TO: ADAM PIRRIE, CITY MANAGER
FROM: JEREMY STARKEY, FINANCE DIRECTOR
DATE: MAY 14, 2024
Reviewed by:
City Manager: AP
SUBJECT:
Title
2024-26 BUDGET PROCESS UPDATE
Body
SUMMARY
Staff is in the process of developing the City of Claremont’s 2024-26 budget for adoption by the City Council in June. Beginning in late 2023, City staff conducted a public outreach process to solicit input from the community on priorities that could be addressed in the upcoming budget.
This report provides an update on the status of the preliminary budget, and discusses how the budget for 2024-26 will address objectives provided by the City Council during their priorities setting process.
It is important to note that staff is still in the process of developing the City’s budget for the next two years, and that projections for revenues and expenditures may change as the budget process progresses.
RECOMMENDATION
Recommended Action
Staff recommends that the City Council receive and file the 2024-26 Budget Process Update and provide any additional direction to staff.
Body
ALTERNATIVE TO RECOMMENDATION
In addition to the staff recommendation, there is the following alternative:
• Request additional information.
FINANCIAL REVIEW
The staff cost to prepare this report and administer this project is estimated at $2,631, and is included in the operating budget of the Financial Services Department.
ANALYSIS
Background
During the 2021-22 budget development process, members of the community requested that the City Council conduct a more robust priorities setting process with community input prior to the development of the next budget. In response to this community request, the City Council directed staff to review the process for establishing Council Priorities and find new ways to engage the community in the process.
Staff engaged the Mejorando Group to gather community feedback from residents and businesses on City Council Priorities. In the last two months of 2023, the City gathered input and feedback through a Citywide survey. The survey was conducted between November 16, 2023 and December 15, 2023 and received responses from 814 participants.
Patrick Ibarra of the Mejorando Group facilitated two community focus group meetings using the Zoom platform on December 5, 2023 and December 13, 2023. A third community focus group was conducted in-person on January 25, 2024. During the focus groups, Mr. Ibarra asked a series of questions to participants and compiled a summary of participants’ answers.
At the City Council Priorities Workshop, held on January 27, 2024, facilitator Patrick Ibarra led the City Council through a series of exercises to gather their opinions on leadership, the benefits of good governance, the trends impacting government organizations, and the lasting impacts they wished to leave on the community. Following discussion on the exercises, the City Council received public comment. After public comment, the City Council reaffirmed the seven existing Council Priorities, which are long term conceptual principles.
The City Council discussed and reaffirmed the following Priorities:
• Preserve Our Natural, Cultural and Historic Resources
• Maintain Financial Stability
• Invest in the Maintenance and Improvement of Our Infrastructure
• Ensure the Safety of Our Community through Community-Based Policing and Emergency Preparedness
• Increase Livability in Our Neighborhoods and Expand Opportunities for Our Businesses
• Promote Community Engagement through Transparency and Communication
• Develop Anti-Racist, Anti-Discrimination Policies and Plan to Achieve Community and Organizational Diversity, Equity, and Inclusion
In addition to reaffirming the City Council Priorities, the City Council discussed objectives under each priority. The objectives include a variety of specific projects, program enhancements, and policy recommendations for staff to implement. Staff has considered these objectives in the development of the City’s budget for the next two years. This report will outline how the preliminary budget addresses the priorities and objectives recently adopted by the City Council.
2024-26 Preliminary Revenue Estimates
The process of developing revenue estimates includes reviewing current revenue trends, including cost of living factors in future revenues, and evaluating commercial and residential development activities that may be taking place over the course of the next two fiscal years. The process of gathering information to continue to refine revenue estimates will continue throughout the budget development process, and it is likely that the revenue estimates presented in this report will be refined as the adoption of the 2024-26 budget approaches.
The preliminary revenue estimates for 2024-25 and 2025-26 by fund type are summarized in the table below:
Total projected City revenues for 2024-25 amount to $64,849,659 representing an increase of 8.10 percent over the adopted budget for 2023-24. Total projected revenues for 2025-26 amount to $64,642,643 representing a decrease of 0.32 percent over preliminary estimates for 2024-25.
General Fund
General Fund revenues support many of the core services provided by the City of Claremont, including public safety, planning, community improvement, youth and senior program administration, street repair, building maintenance, and City administration. Accordingly, much of the discussion of projects and programs in this report will focus on the General Fund.
Preliminary estimates of revenues for the City’s General Fund in 2024-25 amount to $36,056,380. This reflects an increase of 13.99 percent over the adopted budget for General Fund revenues for 2023-24. Projected General Fund revenues for 2025-26 amount to 36,690,554, an increase of 1.76 percent over the preliminary budget for 2024-25.
The table below shows preliminary General Fund revenues by category for 2024-25 and 2025-26:
General Fund revenues are derived largely from taxes. The most significant sources of tax revenue include Property Tax, Sales Tax, Transient Occupancy Tax (TOT), Business License Tax, and Utility User Tax (UUT). Together these taxes account for approximately 82 percent of total General Fund Revenues. These revenue sources are discussed in more detail below.
Other sources of General Fund revenue include licenses and permits, fines and forfeitures, use of money and property, revenue from other agencies, charges for services, and miscellaneous revenues.
Property Tax
Property tax is assessed at a rate of one percent on real property within the City of Claremont. The Los Angeles County Assessor’s Office determines the value at which properties are assessed for the purpose of levying property tax. Property taxes collected by the County are distributed among several taxing entities, including the County, Claremont Unified School District (CUSD), the City of Claremont, and several small special districts. Claremont receives approximately 11.4 percent of this general sales tax levy.
The projection for property tax revenue for 2024-25 is $13,024,590. This figure reflects an increase of approximately 8.61 percent over the prior year’s budget of $11,992,000, and is consistent with current year projections, which should exceed the budget by approximately $600,000. In 2025-26, property tax revenues are expected to grow by an additional 3.94 percent to $13,537,252. The projected increases in property tax revenue are the result of several factors. First, Proposition 13 provides for the annual increase in the assessed value of taxable property by the Consumer Price Index (CPI), capped at an increase of two percent. Staff estimates that the CPI increases for 2024-25 and 2025-26 will be approximately 2.0 percent.
Proposition 13 also permits the reassessment of property at market value when it is sold or transferred to a new owner, or to account for new construction or the reassessment of properties that had their assessed values reduced in the past due to appeals. These factors account for the additional projected increases in property tax revenue in 2024-25 and 2025-26.
Sales Tax
Sales Tax is collected by retail establishments in Claremont at a rate of 9.5 percent and remitted to California Department of Tax and Fee Administration (CDTFA). CDTFA then distributes one percent of the sales tax to the City. The projection for sales tax revenue for 2024-25 is $8,569,997, an increase of 13.22 percent over the adopted budget for 2023-24. The estimate for sales tax revenues in 2024-25 reflects current trend information, and is consistent with current levels of revenue being received by the City. Staff expects sales tax revenues to grow by a further 1.95 percent to $8,737,000 in 2025-26.
Increased revenue projections from the 2022-24 budget are the result of several factors. Strengthening auto sales, led by the City’s largest auto dealership, Claremont Toyota, combined with increasing new and used car prices have resulted in actual receipts that have exceeded budgetary estimates in the current year, and staff expects this increase in revenues to remain over the next two years. Additionally, the impact of the allocation of taxable online sales to the City via the County pool from sales by online retailers such as Amazon has resulted in additional revenue growth. This increase in revenues from online sales is the result of changes in State law that require online retailers to collect and remit sales tax for purchases shipped to California. As staff receives more data about sales tax receipts in the current year, the revenue budget for sales tax may be amended to account for these factors more effectively.
Utility User Tax (UUT)
The Utility User Tax is collected at rate of 5.5 percent on fees for utility services such as electricity, water, gas, cable television and telephone. The projected UUT revenues for 2024-25 amount to $5,140,000, an increase of 11.89 percent from 2023-24. UUT revenues are expected to grow by a further 2.57 percent in 2025-26 to $5,272,000.
Accounting for most of the increases in UUT revenues are those related to the electricity, gas and water utilities. Increasing electricity, gas and water rates are the cause of the increase in the UUT on these utilities, and despite efforts by the City, residents and businesses to conserve energy and water, utility costs continue to rise. UUT revenues in 2023-24 included a temporary pause of gas UUT to Claremont residents to provide assistance with rising gas utility costs.
Given that there are still several months of UUT receipts to be received for the current year, it is likely that any emerging trends related to UUT for the current year may not be known until closer to budget adoption, therefore, it is possible that projections for UUT revenues may change in the coming months.
Transient Occupancy Tax (TOT)
The City’s Transient Occupancy Tax is collected at a rate of ten percent on the room rate for hotel stays of thirty days or fewer.
The projection for TOT revenue in 2024-25 is $1,600,000, an increase of 12.28 percent over the prior year’s adopted budget. The revenue estimates are more in line with pre-pandemic trends, and are consistent with TOT receipts for the current year. Staff has included an increase to $1,632,000 for TOT in 2025-26 in recognition of the continuing recovery of the hotel industry in the wake of the pandemic.
Current year TOT receipts support these projections, however, with a few months still to go in the current fiscal year, these projections may be updated as new information regarding TOT collections becomes available, and the budgets for TOT revenues may be adjusted as the budget process progresses.
Business License Tax
The Business License Tax is assessed on the gross receipts of businesses operating in the City of Claremont. Projected revenues for 2024-25 from this tax are estimated at $1,143,000, an increase of 22.9 percent over the budget for 2023-24. The budget for 2025-26 projects revenues of $1,168,000, an increase of 2.19 percent. The preliminary budget for 2024-25 is in line with actual receipts for Business License Tax receipts in the current fiscal year.
The bulk of business license renewals for the approximately 3,000 businesses operating in Claremont take place in March and April of each year. Accordingly, additional information about trends related to Business License Tax revenue may result in adjustments to the projections for 2024-25 and 2025-26 revenues.
Licenses and Permits
Licenses and Permit fees are collected on public works, grading and building permits within the City of Claremont. Projected revenues for 2024-25 from these revenues are estimated at $1,762,500, an increase of 86.41 percent over the budget for 2023-24. This increase is attributed to continued growth in residential and College development and fee increases that went into effect in 2023-24 for building and grading permits issued by the City. The budget for 2025-26 projects revenues of $1,630,500, a decrease of 7.49 percent.
The remaining General Fund revenue sources comprise a smaller portion of overall revenues, and the preliminary estimates for the next two years show slight overall increases in 2024-25 and 2025-26. Staff will also continue to monitor these revenues as the adoption of the budget approaches to determine whether some may be adjusted.
2024-26 Preliminary Expenditure Estimates
Prior to the beginning of the budget development process, Department Heads received general direction from the City Manager to prepare a budget that captured costs and projected increases for existing levels of service without adding costs for new or expanded programs. The exception to this direction was the consideration of the allocation of resources to achieve the objectives identified by the City Council during their priorities setting process.
Over the last two years, the City has faced significant increases in costs for contracted services, utilities, and insurance. Furthermore, the City is currently in negotiations with the six employee bargaining units. The process of gathering information to refine expenditure estimates for the next fiscal year will continue as the budget development and employee negotiation processes continue.
The preliminary expenditure estimates for 2024-25 and 2025-26 by fund type are summarized in the chart below. The chart does not include transfers out to other funds.
Total preliminary expenditures, excluding transfers out to other funds, across all the City’s funds amount to $68,201,459 in 2024-25. This represents an increase of approximately 13.21 percent from the 2023-24 adopted budget of $60,244,689. Drivers of increases include one-time purchases of vehicles and equipment, rising costs for goods and services, utilities, and insurance, along with estimated costs of employee contract renewals currently in negotiations. Preliminary expenditures for 2025-26 total $66,820,742, a decrease of 2.02 percent over preliminary expenditures for 2024-25.
2024-26 General Fund Expenditures
The City’s General Fund supports many of the core functions of the City, including public safety; planning, building, engineering, and community improvement; youth, senior and recreation programs; street repair; landscape, right-of-way and park maintenance; building maintenance and City administration.
Preliminary estimates of General Fund expenditures for 2024-26, including transfers out to other funds of $1,935,157, amount to $36,058,091. This represents an increase over the adopted 2023-24 General Fund budget of 15.8 percent. The preliminary estimates of General Fund expenditures for 2025-26 amount to $36,688,770, including transfers out to other funds of $1,774,711. This represents an increase of 1.75 percent over the preliminary expenditure estimates for 2024-25.
The chart below shows total General Fund preliminary expenditures for 2024-25 and 2025-26 by department:
The budget development process uses information on the increases in many of the major costs of General Fund to project expenditures for the next two fiscal years.
Cost increases, specifically those related to personnel, insurance and utilities, are the most significant factors in the General Fund’s growing projections for expenditures.
As a service organization, the City’s personnel costs represent a significant portion of the City’s General Fund, accounting for approximately 71.0 percent of total General Fund expenditures in 2024-26.
Base salary costs are expected to increase due to negotiated salary increases and employee merit increases based on annual evaluations. These merit increases are available to employees who are not yet at the top step in the twenty-step pay range for their positions. Approximately half of the City’s employees are not at the top of their salary range, and therefore eligible to receive a merit increase.
The City provides retirement benefits to its employees through the California Public Employees’ Retirement System (CalPERS). CalPERS establishes its employer contribution rates annually, based on the cost of the current year of service, as well as the amortization of any unfunded liability that exists.
Other benefit costs also increase as a result of the fact that they are calculated on a percentage of base salary. The preliminary budget also proposes the addition of a number of new positions, resulting in additional personnel costs in 2024-26. In total, employee salary and benefit costs are expected to increase by approximately $2.7 million or 12.3 percent in 2024-25, and approximately $1.0 million or 4.1 percent in 2025-26.
General Services cost increases are related to increased technology overhead costs due to the addition of one additional staff member to the Technology Division, increased equipment replacement costs and other investments in technology infrastructure to enhance the security and efficiency of City computer networks and technology systems.
Additional discretionary PERS payments of $600,000 each year are also included in the 2024-26 budget to reduce the City’s pension liabilities, an increase of $350,000 per year compared with the budget for 2022-24.
The City of Claremont obtains general liability, workers’ compensation and property insurance coverage through the California Joint Powers Insurance Authority (CJPIA). The CJPIA determines the amounts of the premiums for this insurance coverage based on the City’s claims history and the funded status of the insurance pool to which the City belongs. Over the last several years, the City’s insurance costs have risen steadily, with 2024-25 insurance costs expected to increase by approximately $292,713 or 8.1 percent over the adopted budget for 2023-24. Insurance costs for 2025-26 are expected to increase by an additional $191,977 or 5.0 percent over estimates for 2024-25.
The City’s utility costs for water, electricity, and gas are significant. Regular increases in rates by the utility companies have meant that the City’s costs, particularly for water and gas, have risen steadily in recent years. The projections for utility costs in 2024-25 include an increase of approximately $76,057 related to water and gas service with a minor decrease in 2025-26. These estimates are based on recent usage trends, as well as assumptions for the increase in the rates associated with the water, electricity, and gas utilities. Staff will continue to monitor usage trends until budget adoption to determine whether its projections for next year are accurate and revise the budget for utility costs if necessary.
Community Development Department cost increases of approximately $800,000 are the result of consultant services required for various studies and contracted support to implement City Priorities and Objectives during the next two fiscal years.
Community Services Department cost increases of approximately $400,000 are due to Animal Control costs of $315,000 now budgeted within this department which were formerly budgeted in the Police Department budget. The remaining increases in this department’s budget are due to increasing costs for contracted services.
Recreation and Human Services Department costs increased by approximately $150,000 for part-time staff in Senior and Youth programs, $37,000 for one additional Program Specialist for Special Needs Programming, and approximately $200,000 in other divisions due to general personnel cost increases. It is important to note that the Recreation and Human Services Department’s proposed budget includes an increase in the number of hours for part-time, hourly staff, as well as a proposed increase in the hourly wages paid to these staff. These changes are necessary to properly support programs, as well as to improve the City’s ability to recruit and retain part-time staff.
Current Status of the General Fund Budget
Total projected revenues for 2024-25 are $36,056,380, against preliminary expenditures and transfers out of $36,054,351, resulting in a surplus of $2,029 in the first year of the budget. Preliminary General Fund revenues for 2025-26 are $36,690,554, with projected expenditures and transfers out of $36,688,770, resulting in a surplus of $1,784 in the second year of the budget.
The current estimates for revenues and expenditures for 2024-25 and 2025-26 are shown in the table below.
It is important to note that the City is still in the process of making estimates in the preparation of the 2024-26 General Fund budget. Accordingly, the projections for revenues and expenditures could change, as well as the projection for any surplus that may result.
2024-26 City Council Priorities and Objectives
During the recently concluded City Council priorities setting process, the City Council provided direction to staff on objectives to be included in the City’s work plan for the next two years. The objectives include a variety of specific projects, program enhancements, and policy recommendations for staff to implement. The attached tables of City Council Priorities and Objectives show how staff proposes to address each of the objectives in the budget for the next two years. In many cases, projects or programs will only require the allocation of staff time to complete objectives, however, other projects or programs may require the identification and allocation of funding for consultants or other project costs.
RELATIONSHIP TO CITY PLANNING DOCUMENTS
Staff has evaluated the agenda item in relationship to the City’s strategic and visioning documents and finds that it applies to the following: Council Priorities, General Plan, and the 2022-24 Budget.
CEQA REVIEW
This item is not subject to environmental review under the California Environmental Quality Act (CEQA).
PUBLIC NOTICE PROCESS
The agenda and staff report for this item have been posted on the City website and distributed to interested parties. If you desire a copy, please contact the City Clerk’s Office.
Submitted by:
Jeremy Starkey
Finance Director
Attachment:
City Council Priorities and Objectives