Item 15 - Early Direction for the Fiscal Year 2025-26 Budget

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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.