Receive the Fiscal Year 2025-2026 Recommended Budget (Estimated time - 60 min)

Receive the Fiscal Year 2025-2026 Recommended Budget.

Assumptions and Proposed Policy Changes


In early 2025, the Financial Stewardship Workgroup (FSW) was stood up by the Council to work with staff through the creation of the FY25/26 budget (Attachment 1).  As a product of those meetings this draft budget represents a notable change in how it was constructed, including revenue and expense assumptions, salary projections, and even the application of potentially new financial policies that are being proposed this year.  The following section is intended to give Council an overview of these assumptions before being presented with the budget numbers, and the associated challenges that will need consideration.  


Modified Assumptions


In collaboration with the FSW, this year’s budget was derived through some modified assumptions from previous years:

• Projected Salaries: In previous years, salary costs were projected with the assumption of the position being compensated at the top step.  While this was accurate for some, there are employees who will not reach their top step even with an annual COLA increase.  This provided some “salary savings” in the overall budget.  This assumption has been changed to project each employee at the salary step they will achieve in FY25/26.  The ramification of this change is that there will not be salary savings available during the year if unexpected expenses arise.

• Vacant Positions:  In previous years, vacant positions were budgeted as if they would all be filled on the first day of the new fiscal year.  This added to the salary savings in the budget, but also allowed HR to move as quickly as possible to fill positions.  This assumption has been changed, to estimate that the +/- 10 vacant positions will not be filled and receiving a paycheck for 3 to 4 months, thereby reducing the cost of labor.  The ramification of this, is that if recruitments are able to move faster, some salaries will be over the budgeted amount.  

•  TOT Revenue:  In previous years, TOT was budgeted based off of the previous year’s budgeted amount (not actuals).  This was a conservative approach, as regularly the TOT actual amounts came in above budget.  This year, the TOT assumption was based off FY24/25 projected actual, with a 2% decrease based on projections in the hospitality industry.  The ramification of this change is that our revenue assumptions are no longer conservative.  In other words, the City is much less likely to see more revenue than expected and will be more susceptible to volatility in the travel industry.  This is important, as TOT is one of the three “legs” of the City’s revenue “stool”. 

• Sales and Use Taxes:  In previous years, the City has budgeted for increases in sales and use taxes consistent with the Consumer Price Index (CPI).  This has given the City a steady and reliable income stream.  This year, based on advice from the City’s professional sales tax consultant, our sales and use taxes are still projected to increase, but below CPI.  The reason for this adjustment, is based on data showing that Carmel-by-the-Sea is one of the only cities in the region than expect to see any increase in these taxes.  Most surrounding agencies are projecting a loss in sales and use tax revenues in FY25/26.  The ramification of this assumption, is that effectively another one of the “legs” of the city’s revenue “stool” will be shorter than it has been in previous years

Proposed New Policies


Staff and the FSW are suggesting some new budget policies.  A separate report has been prepared and is being considered by Council at this meeting with all of the suggested policy changes, but the following are the key ones to consider when receiving the draft FY25/26 Budget:

• 90%/10% Revenue Split:  One recommended policy, which would act as a foundational structure for the overall budget, is aspiring to fund Operational Expenses and Capital Expenses wholly from the City’s projected revenues at a split of 90% and 10%, respectively.  In other words, if the projected revenues were $30 Million, then the goal for that year’s Operating Expenses would be $27 Million, and Capital Expenses would be $3 Million.  The ramifications of this policy would be that each year, if operating or capital expenses are projected to outpace their allocation of revenue, Council will need to consider things like cutting expenses, finding additional revenue sources or deciding to not meet the policy goal and pull from fund balance.  In essence, this becomes a forcing factor each year.  As a policy, this 90/10 split is recommended to be aspirational, so that the City can work towards reaching it more consistently each year. 

• CIP Project Carry-Over: Previously, at the end of a fiscal year, any CIP projects that were not complete, but would continue the following year, had all of the associated revenue pulled away, and placed in fund balance.  Then, these funds would be reallocated in the following year’s budget to the project.  This practice effectively created a break in the financial tracking for the project and made the total CIP cost somewhat inaccurate since it included funding that was appropriated in the prior year.  This proposed changed allows an approved CIP project to would live on in the financials, carrying over each year with its funding intact.  The ramification of this change is that each year the CIP budget will be more reflective of what new funds are actually needed to do a project.  In addition, this multi-year approach will allow for better and more accurate tracking of each project’s budget.      

 

The Draft FY25/26 Budget


In accordance with Carmel Municipal Code Section 3.06.020, prior to the beginning of each fiscal year, the City Administrator shall prepare and submit to the City Council a proposed operating and capital budget for the forthcoming fiscal year. The proposed budget, referred to as the Fiscal Year 2025-2026 (FY 25-26) Recommended Budget of $43.2 million is submitted for Council’s consideration. 

• The proposed expenditures total $43.2 million and include the General Fund operating budget ($32.1 million), debt service ($509,100), pension unfunded liability ($2.7 million), and capital budget ($7.9 million). 

• The proposed revenues total $34.7 million include property taxes ($9.2 million), sales tax ($10.4 million), transient occupancy tax ($9.1 million), and other revenue ($6.0 million). 

• The FY 25-26 Recommended Budget requires the use of $9.3 million in prior years’ fund balance in order to balance, unless additional reductions are made.

• This means that the budget is balanced, but it requires tapping into the City’s unassigned fund balance.  

Note, Caplital Outlay Expenditures above are for new projects and do not include $3,460,000 of projectes that have not been completed and are being carried over from the 2024-2025 fiscal year.


The current total fund balance is estimated to end the FY 24-25 at $42 million which includes all restricted, reserved and unassigned funds. The City Council has the authority to tap into the unassigned fund balance, which makes up $22 million of that total.
 


Financial Stewardship Workgroup (FSW)


The FSW and City staff have been working together to analyze budget assumptions and forecast operating returns.  It has been a very fruitful collaboration, and will continue to serve the City well.  We have learned that there is a high degree of uncertainty across taxing agencies for the coming year and tourism industry groups are forecasting declines. Thus, for the primary revenues of the City of Carmel by the Sea, the budget assumes minimal growth in property and sales taxes, and a decrease in transient occupancy taxes. 


Likewise, operating costs have been closely scrutinized by Administration and the FSW.  Throughout the City’s operations, several projects have been put on hold and current operating levels have been being scrutinized. Even with these changes, operating costs (including increasing pension contributions) are exceeding revenue forecasts in the coming fiscal year.


In other words, the FSW and staff have worked closely to “trim the fat” and scrutinize every aspect of the City’s budget to not only more precisely budget expenses and revenues, but also to look at assumptions and what the fiscal future might hold for the City.   


As a result of these efforts, the budgeted amounts for revenue and operating expenses have very little room for uncertainty, and any significant changes caused by unforeseen circumstances will need to be brought back to the City Council.  Although the City is able to prepare a balanced budget, it once again requires the use of unassigned fund balance, which may not be a sustainable tactic into the future.   


With that in mind, Council should also consider one of the proposed policies introduced earlier in this report – the aspirational goal of a 90%/10% split of revenue.  If this policy were to be implemented this year, the City would not meet the goal without further modifications.  As the budget stands right now, operating expenses would need to be reduced by $601,000 dollars in order to meet the goal (or revenues increased).  On the other hand, the City could still implement this new goal, but lean on the fact that it is aspirational and get as close as possible this year while continuing to work towards a 90/10 split over future budget years. 


The following table shows how the City’s current draft FY25/26 budget would hold up against the proposed 90/10 split policy:



If the Council wishes to adopt this new aspirational policy goal of a 90/10 split of revenue, and wishes to make significant operational changes to fully meet the target in the first year, the following options could be considered to cut $601,000 from the budget:

• The City could enact a hiring freeze for the coming year, as the operations of all the departments are analyzed. Each staffing need would be assessed on an individual basis during the coming year.  This option could reduce operational expenses by as much as $996,000.

• Rather than freezing all positions, the City could hold or eliminate budgeted positions not yet filled in specific departments, for example:

o   Public Works: The second Project Manager, the additional Tree Permit Technician, Maintenance Worker, and the Assistant City Forester.  This option could reduce operational expenses by approximately $625K

o   Planning: Principal Planner This option could reduce operational expenses by approximately $215K

• The City could reduce the days/hours of library service as this is not a required service for public safety This option could reduce operational expenses by approximately $50K

• The City could eliminate the Community Service Grant Program.  This option could reduce operational expenses by approximately $40K  

•  The City could put on a fewer or no community activities in FY25/26 This option could reduce operational expenses up to approximately $300K

Looking back over previous years, and applying this proposed 90/10 policy measure, it highlights a trend of Operating Expenditures eclipsing 90% of Revenues that has existed for a number of years.





In future years, contract obligations and pressure from vendors will potentially result in greater shortfalls.  Whether or not a hiring freeze or any of these other expense reductions are enacted, the City Administration will be exploring additional measures over the coming years to help move closer to this goal of a 90/10 split, including:

• Exploring opportunities to increase fees by performing an operations study which will potentially identify necessary increases to fees as well as more effective fee collection strategies.

• Reducing the costs of ongoing contract services

• Researching other more permanent revenue opportunities with the FSW

• Continue to explore grant opportunities

At this time, CIP expenditures are able to be funded from previously set-aside fund balance.  Regardless of whether the 90/10 policy is adopted by Council, it is critical to note that in future years, that fund balance will have been utilized and the CIP budget will be limited to the amount of revenues that is available after expenditures for operations.


Next Steps


Staff will provide a brief overview of the budget as part of the May 6, 2025 Council meeting. In addition, a budget workshop is scheduled for May 21, 2025. Staff will present a detailed review of the budget during the forthcoming workshop, present responses to any questions that staff may receive in advance of the meeting, and receive preliminary direction from Council on the budget. This direction will be incorporated into the FY 25-26 Recommended Budget, which will be considered for adoption by Council on June 3, 2025.

There is no fiscal impact associated with receiving the FY 25-26 Recommended Budget. Forthcoming direction by Council may change the planned expenditures in Fiscal Year 25-26.

Council participated in a Priorities Workshop on February 27, 2025 and received a presentation regarding the Five-Year Forecast and CIP on March 24, 2025.