Chino - File #: 25-008

• File #: 25-008
• Type: New Business
• Status: Agenda Ready
• File created: 1/3/2025
• In control: City Council
• On agenda: 1/21/2025
• Title: Mid-Term Budget Update for Fiscal Year 2024-25 and Appropriations Limit.

TO:                                           MAYOR AND CITY COUNCIL MEMBERS, CITY OF CHINO

FROM:                      LINDA REICH, CITY MANAGER

SUBJECT

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Mid-Term Budget Update for Fiscal Year 2024-25 and Appropriations Limit.

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RECOMMENDATION

recommendation

1) Adopt Resolution No. 2025-006, adopting the Mid-Term Budget Update for Fiscal Year 2024-25; 2) adopt Resolution No. 2025-007, adopting the Appropriations Limit for Fiscal Year 2024-25; and 3) authorize the City Manager to execute all necessary documents on behalf of the City.

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FISCAL IMPACT

On June 20, 2023, the City Council adopted the FY 2023-25 Two-Year Budget. Fiscal Year 2023-24 (FY24) has completed, and the audit process is in progress. The second year of the two-year budget for FY 2024-25 (FY25) began on July 1, as previously approved by the City Council. However, there are Mid-Term updates recommended with this report to reflect the impacts of negotiations, the classification and compensation study, operating needs, reprioritization of capital projects, and the passage of Measure V by the citizens of Chino.

The Mid-Term FY25 General Fund Budget shows net revenues of $143 million, which includes $26 million in Measure V revenue and a net expenditure budget of $142.8 million. The Mid-Term revenues exceed expenditures resulting in an operating budget surplus of $146,026.  The ending estimated balance is projected at $35 million for June 30, 2025.

CITY OF CHINO MISSION / VISION / VALUES / STRATEGIC ISSUES

The recommendation detailed above furthers the City’s values and strategic issues that serve as key pillars on which identified priorities, goals, and action plans are built, by fostering:

•                     Financial Stability

•                     Responsible Long-Range Planning

Revenue:	Expenditure: See Attached Schedule
Transfer In:	Transfer Out:

BACKGROUND

The Mid-Term budget document is not as comprehensive as the original two-year document, which included goals and objectives for each department along with many narrative summaries, which is consistent with the purpose of a two-year budget. The intent of the second year of the two-year budget is to approve the Mid-Term recommended changes. As a result, this report focuses on the recommended changes. The updated budget reports (Attachment 3) provide comparison information showing the impact of the changes made during the Mid-Term update.

ISSUES/ANALYSIS

FY 2024-25 PROPOSED FUND BALANCE REVIEW - LEVEL 3 (see Attachment 3, pages 3-4)

The governing document that summarizes the budget being amended is the FY 2024-25 PROPOSED FUND BALANCE REVIEW summary of all funds.  To better understand this report, below is a summary description of the columns.

Estimated Fund Balances July 1, 2024 - This represents the estimated ending balances for each fund for FY 2023-24, which now becomes available for the new budget year. They include any amounts considered as reserves per council adopted policies.

Estimated Continuing Appropriations - At the end of each fiscal year, an analysis is performed of projects or purchases in progress where the budget has been committed through contracts but not yet spent. These are considered continuing appropriations and, therefore, a reduction in the available fund balance.

Projected Revenues 2024-25 - During the Mid-Term update, the revenues are updated based on new information available. Changes may be attributed to changes in the economy or development or other factors impacting the City.

Total Available - This column represents the total available resources to pay for the activities, services, and capital projects of the City. 

Transfers In - This column represents resources being added to the fund for operational or capital activities. These resources are coming from other funds due to charging the other funds for services rendered or to consolidate funds in a specific fund for technical reasons to cover operations and capital projects. Transfers In also includes administrative overhead charged to the departments. Transfers In are a revenue. A detailed list of the transfers is provided.

Transfers Out - This column represents the opposite of the Transfer In, specifically related to charging the other funds for services rendered or to consolidate funds in a specific fund for operations and capital projects. Transfers Out are considered an expenditure.  A detailed list of the transfers is provided.

Proposed Appropriations 2024-25 - This column represents the appropriations needed for operating and capital costs of the City. Appropriations include personnel costs, maintenance and operation costs, and capital costs.

Net Surplus (Deficit) - This column is new and represents the net Mid-Term revenues (Projected Revenues 2024-25 and Transfers In) minus the net expenditures (Transfers Out and Proposed Appropriations 2024-25). The result informs the reader whether the Mid-Term budget for each fund has a net surplus or deficit.  Ideally there is a net surplus. However, many funds include capital projects revenues that were collected in prior years and the project is now being appropriated.

Estimated Balance 6/30/25 - This column assumes that all budget estimates occur as presented. Although we know the budget is a living document that is modified throughout the year, this column provides an understanding of how the budget year affects City resources. It also provides the foundation for the Mid-Year update that is expected to be presented to the City Council in March.  Included in the Mid-Year update will be the inclusion of all appropriations approved by the City Council since July 1, 2024.

The primary focus of this memorandum will be on the General Fund, with highlights of other changes.

GENERAL FUND

There have been many changes to the General Fund with the Mid-Term recommended updates, which include the impacts of negotiations, the classification and compensation study, operating needs, reprioritization of capital projects, and the passage of Measure V by the citizens of Chino.

MEASURE V

The City took appropriate action to communicate with the community the need for Measure V, which was successfully approved by the citizens of Chino in March 2024, with an effective starting date in July 2024. Measure V is essential to the City for the preservation of the City’s existing quality of life (essential) services and allows the City to begin addressing deferred infrastructure and neighborhood improvement needs.  The estimated revenue for FY25 is $28 million.  It is accounted for in a separate fund (Fund 103). Revenues needed for the preservation of services and capital projects are transferred to the General Fund. The remaining balance remains in the new fund for future capital projects or other Council policy decisions.

The following Measure V table provides a summary of how the tax revenues are being used in the Mid-Term FY25 budget update.

Preservation of services was a vital component of the measure as it allows the City to maintain existing service levels as well as address staffing needs to provide essential services and compensation levels to attract and retain qualified employees. Included in the preservation of services is the structural budget deficit for FY25 that was approved by Council before the Measure was voted on.  In the absence of Measure V, the City would likely have been in the situation where service levels and capital projects would need to be reduced to present a balanced budget to the City Council.  Measure V also includes Council approved General Fund costs associated with personnel retention (compensation study and negotiated COLAs with all bargaining groups) and staffing augmentation to provide essential services.

At a minimum, 40% of Measure V will continue to be used for ongoing operating costs that allow the City to preserve City services and the quality of life expected in the community.

Capital Projects - There is over $15M in capital projects for parks, public facilities, and streets.  A detailed listing is provided in Attachment 3.

Approximately 60% of Measure V is being committed to capital projects. These funds become available every year since capital projects are one-time expenditures. This means that each year the list of capital projects changes.

In addition, the proposed amended budget is setting aside $2M for future needs and Council policy direction.

General Fund Summary

General Fund Estimated Fund Balance for 7/1/24 (Ending Fund Balance)

The estimated Fund Balance for 7/1/24, which has been updated with the FY25 Mid-Term Budget, was projected to end at $47 million when the budget was originally adopted. After the actual activity posted and various adjustments made, the FY 2023-24 ended with an estimated $37.7 million.

During the audit report presentation for FY 2022-23, the Annual Comprehensive Financial Report (ACFR) represented that the City had a “going concern” due to the amount available in reserves to fund ongoing operations in case of an emergency. The City took proactive action to review how the available balances in the budget were presented. As a result, per discussion with the auditors, approximately $15M assigned to a pension note was removed from the estimated Fund Balance for 7/1/24 in the General Fund because it does not represent available spendable resources that can be appropriated. A “going concern” is an accounting term meaning there is concern whether the agency has sufficient resources to operate, particularly in the event of an emergency.

The table that follows provides a quick overview of the General Fund budget. The presentation of this table includes all the components of the PROPOSED FUND BALANCE document but summarizes the information differently. As you can see, the original FY25 budget was adopted with a structural deficit of $7M, which means the appropriations/expenditures are greater than the revenues. From time to time, a deficit budget may be adopted by city councils to avoid unnecessary or untimely reductions in service levels. Measure V addressed this concern in part by communicating the importance of preservation of services along with the need for capital projects to address infrastructure needs.

The amended net expenditure budget for FY25 has increased by just over $24M to include the Council approved operating costs (approx. $8.6M) associated with staff augmentation (to continue essential services), the compensation study, negotiated COLAs with bargaining units, increases in operating costs for maintenance and services as seen in the economy at large, and capital projects (approx. $15.5 M).  Net revenues have increased by $31M, which includes $26M of new Measure V revenue.

The General Fund amended budget for FY25 now shows a surplus of $146,026, which is a significant improvement from the budgetary deficit shown in the original adopted budget and is addressing the “going concern.”

The ending Estimated Fund Balance as of June 30, 2025 is projected at $35M, which factors in the removal of the pension note ($15M) previously included in the Fund Balance numbers as noted above. In addition, the original estimates were prepared Spring of 2023 before the end of the fiscal year. Many year-end adjustments for FY23 and FY24 are factored into the new estimates. The $35M includes the 15% Designated Working Reserve amount of $15.1M based on the policy approved by the City Council.  Maintaining a balance higher than the adopted policy allows the City to navigate future economic downturns or possible changes in development as the build out slows down. Council has already discussed increasing the policy percentage to maintain 4 to 6 months’ reserves. This will be a future Council consideration to formally adopt.

Next steps

Once the amended budget is approved by the City Council, staff will begin the Mid-Year analysis.  This analysis is pending the adoption of the amended Mid-Term budget. Typically, the City Council receives the Mid-Year review in March each year. At that time, any Council approved appropriations since July 1, 2024 (approximately $2M, such as the Ayala Park project and new vehicles) will be factored into the analysis. These are not reflected in the budget documents for Mid-Term but will be incorporated into the Mid-Year Review. In addition, the Fund Balance estimates will be analyzed to reflect the final actual numbers based on the audit, which is currently in progress. Readers of the budget should expect that the estimated ending balance will be updated with the Mid-Year review and completion of the audit.

General Fund Revenues

Overall, General Fund revenues increased by $31M, which includes $26M of the Measure V additional 1% sales tax revenue. Measure V revenues are recorded in a separate fund as indicated earlier in this report. For technical accounting and budget purposes, the amounts needed in the General Fund are transferred in as a revenue.  As seen in the previous table, most revenues were increased. Property taxes are projected to increase $2.4 million due to the addition and reassessment of numerous industrial buildings in the City. Interest income is up substantially due to the Federal Reserve’s actions to increase interest rates. However, two areas show a decrease.  Sales taxes are down across the entire state of California as well as in the City of Chino. A reduction of 1.89M has been factored in based on analysis performed by the City’s sales tax consultants, HdL.  This is being closely monitored for the Mid-Year review in case additional adjustments are needed. Development revenues were adjusted downward by $1.8M as the Federal Reserve’s actions increased mortgage rates, thus slowing the construction and sale of new homes in Chino. This revenue is very sensitive to the economy and development project activities.

General Fund Expenditures by Function

The General Fund operating expenditure budget is an increase of $12M of the total increase of $24M. The majority of the increases can be attributed to the COLA increases and Classification & Compensation Study. Additional increases are noted below by functional department:

Administration - The largest change was moving the animal services contract to Administration from the Office of the Chief, and increases for legislative advocacy, the State of the City, and other outreach efforts.

Finance - There were increases included for additional services with audits of our property taxes and contracts for a Business License program and user fees review.

Human Resources - The COLA increase was offset by removing a vacant position.

Police - The primary increases were the COLA increases and staffing approved in May 2024. The animal service contract was removed and added to Administration while other minor increases were added to training.

Development Services - The Permit Center Program was created, which moved expenditures within the department to the new division as well as centralizing related expenditures from Public Works, Central Services and IT divisions.

Public Works - Increases are primarily related to the COLA implementation.

Community Services, Parks & Recreation - The increase can be attributed to the implementation of the compensation study for the large number of part time staff in the department. Community Services, Parks & Recreation Programs include community facilities, recreation programs, youth sports, counseling services, prevention & intervention programming and social services programs.

Landscape Maintenance - Primary increases are associated with the COLA implementation and contract costs associated with landscape maintenance and street lighting costs on City thoroughfares and neighborhood streets.

Transportation - Primary increases are associated with the COLA implementation and contract costs associated with transportation programs that maintain City streets and increase the ease of traffic flow throughout the City.

The largest increase of $12M is for Capital Projects, which brings the total budget for Capital Projects to $15.6 million.  Measure V is fully funding these projects as mentioned earlier in this report.  Additional details on the capital projects are presented later in this report.

General Fund Expenditures by Category

The following table summarizes the General Fund budget by major category. It is a different way to look at the same information.  As stated earlier, the General Fund operating expenditure budget is recommended to increase by $12M.

Personnel Services

The largest increase is for personnel costs, which includes the new positions approved in May of 2024, the Class & Compensation Study approved in June of 2024 and the Cost-of-Living Adjustment (COLA) and increases to PERS costs of $1.2 million. The impact of the COLA adjustment had been partially anticipated in the original two-year budget with a 2% increase included. The Mid-Term budget includes the additional costs of the final adopted COLA, which is reflected in the total increase to Personnel costs.

Maintenance & Operations

Various contractual services increased or were added requiring additional budget. These include animal services, the User Fee study, and Business License study and additional budget required for essential training. 

Allocated Costs

Allocated costs represent the services provided through the Internal Service Funds to the various departments. The City has six (6) Internal Service Funds, which are Central Services, Liability Insurance, Employee Benefits, Building Management, and Equipment Management. Each of these funds has expenditures related to staffing, operations and capital that benefit all City departments. When increases in operating costs in the Internal Service Fund occurs, like the implementation of the COLA increases, the charges to the departments also increase. In addition, there were budget increases to address increases in software licenses and computer equipment for new staff.

Capital Projects

Capital projects of $15.6M are funded through Measure V. They include street and facilities projects, previously approved by City Council, in progress, or will return to City Council for contract approvals for the next phase of the projects.

Transfers Out for Department Services

As mentioned earlier with the previous table, this area of increase relates primarily to operational services in Transportation, Community Services, Parks & Recreation, Landscape Maintenance and the associated costs of implementing the COLA and any staffing augmentation.

City Staffing Changes

The position changes above are being proposed to continue department efforts to right-size City staffing to continue to provide essential services to the community as well as provide continuing maintenance of streets, parks, and public facilities. The net impact of the changes is $241,109.  The major funding sources for the position changes are in Community Services, Parks & Recreation and the Utilities.

ENTERPRISE FUNDS

The City’s Enterprise Funds provide for water, sewer, storm drain, and sanitation services for residents and businesses throughout the City. Expenses for operations and capital improvements are covered by the monthly utility rates charged to customers. These monthly rates have been approved by customers via California’s Proposition 218 procedures. The City has initiated a new five-year rate analysis that will return to City Council for consideration at a future date.

The primary reasons for the recommended Mid-Term adjustments are as follows:

•                     Water - Increased due to additional grant funding

•                     Sewer - Increased due to additional interest income

•                     Sewer Lift station - Increased due to additional fees collected

•                     Storm Drain - Increased due to Transfers In from development impact fee funds for capital projects

•                     Sanitation - Increased to reflect a full year of the Waste Management revenue sharing agreement

The primary reasons for the recommended Mid-Term adjustments are associated with the COLA increases. Other changes include the following:

•                     Water Fund - Increases in electricity costs for operation of the water wells, budget for additional purchased water and recycled water, for capital projects, for bad dept on uncollectable water accounts, and updates to the ethernet communication equipment.

•                     Sewer Fund - Increases in electricity costs and additional capital projects for the relining projects and sewer line replacement along with the San Antonio Regional Project.

•                     Sewer Lift Station - Increases in electricity costs and in contractual services with Inland Empire Utility Agency (IEUA).

•                     Storm Drain Fund - Increase in contractual services for the Citywide Storm Drain Master Plan Update, and a decrease in the capital projects.

•                     Sanitation Fund - Overall increase is due to additional funding for capital projects.

Internal Service Funds

Revenue in the Central Services, Employee Benefits, General Liability, and Building Management are dependent on corresponding fund expenditures and the reserve policy adopted by the City Council on June 17, 2008.

Equipment Management - The revenue amount into the Equipment Management Fund is dependent upon the cost of the entire Equipment Management program, which includes vehicle maintenance, purchases and vehicle depreciation.

Expenditure adjustments include:

•                     Central Services - In addition to the COLA and classification increases, there are increases for additional software/subscriptions, reallocation of maintenance agreements to software licenses/subscriptions, as well as additional requests from departments.

•                     Employee Benefits - In addition to the COLA and classification increases, there are increases in accrued leave cash outs based on actual realized expense in the benefit bank to match the 2025 health benefits plan rate, and in PERS retirement to cover the City’s portion of the employee retirement benefits.

•                     General Liability - In addition to the COLA and classification increases, the liability insurance claims increased based on the actual number of claims received and for additional review needed by the City Attorney for litigated claims.

•                     Building Management - In addition to the COLA and classification increases, there are increases for added projects, such as, the Citywide HVAC replacement and repairs, Ayala Park Electrical Panel, and Owen’s Bistro Building Interior Repointing.

•                     Equipment Management - In addition to the COLA and classification increases, there were some vehicles added to the replacement schedule that were not originally accounted for due to traffic collisions, as well as a few of the larger vehicles originally budgeted in FY23-24 but not yet purchased that were carried over into the FY24-25 budget, such as the asphalt patch truck, an axle sewer truck, and a boom truck.

Capital Improvement Program (CIP)

The City has continuing appropriations of over $76 million in capital projects. This means contracts have been approved by the City Council or the projects are in various stages of progress.  During the Mid-Term update, over $38 million in projects were added for a total of over $115 million.  Included in these projects is the $15.6 million funded through Measure V.  The remaining $100 million in projects is funded through the utilities or Special Revenue Funds.

Conclusion

The Mid-Term budget has been updated with the collaboration of all the departments. As indicated earlier, the next steps after approval are to begin the FY25 Mid-Year analysis. At the same time, departments will begin the budget process for FY 2025-26. The next budget cycle will return to a one-year document.

There are many factors on the horizon that will need to be considered in the upcoming budget years, such as the new Animal Shelter JPA operation and construction cost reimbursements, fully establishing the Police Air Support operations, and negotiations with bargaining groups. In addition, there are several rate studies starting or in progress that will return to the City Council for consideration and implementation in the next 12 to 18 months. Property tax is likely to increase with the recent annexations.

APPROPRIATIONS (GANN) LIMIT

Article XIII-B of the State Constitution (as amended by Proposition 111) requires the City to adopt an annual limit on the appropriation of tax proceeds, which defines the amount of tax revenue the City can allocate in a given year. For FY25, the City’s appropriations limit has been calculated in accordance with State guidelines. This calculation was made by using Nonresidential New Construction Alternate 2024-25 Appropriation Limit Factor of 5.16% and the City’s annual population change of .57%, which is in accordance with the provisions of Article XIII-B of the State Constitution.

The Appropriations Limit for FY25 for the City of Chino is $3.5 billion. Tax revenue budgeted for this fiscal year that is subject to the Appropriations Limit is $113 million, which places the FY25 City budget $3.4 billion under the limit. The difference represents the amount of tax revenue that the City could appropriate if the revenue is available. The City’s Appropriations Limit (Gann Limit) for FY25 is adopted by resolution by the City Council.

Attachments:                     1 - Budget Resolution No. 2025-006

                                          2 - GANN Limit Resolution No. 2025-007

                                          3 - Mid-Term Budget Update