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HomeMy WebLinkAboutItem 15 - Early Direction for the Fiscal Year 2025-26 BudgetFinance and Management Services www.santa-ana.org/finance Item # 15 City of Santa Ana 20 Civic Center Plaza, Santa Ana, CA 92701 Staff Report March 18, 2025 TOPIC: Early Direction for the Fiscal Year 2025-26 Budget AGENDA TITLE Early Direction for the Fiscal Year 2025-26 Budget RECOMMENDED ACTION Provide direction for preparation of the proposed FY2025-26 budget. GOVERNMENT CODE §84308 APPLIES: No DISCUSSION This Early Direction agenda item marks the commencement of City Council deliberations for the upcoming FY 2025-26 budget. The report serves two purposes: to provide information relevant to the FY 2025-26 budget and future fiscal years, and to request direction from the City Council. City Council is scheduled to review the proposed budget in May, followed by a public hearing in June. Community Engagement City staff presented the FY25-26 Community Engagement Plan to City Council on December 17, 2024, emphasizing a transparent and inclusive budget process. This year, special attention is being given to amplifying youth voices. To achieve this, staff is collaborating with youth nonprofits to hold focus groups and will attend the March 17 Youth Commission meeting to gather feedback on youth spending priorities. Community engagement activities began in January 2025, with Budget staff participating in a Ward 5 Neighborhood Association meeting and the Lunar New Year Celebration at Centennial Park. Staff is committed to reaching all Council Wards and has scheduled additional meetings with neighborhood associations and local nonprofits throughout February, March, and April. Feedback from these sessions will be compiled in early May and presented to City Council during one of three scheduled budget workshops. The City remains dedicated to ensuring community input plays a key role in shaping the budget. As part of this effort, the annual budget survey has also been released on the City website to gather broader community input. Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 2 Budget Process The City will hold internal budget meetings with departments from March 24 to April 4 to review budget requests and staff priorities. After comparing these requests with City Council priorities identified during Early Direction and community priorities gathered during budget outreach, Finance will work with the City Manager's Office to develop a proposed budget for City Council consideration in May. General Fund While the current FY 2024-25 budget is balanced with a net activity of $13,272, staff has had to make adjustments due to a decline in key revenue sources, such as sales tax, which are expected to see modest growth in the upcoming fiscal year. With costs rising faster than revenue, we anticipate challenges in balancing the FY 2025-26 budget. Early Direction from City Council will be essential in helping staff develop a proposed budget that meets the community's needs. General Fund Ten -Year Outlook Assumptions The General Fund Ten -Year Outlook has been updated with the latest information available. The following assumptions were used: • Only recurring revenues and spending were included; • Property Tax estimates from consultant for FY 2025-26 through FY 2029-30, 2.8% increase thereafter; • Sales Tax estimates from consultant for FY 2025-26 through FY 2026-27, 2.8% increase thereafter; • Inflation Factor for all other revenues: increase of Consumer Price Index (CPI) as forecasted by CA Department of Finance for FY 2025-26 through FY 2027-28 (2.5%, 2.6%, 2.8%) and 2.8% thereafter; • Labor at the top of the range: CPI increases of 2.8% for FY 2025-26, Inflation Factor thereafter; • For labor below the top of the range, use the same 2.8% as above + 5% merit step increases; • Orange County Fire Authority contract increase of 4.5% annually; • Contribution to OC Streetcar operations, beginning as early as January 2026, with costs increasing by the Inflation Factor; • Debt retirements (City Hall Annex & Streetlights) totaling $800K in FY25-26, and total of $1.3 million thereafter; • Employee pension unfunded liability contributions as estimated by CalPERS, are rising due to a shortfall in investment returns for FY 2022-23, with an actual return of 5.8% compared to the expected 6.8%; • Contributions to, and uses of, the Pension Stabilization Account have been included to smooth the pension debt fluctuations; and • Inflation Factor for all other spending. Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 3 The Outlook's graphical results indicate that expenditures are growing faster than revenue, leading to a potential deficit starting in FY 2025-26. When the Measure X rate decreases in 2029, the deficit is expected to widen significantly. $670 $630 $590 $550 $510 $470 $430 $419.6 $390 $350 FY25-26 FY26-27 FY27-28 FY28-29 FY29-30 FY30-31 FY31-32 FY32-33 FY33-34 FY34-35 -*-Revenue (Spending The FY 2024-25 Measure X spending plan is attached to this report as Exhibit 1. The detailed plan outlines expenditures that may be considered should it become necessary to reduce costs in order to rebalance the budget. Recommendations from the Measure X Oversight Committee The Measure X Citizens Oversight Committee met on March 12 to formulate recommendations for the FY 2025-26 budget. Staff anticipates incorporating these recommendations into the presentation to the City Council on March 18. One -Time General Fund Spending As reported in the Mid -Year Update on March 4, 2025, the estimated spendable fund balance for one-time expenditures in the General Fund is $16,080,348. The following are potential options for utilizing this one-time funding. Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 4 28 Civic Center Plaza Last year the City acquired 28 Civic Center Plaza from the state. The acquisition is part of a long-term plan to redevelop the Civic Center, potentially with a public -private partnership. The plan becomes more feasible as the City acquires ownership of a larger section of contiguous land in the Civic Center. The building at 28 Civic Center Plaza is in poor condition and the City will need to demolish it. As part of the acquisition, the City received money from the state. After the acquisition cost, $4.3 million is still available for the demolition, which must be used by December 2025. Coincidentally, the county also wishes to demolish the Plaza of the Fountains, adjacent to 28 Civic Center Plaza and owned by the county. The City has received cost estimates to demolish both 28 Civic Center Plaza and the Plaza of the Fountains. Demolishing both structures at the same time is more cost effective, as the contractor could remove the Plaza of the Fountains first and have better access to remove 28 Civic Center Plaza. Without the improved access, the project to demolish only 28 Civic Center Plaza would have some logistical issues resulting in increased cost. The demolition estimates follow. 28 Civic Center Plaza with Plaza of the Fountains $14,481,382 28 Civic Center Plaza $14,872,868 Plaza of the Fountains $5,947,827 In either case, the City has a significant funding shortfall. The City has several options: • Wait until the City has identified full funding for the demolition project and request a time extension from the state for expenditure of the $4.3 million. • Work with the existing budget of $4.3 million to demolish only the interior of 28 Civic Center Plaza, leaving behind a shell building until more funding can be secured. • Negotiate with the County to transfer ownership of Plaza of the Fountains and use the existing budget to demolish only the Plaza. Staff seeks City Council direction regarding demolition of 28 Civic Center Plaza. Bristol and Edinger Parking Lot The Bristol and Edinger Parking Lot serves as a venue for community events, including the popular Friday Night Munchies. To improve usability and support future events, a proposed $250,000 investment would fund necessary upgrades, which may include, but are not limited to painting the fence, addressing gates, upgrading lighting, overlaying and striping the parking lot, and conducting minor landscaping improvements. As a result of these improvements, this would allow the City a revenue generating venue. Currently, events like Friday Night Munchies pay approximately $51 per event under the Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 5 Police Department's Special Events permit, which is only the fee to recoup the cost of the administrative process for issuing the permit. Staff seeks City Council concurrence regarding the recommended one-time allocation of $250,000 in FY 2025-26 for the improvements and establishing fees to generate revenue from the site. Future Pension Costs Set -Aside — Section 115 Trust In 2021, the City refinanced a portion of its debt to the California Public Employee Retirement System (CaIPERS), generating significant debt interest savings. After the refinancing, the City's payment obligations decreased. The City Council approved maintaining the existing budget of pension debt payments and depositing the savings in the City's Section 115 Trust for future pension costs. Staff has maintained this practice through the current year budget. Beginning in FY25-26, the City may not be able to deposit much more into the Trust. Therefore, based on a recommendation from the City Manager, the City Council has approved an additional deposit of $3 million in the current year ($2 million approved in December with "Year End Results" and $1 million approved on March 4 with "Midyear"). The Trust currently has a balance of $45.5 million. The City and its employees both contribute to the CalPERS pension system. CalPERS invests those contributions and makes pension payments to employees when they retire. CalPERS assumes they will have an investment return of 6.8% each year. When the CalPERS investment portfolio earns less than 6.8% each year, the City's liability to CalPERS increases. Recent CalPERS investment returns follow. FY14-15 2.4% FY15-16 0.6% FY16-17 11.2% FY17-18 8.6% FY18-19 6.7% FY19-20 4.7% FY20-21 21.3% FY21-22 -6.1 % FY22-23 5.8% FY23-24 9.3% The FY23-24 return in excess of the 6.8% assumption will not affect the City's contributions until FY26-27. Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 6 Based on the latest information from CalPERS, we expect to need $169.1 million in excess of the current budget level over the next 10 years, as shown in the shaded area of the following graph. Pension Debt Payments 100,000, 000 80,000,000 60, 000, 000 40, 000, 000 20, 000, 000 — Pension Debt Payments Budget The City Council approved a policy titled "Unfunded Employee Pension Liability Cost Reduction Policy" in 2021. The Policy states: "It shall be the City's policy to consider adding money to the Section 115 Trust account during each annual budget process." As noted above, the City has an estimated Spendable General Fund balance of $16.08 million. Staff recommends a $1 million allocation for FY 2025-26. Staff seeks City Council concurrence regarding a Section 115 Trust deposit of $1 million for FY 2025-26. This deposit sets aside money that will earn interest and be available for future pension cost increases when CalPERS does not meet its investment assumption of 6.8%. Jail Improvements The Santa Ana Police Department's jail, built in 1989, was designed to accommodate local detainees and provide additional capacity for outside agencies. Over the years, this arrangement has generated revenue for the City through partnerships with federal and local entities, as well as the "pay -to -stay" program, which allows qualifying detainees to pay for their incarceration. However, due to deferred maintenance and the aging condition of the facility, these revenue -generating opportunities have declined. To modernize the jail, enhance safety, and restore its capacity for detainees and contract housing, facility upgrades are necessary. The facility currently has two holding areas dedicated to the "pay -to -stay" program, which can accommodate up to 20 incarcerated individuals. To support these improvements, staff proposes allocating $250,000 in the FY 2025-26 budget. This amount reflects projected revenue over a six-month period, based on an approximate 50% occupancy rate at a daily fee of $134 per detainee. Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 7 These investments would help restore and expand the facility's ability to accommodate paying detainees and contract housing arrangements, ensuring a sustainable revenue stream while maintaining public safety. Additionally, the current fiscal year included a one- time $250,000 allocation for deferred maintenance, addressing critical facility needs to ensure continued operations. Staff seeks City Council concurrence regarding the recommended one-time allocation of $250,000 in FY 2025-26 for the improvements. Modern Conference Space at the Senior Center on Third and Ross The City currently lacks sufficient meeting spaces across the community, and there is a growing demand for accessible facilities that can accommodate both private and business gatherings. To help meet this need, the Santa Ana Senior Center, located at Third and Ross Streets near Downtown Santa Ana, has been identified as a potential location for hosting meetings and events. The Senior Center was recently renovated in 2020 and continues to serve as an important hub for senior programs and services. In addition to its primary role, the facility has the capacity to accommodate up to 125 people, making it a suitable option for meetings and events. Its central location and proximity to a City -owned parking garage further enhance its potential as a convenient gathering space. With a small investment in furniture and fixtures, the space could become more appealing and functional for expanded use. If the City Council directs staff to explore this investment, staff will develop a proposed amount. Additionally, if the City Council directs staff to explore options to expand capacity, staff could assess potential options and provide an estimated cost for implementation. Staff seeks City Council concurrence regarding one-time funding in the upcoming budget for a small investment in furniture and fixtures. Additionally, if the City Council wishes to explore options to expand capacity, staff can assess potential options and provide an estimated cost for consideration. Santa Ana Stadium Expansion and Upgrades The Santa Ana Stadium, also known as Eddie West Field, is a historic venue for sports and entertainment in the city. Built in 1963, the stadium has primarily served as a host for high school and collegiate football games, community soccer matches, and local events. While it has a strong legacy, the stadium lacks the infrastructure needed to attract larger, high -profile events that could enhance its regional presence and economic impact. Strategic investments are necessary to modernize the facility and expand its potential for hosting major competitions and entertainment events. Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 8 One potential investment includes adding 2,077 seats including a beer garden or refreshment area, which would improve both capacity and amenities. The estimated cost for this expansion is $5,270,175, covering construction expenses and approximately 10% in soft costs. The addition of a beer garden would also complement the city's recent decision to allow alcohol sales at the stadium, enhancing the game -day and event experience while creating an additional revenue stream. Expanding the stadium's seating capacity from 9,000 to 11,000 seats would position it to qualify for a broader range of high -profile events. Many collegiate championships, professional soccer matches, boxing events, and concerts require a minimum seating threshold of 10,000 or more to be considered as host venues. Increasing capacity would make Santa Ana Stadium more competitive for events such as CIF soccer championships, international soccer, regional boxing promotions, Lucha Libre (wrestling) events, and mid -sized concerts, further boosting its ability to attract major events and generate additional revenue. In addition to these upgrades, a review of the fee structure would be necessary to ensure the stadium generates additional revenue for the city, helping offset costs and maximizing the return on investment. Shall staff include one-time funding for the stadium in FY25-26? Investing in Road Improvements to Support Business Growth The area around Majestic, MacArthur Place, and Columbine is home to a vital business community that contributes to the local economy. However, deteriorating road conditions have made it difficult for businesses to attract new tenants, resulting in lost leasing opportunities and limiting economic growth. To support the business community and strengthen the city's tax base, addressing these infrastructure issues is essential. Investing in these road improvements aligns with the city's commitment to fostering a strong business environment and promoting long-term economic stability. Staff seeks City Council concurrence regarding one-time funding of $1.5 million for road improvements in the specified areas to enhance business retention and attract new businesses. Cross -Connection Control Program Compliance The City of Santa Ana is required to implement a Cross -Connection Control Program in compliance with the California State Water Resources Control Board (SWRCB) Cross - Connection Control Policy Handbook and Santa Ana Municipal Code, Section 39-29: Protection of Public Water Supply. This program, managed by the Water Resources Division, is essential to preventing contamination of the public water supply from back siphonage or backpressure hazards. A key requirement of this program is the annual testing of backflow prevention assemblies, with any failing units requiring repair or replacement within 30 days. The City currently maintains over 470 City -owned backflow Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 9 prevention assemblies, of which more than 370 (80%) are non -compliant, either due to missing annual tests or requiring repairs. To achieve compliance with state and local regulations, the City must implement a systematic testing, repair, and replacement program for all City -owned backflow prevention assemblies. This includes ensuring that all assemblies are tested annually, failures are addressed within the 30-day requirement, and proper recordkeeping is maintained to demonstrate compliance. Without immediate action, the City remains at risk of regulatory non-compliance, which could lead to potential enforcement actions and increased liability related to water quality concerns. Staff seeks City Council concurrence regarding an allocation of $500,000 to administer the required testing, maintenance, and replacement of City -owned backflow prevention assemblies to ensure compliance with state mandates. Code Blue Emergency Communication System Upgrade The Code Blue emergency communication units were installed in downtown Santa Ana approximately eight years ago to enhance public safety. These units provide direct access to emergency services and are equipped with surveillance cameras and emergency buttons. Due to their age and technological advancements, an upgrade is necessary to ensure continued functionality. The proposed upgrade would replace thirteen (13) Code Blue units, transitioning from obsolete 3G technology to 5G/LTE. This transition is required due to the phase -out of 3G networks and will enhance cellular connectivity, ensuring reliable emergency communication. The cost for this upgrade is $79,000. Staff seeks City Council concurrence for a recommended allocation of $79,000 in FY25- 26. Bus Shelters The City owns and maintains bus shelters throughout the City. Public Works staff recommends a one-time allocation in the FY25-26 budget to construct new or replacement bus shelters at 16 sites for a cost of $250,000. Staff seeks City Council concurrence for a recommended allocation of $250,000 in FY25- 26. Recurring General Fund Spending As reported in the Mid -Year Update on March 4, 2025, the net recurring amount available for the General Fund was $13,272. However, the available balance for FY 2025-26 has not yet been determined. As staff evaluates recurring capacity, preliminary findings suggest a potential shortfall. Given this, we would like to seek direction on the following recurring items. Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 10 Federal Grant Funding and Staffing During the City Council's Midyear Budget discussion on March 4, a Councilmember inquiry indicated a desire for the City to continue supporting our federally funded programs if that federal funding is lost. The City's current year budget includes more than $187 million of federal funding, summarized as follows. U.S. Department of: FY24-25 Budget FY24-25 FTE's Housing and Urban Development $96,975,715 32.43 The Interior— Bureau of Reclamation $2,374,000 0.00 Justice $671,889 0.00 Labor $4,035,944 14.38 Transportation $11,872,392 0.00 Treasury — ARPA and other COVID Funding $63,188,979 12.45 Homeland Security $8,163,311 2.00 Totals $187,282,230 61.26 The City has already developed its plan for the 12.45 FTE's funded by ARPA. If the City were to lose all federal funding, the remaining 48.81 FTE's would be subject to budget cuts and staff would seek City Council direction regarding which other City programs should be cut to continue these programs and maintain a balanced budget. City Events The City Events Budget for the current fiscal year includes a recurring allocation of $1,365,700. This amount does not account for Public Safety support, which is currently being absorbed within existing department budgets. Due to potential budget constraints, staff has explored ways to streamline event offerings using a holistic and strategic approach that focuses on community -valued events while optimizing resources. Below is the proposed realignment of funding: Event FY24-25 Budget FY25-26 Proposed Budget Fiestas Patrias $475,000 $500,000 Chicano Heritage $125,000 $130,000 Tet/Lunar Festival $75,000 $78,000 July 4 Celebration $100,000 $120,000 5K/10K Event $85,000 $85,000 Movies at the Park $70,000 $50,000 For the 5K/10K event, staff anticipates cost savings as it will be combined with Public Works Week festivities. This consolidation will reduce expenses by requiring only one Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 11 street closure, one stage setup, and shared resources. Additionally, staff proposes adjusting the Movies at the Park Series event to reduce costs. Staff also proposes allocating $20,000 to support outside entities in managing and executing two community -led events, Juneteenth and Noche de Altares/Viva la Vida. With these contributions, the total proposed event budget would be $1,003,000. The current year events budget is $1,365,700. Staff seeks City Council concurrence on the recommendations for reduced event funding allocations for FY25-26. Arts Funding A recurring funding allocation of $200,000 for FY 2025-26 is proposed to support the arts, with the Arts and Culture Commission responsible for reviewing and recommending its distribution to align with community priorities and cultural programming needs. Additionally, staff will review the FY 2025-26 operating budget to determine if this funding can be absorbed within the existing budget without impacting other services. Staff seeks City Council concurrence for a recurring funding allocation of $200,000 to support the arts in FY 2025-26. Miscellaneous Fees The City charges fees for services provided to individuals that do not benefit the public at large (e.g., building permits). Per state law, the City cannot charge more than the cost to provide these services. To keep pace with rising costs of doing business, including compensation and service -related expenses, staff recommends increasing miscellaneous fees each year. Last year, the budget included a 4.66% increase, reflecting both the increase in compensation for employees providing these services (including salary and benefits) and increased service -related costs. The Consumer Price Index for Los Angeles -Long -Beach -Anaheim for the year ending December 2024 increased by 4.76%. Employee bargaining groups are still in negotiations, with wage increases expected. Costs for workers' compensation and general liability have risen by 12% and 10%, respectively, and unfunded liability contributions will increase by 12% for FY 2025-26. Inflationary factors are also driving increases in other service -related costs, such as contract services and operational expenses. For Parks, Recreation, and Community Services Agency, no fee increases were implemented for FY 2024-25 miscellaneous fees. However, for this year, staff is requesting that fees be adjusted by the CPI increase of 4.76% to reflect rising costs. Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 12 Based on this information, an increase of up to 4.76% is justified, ensuring the City remains in compliance with state law. Staff seeks City Council concurrence on a recommended a 4.76% increase in miscellaneous fees for FY 2025-26 budget. Tariff Impact on Sales Tax Staff contacted our Sales Tax Consultant regarding an analysis of the Federal tariff impact on the City's sales tax revenue. However, due to significant uncertainty surrounding the tariffs themselves, there is not enough solid information to accurately assess potential impacts. Additionally, in UCLA's Economic Forecast released on March 5, 2025, emphasized that conditions remain too uncertain to make definitive projections. As a result, they have opted to hold their forecast the same until more data becomes available. Staff will continue to monitor the situation and provide updates as new information emerges. New Requirement: Assembly Bill 2561 - Job Vacancies and Recruitment Efforts As part of the new requirements outlined in Assembly Bill 2561 (AB 2561), effective January 1, 2025, local public agencies in California must address job vacancies and enhance recruitment and retention efforts. This bill mandates that local governments conduct an annual public hearing to present the current status of job vacancies, strategies for recruitment and retention, and any obstacles in the hiring process, along with potential solutions. The public hearing must occur before the final adoption of the budget if an annual or multiyear budget is adopted during the fiscal year. Additional details on these requirements are provided in Exhibit 2. Staff plans to incorporate this new requirement as part of the upcoming budget public hearing in June. During this session, staff will present the necessary information to comply with AB 2561, including the status of job vacancies, recruitment strategies, and any identified barriers to hiring. Staff will also provide additional reporting if any bargaining units have a vacancy rate that exceeds 20% of their authorized positions, as required by the bill. Additionally, recognized employee organizations representing a bargaining unit will have the opportunity to present during the public hearing regarding vacancies and recruitment efforts for positions within their unit. Evaluation of vacancies and hiring decisions continue to ensure program capacity is maintained while avoiding any additional financial strain, particularly in light of projected revenue shortfalls in the coming years. ENVIRONMENTAL IMPACT There is no environmental impact associated with this action. Early Direction for the Fiscal Year 2025-26 Budget March 18, 2025 Page 13 FISCAL IMPACT There is no direct fiscal impact at this time. City Council is scheduled to review the proposed budget in May, followed by a public hearing in June. EXHIBIT(S) 1. FY2024-25 Measure X Spending Plan 2. Assembly Bill 2561 (AB2561) Legislation Summary Submitted By: Alex Trinidad, Acting FMSA Executive Director Approved By: Alvaro Nunez, City Manager x x W 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O N O N N 0 0 o �--i In o 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 C I� O n Ill C 00 O O O O W O n O O O O O O O O O O C C c C C C C C C C O O O I, O n 0) O O O O O O O O O C � O N O I C cl C tD M O W O .-I O O� M CO O O O W O O C C O C C C C C W N M N 0 0 0 0 0) O N 0 0 0 0 0 0 o O O O. 0 N V O O O O O O O O W C N m l0 .-I I(1 M O Ifl O O O m . 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To comply with AB 2561, local governments must: Annual Public Hearing: Conduct a public hearing before the governing board at least once per fiscal year to present: • The current status of job vacancies. • Efforts and strategies related to recruitment and retention. • Identification of any policies, procedures, or recruitment activities that may pose obstacles in the hiring process, along with potential changes to alleviate these obstacles. If the agency adopts an annual or multiyear budget during the fiscal year, this presentation must occur before the final budget adoption. 2. Employee Organization Participation: Recognized employee organizations representing a bargaining unit have the right to make a presentation during the public hearing concerning vacancies and recruitment efforts for positions within their unit. 3. Additional Reporting for High Vacancy Rates: If a bargaining unit's vacancies reach or exceed 20% of its total authorized full-time positions, and upon request from the recognized employee organization, the agency must provide during the public hearing: • The total number of job vacancies within the bargaining unit. • The total number of applicants for these vacant positions. • The average duration of the hiring process from job posting to completion. • Opportunities identified to improve compensation and other working conditions.