TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Javier Carcamo, Finance Director
PREPARED BY: Tanner Benson, Financial Analyst
SUBJECT:
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Budget Workshop - Proposed Operating Budget for Fiscal Year 2025/26 and 2026/27
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RECOMMENDATION
recommendation
Provide direction to staff regarding the proposed Fiscal Years 2025/26 and 2026/27 Operating Budget; and
Receive and file the report.
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PRIOR ACTION/VOTE
None.
CITY COUNCIL GOAL
Maintain a high performing organization that values fiscal sustainability, transparency, accountability and organizational efficiency.
BACKGROUND
This proposed biennial budget integrates revenue and expenditure requests from all City departments. The budget is balanced on a citywide basis, including the General Fund and the Measure T Fund. The Fire Department, Community Services District, and Library funds also maintain balanced budgets through operating transfers originating from the Measure T Fund. A biennial budget is considered structurally balanced when, over the two-fiscal-year period, ongoing revenues are equivalent to ongoing expenditures, with the utilization of one-time revenues or resources, such as available fund balance, being of limited duration.
The Personnel Cost Estimates were based on the current City Council-approved full-time equivalent (FTE) positions of 469.09. The City Manager may recommend adding new positions that would increase the FTE count as part of the budget workshop.
Proposed Budget Overview
The proposed operating budget for all funds for Fiscal Year (FY) 2025/26 is $189,687,362, and FY 2026/27 is $197,026,453. The tables below highlight the revenues and expenditures for each of the City’s major funds (General Fund, Measure T, Fire District, Community Services District, and Library District) and a summary of all remaining funds. Some examples of the remaining funds include Lighting and Landscape Districts, Development Impact Funds, Housing Authority, and grant-related funds.
Revenues
The proposed citywide revenue budget for all funds for FY 2025/26 is $207,595,016, and for FY 2026/27, it is $212,134,760. Revenues are projected to have steady increases over the next two fiscal years, increasing by 3% or $6,046,004 from FY 2024/25 estimates. Following this trend, we anticipate a continued rise in revenues into FY 2026/27 with an overall increase of 2%, amounting to an additional $4,179,781.
Some key drivers for this biennial budget include realistic revenue and expenditure forecasts based on current economic trends. For revenues, a 10-year revenue study was conducted to analyze the trends that have impacted various revenue sources, the greatest being Property Tax, Business License Tax, and Transient Occupancy Tax (TOT).
• In addition to the 10-year analysis, Sales Tax revenues were budgeted based on the City’s consultants’ projections. The consultant estimated a 4.9% increase for FY 2025/26 and a 2.9% increase in FY 2026/27 for the General Fund. For the Measure T Fund, they estimate an increased sales tax revenue of 5.5% in FY 2025/26 and 2.9% in FY 2026/27. However, due to current trends in sales tax receipts and concerns with economic conditions such as persistent inflation, tariffs, and continued high interest rates, staff is estimating Sales Tax revenues will be slightly below the consultant's projections at a 3% increase year-over-year for both the General Fund and Measure T Fund.
• For property tax revenues, staff analyzed the actuals from the last ten fiscal years. Year-over-year changes fluctuate between four (4) and eight (8) percent. Since fewer homes are selling due to the high interest rates, staff applied a 5% escalator against the projected FY 2024/25 Property Tax revenues. A 5% escalator was also used for FY 2026/27.
• The TOT proposed revenue budget was based on increased activity and revenues collected from local hotels, including the Murrieta Hot Springs Resort. Based on the current year's projections, staff proposes a 2% increase for FY 2025/26 and a 3% increase for FY 2026/27.
Revenue projections are based on current economic conditions; however, various uncertainties in the economy, including implementation of the proposed tariffs and the possibility of two reductions in the interest rate from the Federal Reserve, could impact City revenue collections. The Finance Department will monitor economic changes and recommend adjustments during quarterly budget update presentations.
Expenditures
The proposed citywide expenditure budget for all funds for FY 2025/26 is $189,687,362, and for FY 2026/27, it is $197,026,453. It is projected that expenditures will slightly decrease in the first Fiscal Year of the biennial budget, and then the budget will increase in the second year. The projected decrease in expenditures in FY 2025/26 is 0.51%, or a reduction of $904,904, followed by a projected increase of 4%, or $6,979,127, for FY 2026/27. The year-over-year fluctuations in the budget are discussed in the following paragraphs.
Updates to the expenditure categories have been made to show one-time expenditures and a fleet allocation separate from Operations & Maintenance (O&M) and Capital Outlay, respectively. This gives the appearance that O&M and Capital Outlay have greatly reduced from the prior year. If the re-categorization of expenditure categories had not occurred, O&M would have a decrease in expenditures of $2,685,451, or -4%, and Capital Outlay would have a decrease of $210,078, or -8%. Overall, these decreases were influenced by the reductions that were requested by the City Manager as part of this Budget process.
Staff noted various areas of change that impacted the budget for proposed expenditures. Some of the more significant changes came from: increases in expenditures in the internal services charges for Information Services and Risk Management, personnel costs based on approved labor agreements, workers’ compensation costs, and CalPERS regular and unfunded liability costs. The proposed budget also includes funding for capital equipment, contract services, continued funding of other post-employment benefits, and the addition of a fleet replacement allocation to set funds aside for the purchase of fleet vehicles as they age or for new vehicles needed for new employees.
One-Time Expenditures, Department Reductions & Vacancy Saving Rate
In preparation for this biennial budget, staff identified various one-time costs. They are being listed separately to show the difference between the City's recurring costs and the various one-time expenses. Staff identified $1,199,174 in one-time expenses for FY 2025/26 and $824,851 for FY 2026/27. Funding one-time costs out of Unassigned Fund Balance is acceptable to improve budgetary savings for recurring expenditures.
Formulation of the City’s biennial budget is a collaborative process, involving each department assessing its needs and forecasting revenues and expenditures for the upcoming two years. After reviewing and consolidating all departmental submissions, a structural deficit was identified. In response, the City Manager instructed all departments to examine their budgets for potential efficiencies and savings. As a result, nearly every department successfully refined their budgets, identifying areas for improved efficiency and reductions in expenditures.
In total, the departments identified $1,768,409.50, in budgetary savings in FY 2025/26 and $1,855,590.25, in budgetary savings in FY 2026/27. The table below summarizes the total budgetary savings by department and Fiscal Year. For a more detailed review of the departmental budgetary reductions, please refer to Attachment 4. The departments' due diligence in revisiting their budgets to identify these reductions allowed for a balanced budget in both fiscal years of the proposed budget. It will also provide funding for some one-time costs that the departments asked for.
A vacancy savings rate is applied to reflect anticipated personnel cost savings resulting from temporary vacancies that occur throughout the fiscal year due to employee turnover, retirements, or delays in filling positions. This rate is intended to more accurately align budgeted expenditures with actual spending patterns, promoting fiscal responsibility while maintaining the City’s ability to fill critical positions as needed. One of the leading factors leading to a balanced budget is the implementation of a four percent (4%) vacancy rate, which is less conservative than the prior year’s salary savings rate of one percent (1%). The four percent (4%) vacancy rate equates to approximately $4,303,577 and $4,469,928 in personnel budget savings for FY 2025/26 and 2026/27, respectively.
City Manager Recommendations
The City Manager aimed to establish a foundational budget aligned with the operational requirements of the current year and to consider where adjusting service levels would best reflect the needs of the community. Staff were instructed to submit all new budget proposals across various expenditure categories, including operations and maintenance (O&M), capital outlay, new personnel requests, and any reclassifications related to the organizational structure. This also encompassed adjustments pertaining to staffing and operating expenses for the City Manager's evaluation and recommendations. Following approval from the City Council, these requests will be integrated into the budget for adoption. The City Manager has assessed all submissions and will present his recommendations during the budget workshop discussion. Based on the consensus of the City Council, these recommendations will be included in the final draft of the budget.
Operating Reserves
The City’s Fund Balance and Reserve Policy, Policy No. 100-11, requires each major fund to maintain at least a 25% operating reserve balance. During the workshop presentation, staff will outline the current reserve percentages based on the proposed budgets and how much is required to increase the operating reserves to the 30% goal. It is important to note that further increases in the proposed budget will require additional contributions to the operating reserves.
As part of maintaining healthy operating and sustainability reserves, staff recommend replenishing the sustainability reserves for funds allocated for projects currently underway. Additional reserve funds are proposed to be set aside for various purposes. Staff will outline the proposed contributions to sustainability reserves during the budget workshop. General Fund and Measure T unassigned fund balances will be used for all contributions to the operating and sustainability reserves.
The May 6, 2025, budget workshop is intended to familiarize the City Council and the public with staff’s estimates for revenues for the next two years and the estimated costs for funding City services, events, and programs. The presentation will include a summary of the budget highlights and recommendations from the City Manager to incorporate new budget requests and/or modifications to Personnel. Staff will incorporate the desired changes from the City Council into the proposed budget and bring the final Operating Budget for adoption at the June 3, 2025, City Council Meeting.
FISCAL IMPACT
This is an informational report only. There are no fiscal impacts to receive and file this report at this time.
ATTACHMENTS
1. Budget Summaries for Major Operating Funds
2. FY 2025/26 and FY 2026/27 Proposed Budgeted Expenditures
3. Operating and Sustainability Reserve Schedules
4. Detailed Summary of Reductions by Department