  Most of these savings are a direct result of (a) a number of budgeted staff positions that have been left unfilled for either a portion or all of FY20-21, and (b) the cancellation of virtually all budgeted recreation programs and special events that did not or will not occur in FY20-21 due to COVID-19 related restrictions on group and social gatherings.  Although public health conditions continue to improve, it is not yet permissible to host recreational programs or special event gatherings, and it is not clear when those types of large scale activities will be able to resume.

Staff is hopeful that state and local economic conditions will stabilize and that sustained economic improvement will occur later in 2021 as COVID-19 vaccination efforts that are currently underway intensify.  A decline in the rate of COVID-19 transmission, taken in conjunction with the significant economic stimulus packages recently approved by the Federal Government, are good indications that the economy may be on the right path.

Non-General Fund operating budgets are expected to end the fiscal year at or below their approved expenditure budgets, with associated revenues tracking to budget projections.

Mid-Year Budget Adjustments

After careful review of revenues and expenditures, staff recommends the following mid-year budget adjustments for Council consideration and approval:
 
  • Public Works Department and Police Department Budget Adjustments:

In an effort to address current staffing needs in the Public Works Department and the Police Department, and due to the length of time it takes to successfully recruit for some of these positions, staff recommends Council unfreeze the following positions that were originally frozen in the current fiscal year budget:
 
  • Principal Engineer;
  • Police Sergeant;
  • Police Corporal;
  • Police Officer;
  • Community Services Officer II;
  • Crime Analyst;
  • Communication Operator; and,
  • Two Police Trainee positions.

These positions were frozen to temporarily reduce expenditures and to help offset the City’s anticipated reduction in core general fund revenues when the budget was first adopted.

No funding appropriation will be necessary or requested at this time to unfreeze these positions. If these positions are approved, staff will begin the recruitment process in order to have qualified candidates retained by the end of the current fiscal year at the earliest.  In the event any of these unfrozen positions are filled before the end of the fiscal year, their costs will be covered by salary savings from budgeted vacancies.
 
 
  • Police Department Position Reclassification:

Request reclassification of Community Service Officer to Court Liaison Specialist at pay range P19.

Based on its job duties, staff has determined that the full time Court Liaison position is suited for its own distinct job classification.  Since 1995 the City has utilized an employee assigned to the courts on a full time basis to act as a conduit between the court system and the Police Department. The position has evolved over many years to also now include providing full court liaison services, on a contract basis, to the Placentia Police Department.  Currently, the position is listed under the Community Service Officer classification which lacks the specific job requirements for court liaison duties.  Staff recommends that one Community Service Officer position be reclassified to Court Liaison Specialist.  The salary would remain the same and would not be a new position added to the budget.  There is currently a vacancy in this position and staff will begin a recruitment effort to fill it, subject to City Council approval of the change.

Future Fiscal Challenges

There are two significant fiscal challenges that continue to impact the City.  The first challenge concerns the potential long-term economic effects caused by the COVID-19 pandemic.  On one hand, the statewide “stay at home” orders and shutdown of non-essential businesses caused severe disruptions in the business community and their employees, resulting in significant declines in sales for businesses in some industries, but it also resulted in better than anticipated sales activities for other sectors, such as those businesses that were able to quickly shift to an online retail sales and shopping platform, or that could effectively provide drive up/take out services.  While it is difficult to estimate how severe or long-lasting the COVID-19 effects will be for the local economy, it appears the City has fared better than initial projections; however, a number of businesses have closed, and it is unclear how quickly those vacant locations will be replaced by new businesses.  

The second fiscal threat for the City is the continued and sustained escalation in the cost to provide public services, particularly for Police and Fire which, when combined, comprise almost 70 percent of La Habra’s General Fund budget.  While the City can control some factors impacting rising costs, other costs are more difficult to contain as they are not directly controlled by the City.  For example, the cost of the City’s contract with the Los Angeles County Fire Department for fire protection has risen significantly in recent years, as has the cost to provide Ambulance services.  Furthermore, the City has received its FY2021-22 employer pension contribution rates from the California Public Employee Retirement System (PERS).  As expected and previously reported to City Council, these costs continue to grow at an unsustainable rate that surpasses base revenue growth projections.  Staff and the City's outside actuarial consultants expect this trend to continue for the foreseeable future, likely for the next decade or more.   

As Council is aware, these cost increases place a significant strain on the City’s budget.  In the past, the City has been proactive and taken significant actions to reduce expenditures in order to remain within revenue projections.  However, in light of anticipated increases in the cost of services and personnel costs, and absent a corresponding growth in revenue, future efforts to maintain a balanced budget will likely require consideration of a variety of changes to municipal operations, such as deep spending cuts, changes in the level and method of how the City delivers services, including public safety services, programmatic reductions across all City departments, and potentially the need to draw on one-time reserves in some cases. 

To help address these challenges the City Council has successfully implemented lower cost PERS pension plans for new employees as a method to reduce future costs.  In addition, the City has been able to negotiate with its employee labor groups to have employees pay more towards their own pension costs, as well as pay for a portion of the required “employer” contribution as part of a cost sharing arrangement.  City employees, depending on the plan they were enrolled at the time they were hired, now contribute between 8.0 percent to 13.75 percent of their pensionable compensation to PERS.  These costs had previously been solely a City borne expense.
 

It is expected that pension costs will continue to grow significantly over the next decade or more, theoretically peaking in FY2032-33.  During FY2020-21, the City budgeted a total of approximately $8.9 million for pension costs, with approximately $3.5 million budgeted for the Miscellaneous plans and approximately $5.4 million budgeted for the Safety plans.  Based on current projections, the City’s total estimated annual pension cost in FY2032-33 will be approximately $16.5 million, with approximately $6.2 million attributed to the Miscellaneous plans and approximately $10.3 million for the Safety plans.

While staff projects modest average annual growth in the City’s two largest local revenue sources (property tax and sales/transaction taxes), that anticipated revenue growth will be insufficient to offset the anticipated rise in the cost to provide the current level of public programs and services, especially in the area of public safety.  These factors will be taken into consideration as staff begins to prepare the proposed FY2021-22 municipal budget in the coming months for Council review and consideration.

 
FISCAL IMPACT/SOURCE OF FUNDING:
The requested mid-year budget adjustments do not have a significant fiscal impact to the General Fund.  The unfrozen Principal Engineer position will be reclassified at a lower level Senior Civil Engineer position. If any of the unfrozen positions in Public Works or Police Department are filled prior to the end of the fiscal year, the additional cost in the current fiscal year can be covered by the vacancy savings of currently unfilled positions.  The final determination and allocation of any potential year-end carry over will be made after the end of FY2020-21, when actual revenue and expenditure performance will be reported to the City Council
GENERAL PLAN RELEVANCE:
LU 17.1 – Adequate Community Supporting Uses
ED 9.1 – Balance Fiscal Practices
ED 9.2 – Long-Term Infrastructure Viability
 
Attachments
1. FY20-21 Mid-Year Budget
2. Salary Grid POA Civ 3-21
3. Court Liaison Flyer 2021


    

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