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HomeMy WebLinkAbout2023-11-14; City Council; ; Economic and Financial Update for the First Quarter of Fiscal Year 2023-24CA Review JRT Meeting Date: Nov. 14, 2023 To: Mayor and City Council From: Scott Chadwick, City Manager Staff Contact: Roxanne Muhlmeister, Assistant Finance Director roxanne.muhlmeister@carlsbadca.gov, 442-339-2417 Matt Sanford, Economic Development Manager matt.sanford@carlsbadca.gov, 442-339-5987 Subject: Economic and Financial Update for the First Quarter of Fiscal Year 2023- 24 Districts: All Recommended Actions Receive a report on the economic and financial update for the first quarter of fiscal year 2023- 24 and provide direction as appropriate. Executive Summary The City Manager has committed to providing quarterly updates to the City Council on the economic outlook and the city’s finances. The update reviews the city’s economic and fiscal health and serves as a measure of budgetary performance. While substantial recovery from the COVID-19 pandemic has occurred, economic uncertainty has increased fueled by, among other factors, geopolitical conflict and rising inflation. In this report, staff will provide a presentation on: •National, state, regional and Carlsbad-specific economic data •The city’s most recent financial data This report also details recent economic trends and information on current impacts to our local economy. In line with regional trends, Carlsbad saw increases in revenues in almost all categories when compared to the same quarter in the previous fiscal year, and expenditures are in line with the prior year’s rate of spending. Explanation & Analysis Economic update Carlsbad’s economy is diverse, has strong industry clusters and is a leader in innovation. According to the most recent biennial business survey of Carlsbad businesses, released in January 2022, five key industry clusters are driving growth: •Life sciences •Information, communications and technologies •Cleantech •Sports innovation and design •Hospitality and tourism Nov. 14, 2023 Item #6 Page 1 of 26 The gross regional product for Carlsbad is $16.6 billion, indicating that Carlsbad has the largest economy in the county behind the City of San Diego. Companies that call Carlsbad home are at the forefront in areas of technology and innovation, and the city’s hospitality and tourism industry generate the second-highest amount of transient occupancy tax, the tax on local hospitality stays, among the county’s 18 cities. Carlsbad’s economy has remained resilient despite greater economic uncertainty. After rising 0.8% in the previous quarter, unemployment has hovered around 4% for this quarter. One of the things affecting unemployment levels is the downsizing from pandemic employment levels, which were artificially high as companies held onto employees during the uncertainty caused by COVID-19. The tech industry layoffs seen elsewhere in the country in previous quarters have had some impact in Carlsbad, with ViaSat, Thermo Fisher, L3 Harris, and others all performing recent reductions in force. This quarter, Carlsbad also saw an increase in industrial vacancy rates, now at 7.9%. This is largely attributable to two properties vacated by Amazon in the Carlsbad Raceway and Oaks North areas, and some other newer developments coming online. While industrial vacancy rates are elevated, strong demand is likely to bring them back down over the coming quarters. Office vacancy continues to tick up slightly, now at 12.7% as some office leases held by employers with remote or hybrid work have expired, and leases have not been renewed. This is a trend seen in major metro areas across the country. However, Carlsbad remains relatively well positioned, as some employers with previous large office leases in major cities may open or maintain smaller satellite offices closer to where employees live. Retail vacancy, now at 5.4% continues to improve, as high demand continues. However, the low availability of retail space is driving up costs for businesses. The tourism industry is considering 2022, which was fueled by so-called “revenge travel” an anomaly in terms of occupancy and average daily rate. In comparison, 2023 saw a slowdown in tourism, although the demand is more like pre-pandemic norms. Industry representatives have stated that group travel, which accounts for about 15% of overall travel to Carlsbad, still lags pre-pandemic levels, but continues to recover. Despite elevated interest rates, home values in Carlsbad have begun to rise again. The current median home price is $1.45 million, after three months of value increases. To ensure the city remains responsive to the changing landscape, staff have capitalized on greater in-house economic data capabilities and analytics developed over the past year to publish a quarterly economic scan. The full economic scan for the first quarter of fiscal year 2023-24 is provided as Exhibit 1. Staff also publish relevant data on the city’s economic development site, carlsbadca.gov/doingbusiness. Financial update The COVID-19 pandemic created immense uncertainty in the city’s revenues, most notably in sales tax and transient occupancy tax, the tax assessed on local hotel, motel and short-term vacation rental stays. The fiscal year 2021-22 adopted budget had anticipated continued adverse impacts from the pandemic with moderate recovery. However, General Fund revenues in total, specifically property, sales and transient occupancy tax revenues, reached historically Nov. 14, 2023 Item #6 Page 2 of 26 high levels. This was mainly due to the staggered removal of COVID-19 restrictions, coupled with pent-up demand and inflationary increases. During the development of the fiscal year 2022-23 adopted budget, unprecedented inflationary increases and its anticipated impacts on disposable income, personal savings, tourism, and the housing market drove the need for conservative revenue estimating and budget tightening. As fiscal year 2022-23 came to a close, the General Fund’s primary revenue sources continued to persevere through the high inflationary period, sustained by strong consumer demand. As we enter fiscal year 2023-24, and despite the recent positive historical revenue performance, monitoring the city’s revenues and expenditures and taking necessary proactive steps towards mitigating economic uncertainty is as critical as ever. The September 2023 Financial Status Report is provided as Exhibit 2. Revenues The General Fund’s top three revenue sources – property, sales and transient occupancy tax – reached historic highs in fiscal year 2022-23. The fiscal year 2023-24 adopted budget took a conservative approach at estimating these revenue sources since revenue growth appears to be leveling off. However, year-over-year increases through the first quarter are notably positive given the amount of uncertainty in the economy. The table below shows the differences in revenue when comparing quarter 1 of fiscal year 2023-24 with the same period in the prior fiscal year. Fiscal year 2023-24 year to date revenues as of September 2023 compared to fiscal year 2022-23 as of September 2022 Revenue category Change ($) Change (%) Transient occupancy tax $30,974 0.3% Property tax $895,362 27% Sales tax $2,361,275 18% Charges for services $522,760 17% Investments, property income $345,472 25% Interdepartmental charges $106,821 8% Licenses and permits $38,497 6% Other revenues sources -$80,483 -26% Fines and forfeitures -$24,309 -19% Intergovernmental $522,548 471% Other taxes $259,546 11% Total Revenues $4,978,463 13% As noted above, the city’s three major revenue sources are property tax, sales tax and transient occupancy tax. Nov. 14, 2023 Item #6 Page 3 of 26 Property tax The majority of property tax revenue is collected in December and April each year. Increases of $900,000 for the first quarter are due to an increase in assessed property values along with a higher number of property owners paying their annual taxes early when compared to last year. Aircraft taxes revenues have also increased due to an increase in aircraft assessed values combined with an increase in the number of aircrafts being housed at the airport. Sales tax For the first three months of the fiscal year, sales tax revenues are $2.4 million higher than the same period in the previous fiscal year. Sales tax revenues to date represent receipts that were collected for the second quarter of calendar year 2023 as well as the first advance of the city’s sales tax revenues from the third calendar quarter of 2023. In fiscal year 2021-22, the city experienced accelerated recovery after the impacts of the COVID-19 pandemic. Fiscal year 2022-23 saw historically high levels of sales tax revenues. The city is anticipating that this growth in sales will level off and slowdown this fiscal year. For sales occurring in the second calendar quarter of 2023 (the most recent data available), key year-over-year gains were seen in new auto sales and light industry. The largest economic segments in the city are automobile dealers, general retail stores, and restaurants. Together, they generate approximately 70% of the city’s sales tax revenues. A significant portion of the year-over-year increase is attributed to the auto sales sector and a correction in methodology for how respective sales were being assigned and reported. It has not yet been determined whether this will be a one-time or ongoing experience. Transient occupancy tax Year-to-date transient occupancy tax figures represent taxes collected on hotel receipts through the month of August 2023. The revenues received in the first quarter represent a slight increase of $31,000, or 0.3% when compared to the same year to date period last year. Expenditures and encumbrances Overview Total General Fund expenditures and encumbrances – those funds either spent or committed for specific expenses – through the month of September 2023 are $72.4 million, compared to $79.5 million at the same time last year. The remaining budget available through the fiscal year ending June 30, 2024, is $168.7 million, or 70%. Excluding transfers out, contingencies, and non-departmental charges, the percentage available on September 30, 2023, is 67.5%, slightly more than the 67.0% available on Sept. 30, 2022. Pension funding CalPERS, the state pension system for government employees, and pension funding has been and will continue to be a challenge for participating agencies like the City of Carlsbad. CalPERS administers the city’s defined benefit pension plan, and costs have been increasing in past years as CalPERS addresses a structural shortfall in plan assets to cover unfunded liabilities. In support of CalPERS strategies for plan sustainability and as part of the city’s strategic, long-term approach to financial management, the city actively manages its unfunded pension liability. Since fiscal year 2016-17, the City Council has approved additional discretionary payments of Nov. 14, 2023 Item #6 Page 4 of 26 $56.4 million to decrease future costs related to the city’s unfunded actuarial liability and strive to achieve a funded status of 80% in accordance with City Council Policy No. 86. CalPERS latest actuarial valuation report (as of June 30, 2022) indicated the city had a combined pension funded status of 74.6%, reduced from the prior year’s status of 86%. This reduction was predominantly driven by CalPERS’ fiscal year 2021-22 investment loss of -6.1%. This negative return will not impact the city’s required contributions until fiscal year 2024-25. The City Council approved the establishment of a Public Agencies Post-Employment Benefits Trust (Section 115 Trust) on September 12, 2023. This trust allows the city to stabilize pension cost volatility, maintain local control over the city’s assets and earn a potentially higher rate of return than if the assets were kept within the General Fund. The City Council approved an initial trust contribution of $10 million on September 26, 2023. Enterprise funds The city’s water and wastewater enterprise funds1 continue to operate in line with budgeted expectations. Operations at the city’s municipal golf course, The Crossings at Carlsbad, have remained relatively consistent year over year. Fiscal Analysis This is an informational item with no fiscal impact. Next Steps Staff will continue to develop tools to understand the economy, attract businesses and cultivate talent, and provide quarterly updates to the City Council on the economic outlook and the city’s finances. Environmental Evaluation This action does not require environmental review because it does not constitute a project within the meaning of the California Environmental Quality Act under California Public Resources Code Section 21065 in that it has no potential to cause either a direct physical change or a reasonably foreseeable indirect physical change in the environment. Exhibits 1. Economic Scan Fiscal Year 2023-24 Q1 2. September 2023 Financial Status Report 1 Enterprise funds are government funds usually used to account for operations that are financed and operated in a manner similar to private business enterprises, with the services provided paid for primarily through user charges. Nov. 14, 2023 Item #6 Page 5 of 26 1 First Quarter, Fiscal Year 2023-2024 The following scan provides an overview of key economic indicators for July, August and September 2023 for the City of Carlsbad. This economic scan is updated quarterly to provide information that is relevant to the health of Carlsbad’s economy. For regularly updated information regarding the Carlsbad economy and economic development visit carlsbadca.gov/doingbusiness. GROSS REGIONAL PRODUCT Carlsbad GRP (Source: Lightcast, 2022. Data revised Q2, 2023) $16.6B In 2022, Carlsbad had the second largest gross regional product in San Diego County at nearly $16.6B, only trailing the City of San Diego. In 2019, Carlsbad’s economy grew by $800 million to nearly $13.6 billion. In 2020, as a result of the pandemic, the city’s GRP remained flat. In 2021, Carlsbad’s economy grew to $15.1 billion. From 2021 to 2022, Carlsbad’s GRP grew by $1.5B. This growth was seen across almost all industry categories, and was led by manufacturing, wholesale trade, hospitality, and professional, scientific, & technical services. JOBS Unemployment Rate (Source: California Employment Development Department, Sept. 2023 Report) Carlsbad’s labor market loosened slightly, with unemployment hovering at about 4% for the quarter (3.9% in September). This loosening has been seen across industries and is noted by some as a normalization as pandemic-era employment trends, which saw greater employee retention, return to normal. Overall, unemployment remains low and employers continue to hire. The unemployment rate in September was 4.9% at the state level and 4% at the county level. 0 1 2 3 4 5 6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Carlsbad Unemployment Rate 2022 vs 2023 2022 2023 0 1 2 3 4 5 6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Unemployment Rate Comparison 2023 Carlsbad San Diego County North County Avg w/o Carlsbad California Innovation + Economic Development Department Exhibit 1 Nov. 14, 2023 Item #6 Page 6 of 26 2 Job Postings (Source: Lightcast, July - Sept. 2023) 11,398 There were 11,398 unique job postings in Carlsbad between July and September, a decrease of 1,863 jobs from the previous quarter. The median advertised salary for these postings was $51,100, which is on average $1,500 less than jobs posted in the previous quarter. Of jobs posted, 70% indicated an education requirement of High School/GED or no requirement listed. 65% of postings indicated less than a year of experience or no experience was required, indicating there are a number of entry-level jobs being posted. TALENT + WORKFORCE Education (Source: 2021 ACS 5-Year Estimates, the latest year available) Carlsbad has established itself as having the right workforce to fuel innovation in tech and life sciences fields. Carlsbad businesses can access talent from San Diego County, Orange County, and even southwest Riverside County. More than 60% of working-age residents hold a bachelor’s degree, with nearly 25% attaining an advanced degree. Outside of some communities in central San Diego, Carlsbad has the heaviest concentration of households with degrees in science, technology, engineering, and mathematics (STEM degrees). This local talent mix is among the leading reasons that firms choose Carlsbad. 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%40.00% Less Than High School High School Diploma Some College, no Degree Associate's Degree Bachelor's Degree Graduate or Professional Degree Educational Attainment Comparison Percent of Population Over 25 Years Old National California San Diego County Carlsbad Nearby public and private universities offer top-notch programs. Within a 30- mile radius, more than a half-dozen universities and colleges confer more than 35,000 degrees annually. The Carlsbad business community works closely with higher education partners to align various education tracks with local workforce needs. Talent Pipeline Degrees Conferred by University, Displayed as Distance from Carlsbad San Diego State University9,671 Proximity in Miles from CarlsbadNov. 14, 2023 Item #6 Page 7 of 26 3 CAPITAL Interest Rates (Source: U.S. Department of the Treasury, Sept. 2023) National interest rates continue to rise as the Federal Reserve raises rates to combat inflation, although the pace of rate increases has slowed. One-year rates are currently at 5.46%. Ten-year rates are currently at 4.59%. 30-year rates are currently at 4.73%. Some economists are predicting that the Fed may be done raising rates, although the organization has not ruled out subsequent increases in the future. Inflation figures have improved dramatically over the past year, now at 4.7% annual inflation for San Diego County, and the economy remains strong. There is growing optimism that a recession may have been averted, or that it be will be mild if it occurs. September 2022 One-year interest rate 4.05% 10-year interest rate 3.83% 30-year interest rate 3.79% September 2023 One-year interest rate 5.46% 10-year interest rate 4.59% 30-year interest rate 4.73% COMMERCIAL REAL ESTATE Market Vacancy Rates and Rent per Square Foot (Source: CoStar, Sept. 2023) Commercial vacancy rates went down in office and retail categories this quarter. Industrial vacancy jumped up to 6.4%, largely attributed to a select few parcels that were vacated. The industrial vacancy rate in September was 7.9%. The office vacancy rate in September was 12.7%. Retail vacancy in September was 5.4%. Rental rates were relatively steady across all categories. Average market rents per square foot, per year for office rates in September were $38.06. Industrial rates in September were $22.30. Retail rates in September were $44.80. Commercial developers are largely holding off on new developments and office space elsewhere in the region and the county is seeing a rise in vacancy and a drop in value, an indicator of instability. This trend is predicted to continue. 7.9% Industrial vacancy rate 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q4 2022Q1 2022Q2 2022Q3 2022Q42023Q12023Q22023Q3 Carlsbad Commercial Vacancy Rates Carlsbad Retail Carlsbad Office Carlsbad Industrial 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% Retail Office Industrial Retail Office Industrial Carlsbad North County w/o Carlsbad Vacancy Rate Comparison 2021 Q1 2021 Q2 2021 Q3 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 Nov. 14, 2023 Item #6 Page 8 of 26 4 TOURISM Occupancy averaged 75.7% in the first quarter, which lags the same quarter for 2022 (79.3%). The surge in travel in 2022, known in the industry as “revenge travel” is unlikely to be sustained in 2023 or beyond, according to industry experts. 2023 is seen by those in the industry as a normalization year. 42 With 42 hotels in Carlsbad, tourism is a major industry in terms of employment and economic impact. It is also a major contributor to city revenue, through TOT and sales tax generation. Below are several indicators reflecting the health of the city’s tourism economy. Hotel Occupancy (Source: Smith Travel Research, Sept. 2023 Report) Carlsbad’s average daily room rate (ADR) remains higher than historic norms, but is lower than the same quarter of 2022. ADR averaged $255.43 in the fourth quarter, compared to $262.95 for the same quarter in 2022. ADR is likely to remain higher than pre-pandemic levels, as hotel costs have also increased over time. Hotel Average Daily Room Rate (Source: Smith Travel Research, Sept. 2023 Report) 0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00 Ju l - 1 9 Oc t - 1 9 Ja n - 2 0 Ap r - 2 0 Ju l - 2 0 Oc t - 2 0 Ja n - 2 1 Ap r - 2 1 Ju l - 2 1 Oc t - 2 1 Ja n - 2 2 Ap r - 2 2 Ju l - 2 2 Oc t - 2 2 Ja n - 2 3 Ap r - 2 3 Ju l - 2 3 Hotel ADR Trend 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 Ju l - 1 9 Oc t - 1 9 Ja n - 2 0 Ap r - 2 0 Ju l - 2 0 Oc t - 2 0 Ja n - 2 1 Ap r - 2 1 Ju l - 2 1 Oc t - 2 1 Ja n - 2 2 Ap r - 2 2 Ju l - 2 2 Oc t - 2 2 Ja n - 2 3 Ap r - 2 3 Ju l - 2 3 Hotel Occupancy Trend 0 20 40 60 80 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Hotel Occupancy 2023 City of Carlsbad San Diego County, CA City of Oceanside, CA City of Newport Beach, CA 50 100 150 200 250 300 350 400 450 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avgerage Daily Rate 2023 City of Carlsbad San Diego County, CA City of Oceanside, CA City of Newport Beach, CA Nov. 14, 2023 Item #6 Page 9 of 26 5 INCOME + HOUSING Median Household Income (Source: 2021 ACS 5-Year Estimates, the latest year available) Median household income in Carlsbad continues to exceed county income levels. The median income for a household in Carlsbad in 2021 was $124,669, (adjusted for inflation), which was $33,666 higher than the county median income. Carlsbad has generally outpaced the region in terms of household income growth. Median Home Price (Source: Zillow Home Value Index - Sept. 2023) Home prices rebounded this quarter despite rising interest rates. The continued rise in interest rates did impact property values in Carlsbad but high consumer demand is keeping prices elevated. Median home prices rose consistently in Carlsbad this quarter. The current median home price is $1.47 million, an increase of about $50,000 over the last quarter. $600,000.00 $700,000.00 $800,000.00 $900,000.00 $1,000,000.00 $1,100,000.00 $1,200,000.00 $1,300,000.00 $1,400,000.00 $1,500,000.00 $1,600,000.00 2019 2020 2021 2022 2023 Carlsbad Median Home Price $600,000.00 $700,000.00 $800,000.00 $900,000.00 $1,000,000.00 $1,100,000.00 $1,200,000.00 $1,300,000.00 $1,400,000.00 $1,500,000.00 Jan Feb Mar Apr May Jun Jul Aug Sep Median Home Price Comparison -2023 Carlsbad Escondidio Oceanside San Marcos Vista Nov. 14, 2023 Item #6 Page 10 of 26 6 BUSINESS ACTIVITY Business Licenses (Source: City of Carlsbad, Sept. 2023) There were a total of 2,436 business licenses issued last quarter, including 1067 non-residential, 620 residential, and 749 outside- the-city licenses. This is an increase of 138 total businesses over the same quarter of 2022. The number of licenses issued does not reflect the number of businesses in Carlsbad as a business may carry multiple licenses, short-term vacation rentals are required to get a license, and businesses outside of Carlsbad that do business in the city or with the city are required to get a license. It is estimated that there are approximately 6,654 businesses in Carlsbad. Building Permits (Source: City of Carlsbad, Sept. 2023) Between July and September, permit activity decreased significantly for residential building permits (992), indicating a slowdown in development activity. Before this quarter, the number of residential building permits issued had been generally increasing over the past several years. Commercial permits issued (109), also slowed slightly this quarter. It is too early to tell whether the trend will continue. 0 200 400 600 800 1000 1200 1400 1600 Co m m e r c i a l Re s i d e n t i a l Co m m e r c i a l Re s i d e n t i a l Co m m e r c i a l Re s i d e n t i a l Co m m e r c i a l Re s i d e n t i a l 2020 2021 2022 2023 Building Permits Issued Q1 Q2 Q3 Q4 0 500 1000 1500 2000 2500 3000 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Business Licenses Issued by Quarter Non-Residential Residential Outside City Total Nov. 14, 2023 Item #6 Page 11 of 26 7 INDUSTRY CLUSTERS Life Sciences (Source: 2022 Business Report and Industry Cluster Update) The Life Sciences industry cluster employs 6,657 workers across 134 firms and experienced a 2.6% increase in employment between 2018 and 2020. The cluster is 5.51 times more concentrated in Carlsbad than the national average and annual wages per worker average $123,702. San Diego County and California have experienced parallel employment growth in the Life Sciences cluster between 2010 and 2020. In the same ten-year period, employment in Carlsbad grew by 75%. Between 2016 and 2018, Carlsbad experienced over 40% growth. Over the past two years (2018-2020), however, employment growth tapered off compared to years prior. Technology (Source: 2022 Business Report and Industry Cluster Update) The Information and Communications Technologies (ICT) cluster employs 9,008 workers across 343 firms in Carlsbad and is 2.75 times more concentrated in Carlsbad than the national average. Annual wages per worker average $136,254, and the ICT industry cluster experienced a 3.3% increase in the number of jobs between 2018 and 2020. San Diego County and California experienced steady parallel growth in the ICT cluster between 2010 and 2020. In the same ten-year period, Carlsbad experienced an initial decline in employment between 2012 and 2015; between 2015 and 2020, employment in the ICT cluster has steadily trended upwards. Cleantech (Source: 2022 Business Report and Industry Cluster Update) Between 2018 and 2020, the number of workers employed at Cleantech firms increased by 22.2%. By 2019, the 48 Cleantech firms in Carlsbad employed more than 872 people. The average annual wage per worker is $109,779, and the Cleantech industry cluster in Carlsbad is 4.66 times more concentrated than the national average. Between 2010 and 2012, Carlsbad experienced an initial employment drop for the Cleantech industry followed by steady growth between 2012 and 2020. Employment growth in California peaked in 2013 and has been on a steady decline since. Growth in San Diego County also peaked in 2013, dropping by over 25% between 2013 and 2017. Since 2017, employment in the Cleantech cluster for San Diego County has been on a steady increase. Sports Innovation & Design (Source: 2022 Business Report and Industry Cluster Update) The Sports Innovation & Design industry cluster employs 1,804 workers across 116 firms and experienced a 16.3% decrease in employment between 2018 and 2020. The cluster is 5.06 times more concentrated in Carlsbad than the national average and annual wages per worker average $75,652. Employment in the Sports Innovation & Design cluster has steadily declined since 2013 in Carlsbad. Both San Diego County and California have declined steadily since 2015 and experienced sharp declines between 2019 and 2020, likely due to the COVID-19 pandemic. Hospitality & Tourism (Source: 2022 Business Report and Industry Cluster Update) Carlsbad’s Hospitality & Tourism cluster is about 1.35 times more concentrated in Carlsbad than the national average and employs 9,179 people across 467 businesses. Hospitality & Tourism experienced a sharp 34% decrease in employment between 2018 and 2020, driven by the effects of the COVID-19 pandemic between 2019 and 2020. Average annual wages per worker remain low relative to other key industry clusters, with workers earning $31,315 on average. Carlsbad, San Diego County, and California experienced sharp declines between 2019 and 2020, during which sub-clusters like Theater Companies and Dinner Theaters, Amusement and Theme Parks, and Amusement Arcades were shut down to mitigate the effects of the COVID-19 pandemic.Nov. 14, 2023 Item #6 Page 12 of 26 8 INDUSTRY IMPACT Largest Industries (Source: Lightcast, Sept. 2023) Carlsbad’s economy significantly exceeds the national average in manufacturing, accommodation and food services, and professional, scientific and technical services jobs. These sectors, which would include tech, life sciences, and other innovation industries are generally more resilient to recessions, also represent significant job growth in the economy. GRP by Industry Industry size by employment Nov. 14, 2023 Item #6 Page 13 of 26 9 INNOVATION Patents (Source: 2020 Carlsbad Industry Cluster Patent Update) Four of the key industry clusters mentioned above drive innovation activity in Carlsbad. The figure below shows that while the Life Sciences cluster has been a long-term driver of the city’s Innovation Economy, Information & Communications Technology patents have seen dramatic growth over the past ten years and was responsible for virtually the same number of new patents as life sciences in 2019. It is also worth noting that Clean Technology, which is the industry cluster with the lowest number of patents, has grown by more than 800% since 2009. All told, these four industry clusters accounted for 96% of all patents awarded to Carlsbad firms in 2019. Patents per Capita 2019 Patents per 1,000 Workers in the Labor Force Carlsbad has a notably higher proportion of patents per 1,000 workers—over 60% more than the next-closest competitor city. This figure shows that Carlsbad has a greater concentration of patent activity than even the technology hubs of San Jose, Seattle, San Francisco, and Boston. In 2019, Carlsbad had 1.6 patents for every 1 patent per 1,000 workers in San Jose. That ratio was 2.5 and 2.8 for Seattle and San Francisco. Released Nov. 14, 2023 The quarterly economic scan is developed by the City of Carlsbad Innovation & Economic Development Department. For more information, visit carlsbadca.gov/doingbusiness, or contact the team at business@carlsbadca.gov. Nov. 14, 2023 Item #6 Page 14 of 26 Exhibit 2 This report summarizes the City of Carlsbad’s General Fund revenues and expenditures through September 30, 2023. It compares revenues and expenditures for the first three months of fiscal year 2023-24 and fiscal year 2022-23. In addition, the financial status of the Water, Wastewater and Golf Course Enterprise Funds are included. This report is for internal use only. The figures presented here are unaudited and have not been prepared in accordance with Generally Accepted Accounting Principles. General Fund Revenues Property Taxes ($4.2 million) – The majority of property tax revenue is collected in December and April each year. According to the County of San Diego Assessor’s Office, assessed values in Carlsbad have increased by 6.26% for fiscal year 2023-24. This is the 11th year in a row that Carlsbad’s assessed values have increased from year to year, and in line with assessed value increases with other cities in San Diego County for the year. The increase in this year’s assessed values is due to increases in the assessed values of residential and commercial properties in the city; the city saw a smaller increase in industrial property values for the year. This is the ninth year in a row since the Great Recession ended that the city saw increases in assessed values in all three property components (residential, commercial and industrial). Although increases in residential assessed values were recorded for fiscal year 2023-24, the county is now experiencing historically low for-sale housing inventory with housing prices remaining steady. The property taxes for the first three months of the fiscal year have increased by 27% as compared to the prior fiscal year. The primary reasons for the increase are: • Current taxes are up by $211,000 or 18.4% mainly due to increased assessed property values along with a higher number of property owners paying their annual taxes early when compared to last year. The first large receipt of taxes will be received by the city in December. • Aircraft taxes are also up $750,000 or 42% due to an increase in aircraft assessed values (32%) combined with an increase in the number of aircrafts being housed at the airport. Sales Taxes ($15.7 million) – For the first three months of the fiscal year, sales tax revenues are $2.4 million higher than the same period in the previous fiscal year. Sales tax revenues to date for the current fiscal year represent the city’s sales tax revenues for the second calendar quarter of 2023 and the first advance for the third calendar quarter of 2023. In fiscal year 2021-22, the city experienced accelerated recovery after the impacts of the COVID-19 pandemic. Fiscal year 2022-23 saw historically high levels of sales tax revenues. The city is anticipating that this growth in sales will level off and slowdown this fiscal year. For sales occurring in the second calendar quarter of 2023 (the most recent data available), key year-over-year gains were seen in new auto sales and light industry. The largest economic segments in the city are automobile dealers, general retail stores, and restaurants. Together, they generate approximately 70% of the city’s sales tax revenues. September 30, 2023 27% 18% Nov. 14, 2023 Item #6 Page 15 of 26 Quarterly Financial Report _______________________________________________________________ 2 A significant portion of the year-over-year increase is attributed to the auto sales sector and a correction in methodology for how respective sales were being assigned and reported. It is not yet determined whether this will be a one-time or ongoing experience. Transient Occupancy Tax ($11.6 million) – The city’s third highest General Fund revenue source on an annual basis is Transient Occupancy Tax (TOT or hotel tax), estimated at $32.8 million for the current fiscal year. A tax of 10% of the rent amount is collected on all occupancies less than 30 days (transient) in duration. Year-to-date TOT figures represent taxes collected on hotel receipts through the month of August 2023. TOT collected for the first three months of the fiscal year reflects a slight increase of $31,000 or 0.3%, more than the previous year. Currently, there are 4,768 hotel rooms in service (of 5,059 total rooms built in the city and 423 registered short- term vacation rentals. The average occupancy of hotel rooms over the most recent 12 months has been 72.3% which is slightly lower than 72.7% at this time last year. Business License Tax ($1.5 million) – All entities doing business in the City of Carlsbad are required to have a valid business license. Business license revenue is estimated at $6.4 million for the current fiscal year. Business license revenues are up $34,000, or 2%, from the previous fiscal year. The increase is due to an increase in license renewal revenue offset by a reduction in penalty revenue from overdue business license renewals when compared to the prior year. There are currently 9,395 licensed businesses operating within the city, 167 less than the prior year. The majority of taxed businesses (6,291 businesses) are located in Carlsbad, with 2,300 of these businesses home-based. Interdepartmental Charges ($1.5 million) – Interdepartmental charges are up by $106,800 when compared with the same period last year. These charges are generated through engineering services charged to capital projects (up $61,000 due to more staff time charged to capital projects); reimbursed work from other funds; and miscellaneous interdepartmental expenses charged to funds outside the General Fund for services performed by departments within the General Fund (up $45,600). Income from Investments and Property ($1.7 million) – For the first three months of the fiscal year, income from investments and property is up $345,500 compared to the previous fiscal year. This increase is largely due to a 63% rise in yield from 1.51% as of September 2022 to 2.33% as of September 2023 along with a 10.8% increase in the average cash balance held in the General Fund. Throughout the pandemic, the Federal Reserve had maintained an effective benchmark rate between 0 and 0.25%. However, inflation has been on a historic rise for much of the last year and resulted in the Federal Reserve increasing benchmark rates all the way to a target range of 5.25%-5.5% as of July 2023. While 2022 saw repeated and large interest rate hikes, 2023 has experienced smaller interest rate hikes at a slower and more deliberate pace. Recreation Fees ($1.4 million) – Recreation fees are generated through instructional classes, camps, youth and adult sports, special events, parent participation preschool, senior programs, and various aquatic programs. Recreation revenues are up by $85,150 compared to last year at this time. Half of this increase is attributable to an increase in aquatic lesson revenue. 8% 0.3% 6% 25% 2% Nov. 14, 2023 Item #6 Page 16 of 26 Quarterly Financial Report _______________________________________________________________ 3 Development Related Revenues ($1 million) – Development related revenues, which include building permits, planning fees, building department fees, and engineering fees, reflect a 15% decrease for the first three months of the fiscal year. Development related fees are paid by developers to cover a portion of the cost of reviewing and monitoring development activities, such as plan checks and inspections. Engineering plan check fees are one of the first fees paid during the initial stages of development. Activity during the first fiscal quarter of fiscal year 2023-24 included permits associated with the new residential construction of 24 second dwelling units, 12 condominiums, 6 single family homes, 259 apartments (Aviara Apartments) and various homeowner improvements. Commercial permit activity included permits associated with a preschool (13,500 sq. ft.) There were no commercial buildings permitted during the first quarter. One source of development related revenue is building permits, which are up 7% compared to last fiscal year. The year-to-date valuation of new construction in the current fiscal year is $105 million. This represents a $51 million, or 94%, increase over the previous fiscal year. Franchise Tax ($917,000) – Franchise taxes are generated from public utility sources, such as San Diego Gas & Electric (SDG&E), trash collection franchises, and cable franchises conducting business within city limits. Franchise tax revenue is estimated to be at $7.1 million for the current fiscal year. Year-to- date franchise taxes are $183,000 higher when compared to the same period last year. Cable television franchise revenues (Spectrum and AT&T) are down $17,000 representing a relatively nominal amount of change for subscription services (premium video, equipment rental, on-demand, and programming services). An increase in trash collection revenue of $200,000 resulted from the city’s most recent contract with Republic Services, the city’s waste services provider. SDG&E pays franchise taxes for the use of public land over which they transport gas and electric services. In addition, SDG&E pays an “in-lieu” franchise tax based on the value of gas and electricity transported through SDG&E lines but purchased from another source. The “in-lieu” tax was put in place to capture the franchise taxes on gas and electricity that is transported using public lands, but which would not otherwise be included in the calculations for franchise taxes. Approximately 46% of the city’s franchise taxes are anticipated to be received from SDG&E in April 2024. Ambulance Fees ($1.6 million) – The city bills any individual who is transported in one of the city’s ambulances. Through September 2023, receipts from ambulance fees are up $621,000, or 64%, compared to last fiscal year. The increase in revenue for the first three months of the fiscal year is mainly due to changes to the ambulance fee schedule that the City Council approved in June 2023 along with an increase in the number of billable transports, 1,914 in the first three months of fiscal year 2023-24 versus 1,892 at the same time in the prior fiscal year. Other Revenue Sources ($234,000) – Other revenue sources have decreased by $80,500 and include revenues received by the city to offset the costs of special studies or projects for developers; reimbursements for damage done to city streets, rights-of-way, and other city-owned property; donations; and miscellaneous reimbursed expenses and refunds of prior year fees. The decrease to date is related to higher amounts received for developer funded studies in the prior fiscal year when compared to the current fiscal year. 15% 64% 25% 26% Nov. 14, 2023 Item #6 Page 17 of 26 Quarterly Financial Report _______________________________________________________________ 4 Other Licenses and Permits ($229,000) – Other licenses and permits consist of fire protection services, right-of-way, lagoon, grading, hazardous uses, and other miscellaneous permit revenues. These permits usually increase/decrease along with increases/decreases in development activity. Other licenses and permit revenues can vary throughout the year. To date, the increase of $5,000 is primarily a result of increased right of way permits when compared to the same period last year. Fines and Forfeitures ($104,000) – Fines and forfeitures represent fees collected for code violations, parking citations, overdue fines, and returned checks. The city recognizes revenues when the citizen pays the fine or forfeiture, as opposed to when the fine is imposed. The decrease to date of $25,000 is mainly due to decreases in code violation assessments ($22,500) when compared to the previous fiscal year as well as the elimination of overdue fines ($8,000) for library materials offset by a small increase in parking and vehicle citations and fees. Intergovernmental Revenues ($633,500) – Intergovernmental revenues include homeowners property tax exemption revenue and miscellaneous receipts and grants received from the state or federal governments, as well as local school districts. Various miscellaneous receipts comprise the $663,500 received this year which represents an increase of 471% over the same period last year. This increase is mainly due to state reimbursements received for two planning related state grant awards. Transfer Taxes ($158,000) – When real property is sold, the County Assessor’s Office charges a transfer tax. The transfer tax rate in San Diego County is $0.0011 multiplied by the selling price of the property. The city receives 50% of the transfer tax charged for sales within the City of Carlsbad. Revenues have increased over the same period last year due to an increase in property transfers. Other Charges or Fees ($122,700) – Other charges or fees are generated through the sale of city documents, such as staff reports, blueprints and copies; general fees collected for false alarms, easements and agreements, weed abatement and kiosk signs; and general services, such as mutual aid response, mall police services, emergency response services, reports, etc. These fees are up by $25,000, or 26% mainly due to an increase in annual fire inspection fees and false alarm response fees when compared to the prior fiscal year. A detailed schedule of General Fund revenues is provided on the following page. 2% 19% 37% 471% 26% Nov. 14, 2023 Item #6 Page 18 of 26 Quarterly Financial Report _______________________________________________________________ 5 REVENUE REVENUE EXPECTED ACTUAL ACTUAL CHANGE FROM BUDGETED THROUGH FY 2023 FY 2024 YTD 2023 TO PERCENT FOR FY 2023-24 09/30/23 AS OF 09/30/22 AS OF 09/30/23 YTD 2024 CHANGE TAXES PROPERTY TAX $84,246,868 $3,244,993 $3,359,126 $4,254,488 $895,362 27% SALES TAX 51,064,943 12,109,909 13,324,521 15,685,796 2,361,275 18% TRANSIENT OCCUPANCY TAX 32,861,193 11,136,397 11,617,301 11,648,275 30,974 0.3% FRANCHISE TAX 7,084,717 663,854 734,049 917,206 183,157 25% BUSINESS LICENSE TAX 6,435,502 1,501,335 1,482,976 1,517,020 34,044 2% TRANSFER TAX 1,624,950 137,290 115,537 157,882 42,345 37% TOTAL TAXES 183,318,173 28,793,778 30,633,510 34,180,667 3,547,157 12% INTERGOVERNMENTAL VEHICLE LICENSE FEES 83,951 0 0 0 0 0% HOMEOWNERS EXEMPTIONS 353,000 0 0 0 0 0% OTHER REIMBURSEMENT 599,000 32,861 111,012 633,560 522,548 471% TOTAL INTERGOVERNMENTAL 1,035,951 32,861 111,012 633,560 522,548 471% LICENSES AND PERMITS BUILDING PERMITS 1,250,000 263,477 464,022 497,495 33,473 7% OTHER LICENSES & PERMITS 850,500 193,552 224,176 229,200 5,024 2% TOTAL LICENSES & PERMITS 2,100,500 457,029 688,198 726,695 38,497 6% CHARGES FOR SERVICES PLANNING FEES 442,000 119,079 159,061 156,746 (2,315)-1% BUILDING DEPARTMENT FEES 861,000 301,312 333,599 186,209 (147,390) -44% ENGINEERING FEES 774,000 157,085 201,082 141,848 (59,234) -29% AMBULANCE FEES 6,798,000 1,519,213 976,342 1,597,552 621,210 64% RECREATION FEES 2,598,600 1,123,696 1,352,274 1,437,430 85,156 6% OTHER CHARGES OR FEES 1,584,245 116,239 97,395 122,728 25,333 26% TOTAL CHARGES FOR SERVICES 13,057,845 3,336,624 3,119,753 3,642,513 522,760 17% FINES AND FORFEITURES 276,200 87,879 128,207 103,898 (24,309) -19% INCOME FROM INVESTMENTS & PROPERTY 5,948,225 1,171,511 1,360,344 1,705,816 345,472 25% INTERDEPARTMENTAL CHARGES 5,746,232 1,336,516 1,393,584 1,500,405 106,821 8% OTHER REVENUE SOURCES 987,000 146,426 314,739 234,256 (80,483) -26% TRANSFERS IN 10,000 0 0 0 0 0% TOTAL GENERAL FUND $212,480,126 $35,362,624 37,749,347 $42,727,810 $4,978,463 13.2% (1) (1) Calculated General Fund revenues are 21% above estimates as of September 30, 2023. GENERAL FUNDREVENUE COMPARISON Nov. 14, 2023 Item #6 Page 19 of 26 Quarterly Financial Report _______________________________________________________________ 6 Expenditures Total General Fund expenditures and encumbrances-those funds either spent or committed for specific expenses- through the month of September 2023 are $72.4 million, compared to $79.5 million at the same time last year. The remaining budget available through the fiscal year ending June 30, 2024, is $168.7 million, or 70%. If funds were spent in the same proportion as the previous year, the General Fund would have 64.4% or $144.1 million available. Excluding transfers out, contingencies, and non-departmental charges, the percentage available on September 30, 2023, is 67.5%, slightly more than the 67.0% available on September 30, 2022. The fiscal year 2023-24 budget was developed with a focus on resiliency over the long-term and reflects a call for departments to increase efficiency and find new ways to reduce ongoing spending. In addition to lowering base spending in the General Fund by $2.3 million at a time when inflation is 6%, the adopted budget reduced city staffing by the equivalent of 12 positions. With the development and adoption of the city’s fiscal year 2023-24 budget, the city forecasted that ongoing spending will exceed ongoing revenues as soon as fiscal year 2025-26. Since the adoption of this year’s budget and the close of fiscal year 2022-23, staff presented an updated forecast at the City Council meeting of October 24, 2023, that showed this shortfall is now projected to occur in fiscal year 2028-29, which was driven by stronger-than-expected revenue performance. This year’s budget scales back custodial services, nonessential park maintenance, printing and other administrative expenses, travel and training for city staff, and city cell phone use, among other areas expected to have a minimal impact on the community. The adopted General Fund budget for fiscal year 2023-24 increased by 9.3% or $18.5 million when compared to last fiscal year due to: • Increased personnel costs (increase of $6 million or 4.8%): o $5.2 million in salaries and wages due to negotiated salary increases offset by a reduction in total full- time equivalent positions of 12.06. o $0.2 million in health insurance and retirement benefits costs. o $0.6 million increase in other personnel costs (Medicare, unemployment and disability benefits). • Increased maintenance and operations costs (increase of $5.6 million): o Overall, total maintenance and operations costs are projecting an increase, however, this category includes a one-time appropriation of $5.22 million from General Fund reserves toward regional efforts to lower the railroad tracks in Carlsbad. Excluding this one-time use of reserves, the maintenance and operations costs are projected to increase just 0.7% for fiscal year 2023-24 when compared to fiscal year 2022-23. With year-over-year increases in inflation of 8.2% and 6.4%, respectively, this relatively minor increase in maintenance and operations is a tremendous achievement that was accomplished through a strategic analysis of budget reductions. • Increase in transfers to other city funds (increase of $8.3 million): o The city annually budgets 6% of General Fund revenues as a transfer to the Infrastructure Replacement Fund, General Capital Construction Fund and The Technology Investment Capital Fund to help fund major new construction, maintenance and replacement of city infrastructure and facilities and the city’s future technology needs. o $7.4 million in additional transfers was budgeted for the General Capital Construction Fund and funded by the General Fund’s budgeted operating surplus. The General Capital Construction Fund is funded by the General Fund and includes many capital projects programmed in the future. The level of funding necessary to fully fund these projects is an increasing concern. This one-time transfer amount will assist with funding the city’s general capital construction into the future. CalPERS and pension funding has been and will continue to be a challenge for participating agencies. CalPERS administers the city’s defined benefit pension plan and costs have been increasing in past years as CalPERS Nov. 14, 2023 Item #6 Page 20 of 26 Quarterly Financial Report _______________________________________________________________ 7 addresses a structural shortfall in plan assets to cover unfunded liabilities. In support of CalPERS strategies for plan sustainability and as part of the city’s strategic, long-term approach to financial management, the city actively manages its unfunded pension liability. Since fiscal year 2016-17, the City Council has approved additional discretionary payments of $56.4 million to decrease future costs of the city’s unfunded actuarial liability and strive to achieve a funded status of 80% in accordance with City Council Policy Statement No. 86. CalPERS latest actuarial valuation report (as of June 30, 2022), the city had a combined pension funded status of 74.6%, reduced from the prior year’s status of 86%. This reduction was predominantly driven by CalPERS’ fiscal year 2021-22 investment loss of -6.1%. This negative return will not impact the city’s required contributions until fiscal year 2024-25. The City Council approved the establishment of a Public Agencies Post-Employment Benefits Trust (Section 115 Trust) on September 12, 2023. This trust allows the city to stabilize pension cost volatility, maintain local control over the city’s assets and earn a potentially higher rate of return than if the assets were kept within the General Fund. The City Council approved an initial trust contribution of $10 million on September 26, 2023. City staff will continue to provide regular financial updates to the City Council throughout fiscal year 2023-24. Identifying a potential structural deficit early has allowed the city to take a thoughtful approach to solutions, exploring new ways to reduce spending and increase revenue. A detailed schedule of General Fund expenditures is provided on the next page. Nov. 14, 2023 Item #6 Page 21 of 26 Quarterly Financial Report _______________________________________________________________ 8 ADOPTED WORKING BUDGET BUDGET AMOUNT AVAILABLE % DEPARTMENT DESCRIPTION FY 2023-24 FY 2023-24 (a)COMMITTED (b)BALANCE AVAILABLE (c) POLICY AND LEADERSHIP GROUP CITY ATTORNEY $2,115,596 $2,115,596 $567,062 $1,548,534 73.2% CITY CLERK 1,274,455 1,298,267 302,046 996,221 76.7% CITY COUNCIL 607,078 609,881 123,155 486,726 79.8% CITY MANAGER 2,184,823 2,298,394 627,624 1,670,770 72.7% CITY TREASURER 279,149 279,149 52,238 226,911 81.3% COMMUNICATIONS & ENGAGEMENT 1,953,098 2,227,156 829,532 1,397,624 62.8% TOTAL POLICY AND LEADERSHIP GROUP 8,414,199 8,828,443 2,501,657 6,326,786 71.7% ADMINISTRATIVE SERVICES ADMINISTRATION 784,107 807,692 203,945 603,747 74.7% FINANCE 5,323,368 5,726,992 1,538,763 4,188,229 73.1% HUMAN RESOURCES 5,029,995 5,238,274 1,375,131 3,863,143 73.7% INNOVATION & ECONOMIC DEVELOPMENT 2,608,489 2,812,757 930,802 1,881,955 66.9% TOTAL ADMINISTRATIVE SERVICES 13,745,959 14,585,715 4,048,641 10,537,074 72.2% PUBLIC SAFETY POLICE 55,615,155 60,314,650 18,678,724 41,635,926 69.0% FIRE 37,882,886 41,689,777 13,074,905 28,614,872 68.6% TOTAL PUBLIC SAFETY 93,498,041 102,004,427 31,753,629 70,250,798 68.9% COMMUNITY SERVICES COMMUNITY SERVICES ADMINISTRATION 585,411 733,802 303,818 429,984 58.6% COMMUNITY DEVELOPMENT 11,012,958 13,516,576 4,645,525 8,871,051 65.6% HOUSING & HOMELESS SERVICES 2,765,195 3,219,743 1,493,435 1,726,308 53.6% LIBRARY & CULTURAL ARTS 13,637,285 14,157,554 3,728,345 10,429,209 73.7% PARKS & RECREATION 21,055,565 22,019,703 8,970,320 13,049,383 59.3% TOTAL COMMUNITY SERVICES 49,056,414 53,647,378 19,141,443 34,505,935 64.3% PUBLIC WORKS PUBLIC WORKS ADMINISTRATION 1,562,272 1,595,344 406,690 1,188,654 74.5% CONSTRUCTION MANAGEMENT & INSPECTIONS 3,257,906 3,341,081 1,011,810 2,329,271 69.7% ENVIRONMENTAL SUSTAINABILITY 1,178,783 1,580,542 701,681 878,861 55.6% FACILITIES 7,497,115 8,752,270 3,558,612 5,193,658 59.3% TRANSPORTATION 9,732,215 10,876,588 3,500,972 7,375,616 67.8% TOTAL PUBLIC WORKS 23,228,291 26,145,825 9,179,765 16,966,060 64.9% NON-DEPARTMENTAL & CONTINGENCY (d)OTHER NON-DEPARTMENTAL 1,356,700 2,062,990 349,001 1,713,989 83.1% VILLAGE TRENCHING 5,220,000 5,220,000 0 5,220,000 100.0% OPERATING TRANSFERS OUT 21,910,000 28,210,000 5,477,499 22,732,501 80.6% CONTINGENCY 500,000 500,000 0 500,000 100.0% TOTAL NON-DEPT & CONTINGENCY 28,986,700 35,992,990 5,826,500 30,166,490 83.8% TOTAL GENERAL FUND $216,929,604 $241,204,778 $72,451,635 $168,753,143 70.0% (a) Working budget includes the adopted budget, open encumbrances from the end of the prior fiscal year, approved carry forwards of the prior fiscal year and all other mid-yearcouncil approvals. (b) Actual expenditures on a budgetary basis include encumbrances and exclude non-budgeted items. (c) Amount available would be 64.4% if funds were spent in the same proportion as the previous year. (d) Other non-departmental includes property tax administration fees, assessment district administration, citywide litigation expenses, and other items not attributed to a specific department. AS OF 09/30/23 EXPENDITURE STATUS BY DEPARTMENTGENERAL FUND Nov. 14, 2023 Item #6 Page 22 of 26 Quarterly Financial Report _______________________________________________________________ 9 Council Contingency The City Council has allocated $500,000 out of the General Fund budget for unanticipated emergencies or unforeseen program needs. Below is a listing of the City Council’s contingency: Donations Carlsbad Municipal Code 2.08.100 authorizes the city manager to accept donations on behalf of the city in an amount or of value of up to $5,000 per donation. These donations shall be used in accordance with the donor’s intent or added to the city’s contingency account. Below is a listing of all donations, that have been accepted during fiscal year 2023-24: CONTINGENCY ACCOUNT USE OF FUNDS EXPLANATION AMOUNT ADOPTED BUDGET $500,000 USES: NONE AS OF SEPTEMBER 30, 2023 0 TOTAL USES 0 AVAILABLE BALANCE $500,000 Note 1 - City Council Policy 51 gives authorization to the City Manager, or designee, to approve Winning Teams and Community Spirit Grants up to $5,000 per grant. Department Intention July Aug.Sept.Total Parks & Recreation Leo Carrillo Ranch Cash Donations $458 $450 $2,592 $3,500 Parks & Recreation Opportunity Grant Donations 769 745 497 2,011 Parks & Recreation Senior Center Cash Donations 195 210 224 629 Parks & Recreation Senior Meals Cash Donations 2,310 2,028 2,061 6,399 Parks & Recreation Senior Transportation Cash Donations 112 180 111 403 Parks & Recreation Special Events Cash Donations 0 0 1,000 1,000 Parks & Recreation Teen Program Cash Donations 0 0 1 1 Parks & Recreation Parks Maintenance Cash Donations 1,850 0 0 1,850 Subtotal - Parks & Recreation $5,694 $3,613 $6,486 $15,793 Library & Cultural Arts Book Purchases $0 $0 $0 $0 Library & Cultural Arts Support Library Programs and Services 0 2 100 102 Subtotal - Library & Cultural Arts $0 $2 $100 $102 Fire Food gifts for crews $0 $0 $24 $24 Fire Misc. supplies and equipment 0 0 0 0 Subtotal - Fire $0 $0 $24 $24 Total Donations $5,694 $3,615 $6,610 $15,919 DONATIONS FISCAL YEAR 2023 - 24 Nov. 14, 2023 Item #6 Page 23 of 26 Quarterly Financial Report _______________________________________________________________ 10 Water Enterprise Revenues • Decrease in water operating revenues due to 6.13% decrease in water volume sales, offset by increase in user rates effective January 2023. • Interest earnings increased due to a 63% increase in the yield of the Treasurer’s portfolio offset by a 3.3% decrease in the monthly average cash balance. • The increase in misc. service charges is due to reimbursement for interdepartmental labor charges. • The increase in property taxes is primarily due to increase in assesed property values. • The increase in fines is due to reinstatement of customer late charges starting in January 2022. Expenses • The increase in staffing expenses includes salary increases combined with an annual required contribution to the city’s unfunded pension liability balance with CalPERS. • Higher interdepartmental expenses resulted from increased personnel related costs, and general liability insurance. • Purchased water expenses have decreased from the prior year due to a 7.8% rate increase in the variable cost of water purchased from the San Diego County Water Authority (SDCWA) offset by a 4.9% decrease in the amount of water purchased. • Captial outlay decrease due to additional fleet vehicle purchase in prior year. CHANGE FROM BUDGET YTD*YTD*YTD 2022-23 TO PERCENTFY 2023-24 9/30/2022 9/30/2023 YTD 2023-24 CHANGE REVENUES: WATER DELIVERY 41,688,000$ 11,736,959$ 11,385,376$ (351,583)$ -3.0% INTEREST 389,000 78,085 163,692 85,607 109.6% MISC. SERVICE CHARGES 441,000 77,839 105,302 27,463 35.3% PROPERTY TAXES 4,729,000 89,197 98,806 9,609 10.8% FINES, FORFEITURES & PENALTIES 411,000 1,422 93,049 91,627 6443.5% OTHER REVENUES 491,000 102,196 110,740 8,544 8.4% TOTAL OPERATING REVENUE 48,149,000 12,085,698 11,956,965 (128,733) -1.1% EXPENSES: STAFFING 4,782,779 1,083,427 1,223,068 139,641 12.9% INTERDEPARTMENTAL SERVICES 3,765,584 735,291 941,222 205,931 28.0% PURCHASED WATER 30,805,000 7,519,662 8,114,418 594,756 7.9% MWD/CWA FIXED CHARGES 7,550,000 1,697,695 1,699,401 1,706 0.1% OUTSIDE SERVICES/MAINTENANCE 2,491,059 116,077 86,970 (29,107) -25.1% DEPRECIATION/REPLACEMENT 5,000,000 1,125,000 1,250,000 125,000 11.1% MISCELLANEOUS EXPENSES 986,543 101,965 117,516 15,551 15.3% CAPITAL OUTLAY 99,302 0 60,936 60,936 100.0% TOTAL OPERATING EXPENSES 55,480,267 12,379,116 13,493,531 1,114,414 9.0% OPERATING INCOME/(LOSS)(7,331,267)$ (293,418)$ (1,536,566)$ (1,243,147)$ 423.7% *Adjusted to reflect timing differences for water purchases and depreciation. WATER OPERATIONS FUND September 30, 2023 9.0% 1.1% Nov. 14, 2023 Item #6 Page 24 of 26 Quarterly Financial Report _______________________________________________________________ 11 Wastewater Enterprise Revenues • Charges for current services are higher than in the prior year due primarily to a 20% rate increase that went into effect in January 2023. • Interest earnings increased due to a 63% increase in the yield of the Treasurer’s portfolio combined with a 39.5% increase in the monthly average cash balance. • The increase in other revenues is due to customer late charges resuming after the COVID-19 pandemic in January 2022 and reimbursement for interdepartmental labor charges. Expenses • The increase in staffing expenses is driven by salary increases combined with an annual required contribution to the city’s unfunded pension liability balance with CalPERS. • Higher interdepartmental expenses resulted from increased personnel related costs, and general liability insurance. • Higher miscellaneous expenses from purchase of parts and chemicals. • The capital outlay in fiscal year 2022-23 was for lift station land acquisition costs. CHANGE FROM BUDGET YTD*YTD*YTD 2022-23 TO PERCENTFY 2023-24 9/30/2022 9/30/2023 YTD 2023-24 CHANGE REVENUES: CHARGES FOR CURRENT SERVICES 21,939,000 3,971,433 5,558,309 1,586,876 40.0% INTEREST 110,000 21,878 59,065 37,187 170.0% OTHER REVENUES 307,000 24,962 105,731 80,769 323.6% TOTAL OPERATING REVENUE 22,356,000 4,018,273 5,723,105 1,704,832 42.4% EXPENSES: STAFFING 3,322,088 682,898 839,807 156,909 23.0% INTERDEPARTMENTAL SERVICES 1,929,134 337,343 481,667 144,324 42.8% ENCINA PLANT SERVICES 6,000,000 1,075,000 1,972,764 897,764 83.5% OUTSIDE SERVICES/MAINTENANCE 1,993,412 86,839 117,705 30,866 35.5% DEPRECIATION/REPLACEMENT 5,300,000 1,325,000 1,325,000 0 0.0% MISCELLANEOUS EXPENSES 827,614 77,590 143,149 65,559 84.5% CAPITAL OUTLAY 24,651 28,719 245 (28,474) -99.1% TOTAL OPERATING EXPENSES 19,396,899 3,613,389 4,880,337 1,266,948 35.1% OPERATING INCOME/LOSS 2,959,101 404,884 842,768 437,884 108.2% (*) Adjusted to reflect timing differences for Encina quarterly invoices and depreciation. WASTEWATER OPERATIONS FUND September 30, 2023 42.4% 35.1% Nov. 14, 2023 Item #6 Page 25 of 26 Quarterly Financial Report _______________________________________________________________ 12 Golf Course Enterprise Revenues • Primary operating revenues at the golf course have remained relatively consistent year over year. Inclement weather during the first quarter offset strong continued demand, moderate rate increases, and positive practice center activities. • Other revenues increased notably over the prior period due to timing adjustments related to interest earnings on cash and investments on hand. Expenses • General & Administrative costs increased over the prior period as a result of cost of living increases and lingering inflation. • This increase was absorbed by prudent operational spend over grounds maintenance, food & beverage, and the pro shop. • Depreciation has decresed by 78% when compared to the prior year. This is due to the fact that the original course land improvements are now fully depreciated. • Miscellaneous expenses appears to have increased significantly; however, the prior period experienced a one-time accounting adjustment for legal expenses that reduced the bottom line expense total. 6.0% 3% Nov. 14, 2023 Item #6 Page 26 of 26 Matt Sanford, Economic Development Manager Roxanne Muhlmeister, Assistant Finance Director November 14, 2023 Economic and Financial Update: Q1 FY 2023-24 TODAY’S PRESENTATION •Today’s report will cover Fiscal Year 2023 – 2024, First Quarter o July through September 2023 •Economic update •Financial update ECONOMIC AND FINANCIAL UPDATE 2 CARLSBAD ECONOMY •Carlsbad’s GRP was $16.6 billion in 2022 •Carlsbad’s economy grew by approximately $800 million since 2021. •GRP data for 2023 will be available in January, 2024 ECONOMIC AND FINANCIAL UPDATE 3 EVOLVING ECONOMIC CONDITIONS •Macro-disruptions continue to affect Carlsbad’s economy and businesses o Lingering Inflation o High fuel prices o Higher cost of capital o Uncertainty due to global turmoil o Layoffs in tech and life sciences o Reemergence of international travel •Disruptions create a degree of operational uncertainty ECONOMIC AND FINANCIAL UPDATE 4 INFLATION CONCERNS •Inflation has continued a downward trend over the past year •San Diego area prices are up 1.3% over the past two months •Over-the-year prices are up 4.7% (4.8% less food and energy) o The September 2022 report was 8.2% ECONOMIC AND FINANCIAL UPDATE Consumer Price Index for All Urban Consumers for San Diego-Carlsbad MSA 5 WORKER/TALENT SHORTAGE •EDD September unemployment data o California unemployment rate: 4.9%, (.2% improvement) o County unemployment rate: 4%, (.3% improvement) o Carlsbad unemployment rate: 3.9%, (.3% improvement) ECONOMIC AND FINANCIAL UPDATE 0 1 2 3 4 5 6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Carlsbad Unemployment Rate 2022 vs 2023 2022 2023 6 CARLSBAD JOBS •June through September saw 11,398 unique job postings •This is a drop of 1,863 jobs from the previous quarter •Continues a slide in new job postings •Average salary for posted jobs was $51,100 •An Increase of more than $5,000 per year from the same quarter, last year. •Entry Level jobs account for 2/3rds of available jobs ECONOMIC AND FINANCIAL UPDATE 7 COMMERCIAL REAL ESTATE •Vacancy rates for industrial properties are 7.9% •Vacancy rates for office properties are 12.7% •Vacancy rates for retail properties are up to 5.4% ECONOMIC AND FINANCIAL UPDATE 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 Carlsbad Commercial Vacancy Rates Carlsbad Retail Carlsbad Office Carlsbad Industrial8 RESIDENTIAL REAL ESTATE •Median home values are currently at $1.45 million •Despite higher interest rates, housing demand has kept values elevated ECONOMIC AND FINANCIAL UPDATE $600,000.00 $700,000.00 $800,000.00 $900,000.00 $1,000,000.00 $1,100,000.00 $1,200,000.00 $1,300,000.00 $1,400,000.00 $1,500,000.00 $1,600,000.00 2019 2020 2021 2022 2023 Carlsbad Median Home Price 9 CARLSBAD TOURISM •Softening in tourism, compared to 2022 •Group Travel is still recovering from the pandemic •2023 is likely to represent a “new normal” in visitor trends ECONOMIC AND FINANCIAL UPDATE 0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00 Ju l - 1 9 Oc t - 1 9 Ja n - 2 0 Ap r - 2 0 Ju l - 2 0 Oc t - 2 0 Ja n - 2 1 Ap r - 2 1 Ju l - 2 1 Oc t - 2 1 Ja n - 2 2 Ap r - 2 2 Ju l - 2 2 Oc t - 2 2 Ja n - 2 3 Ap r - 2 3 Ju l - 2 3 Carlsbad Hotel Average Daily Rate 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 Ju l - 1 9 Oc t - 1 9 Ja n - 2 0 Ap r - 2 0 Ju l - 2 0 Oc t - 2 0 Ja n - 2 1 Ap r - 2 1 Ju l - 2 1 Oc t - 2 1 Ja n - 2 2 Ap r - 2 2 Ju l - 2 2 Oc t - 2 2 Ja n - 2 3 Ap r - 2 3 Ju l - 2 3 Carlsbad Hotel Occupancy 10 NEW DEVELOPMENT & BUSINESS ACTIVITY •There are an estimated 6,654 current businesses in Carlsbad •Residential building permit drop likely caused by the statewide change in Solar Incentives ECONOMIC AND FINANCIAL UPDATE 0 500 1000 1500 2000 2500 3000 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Business Licenses Issued by Quarter Non-Residential Residential Outside City Total 0 200 400 600 800 1000 1200 1400 1600 Co m m e r c i a l Re s i d e n t i a l Co m m e r c i a l Re s i d e n t i a l Co m m e r c i a l Re s i d e n t i a l Co m m e r c i a l Re s i d e n t i a l 2020 2021 2022 2023 Building Permits Issued Q1 Q2 Q3 Q4 11 KEY TAKEAWAYS •Macro-trends continue to impact Carlsbad business operations •The labor market is loosening across industries •Despite disruptions, Carlsbad’s economy continues to be resilient ECONOMIC AND FINANCIAL UPDATE 12 GENERAL FUND REVENUES first quarter of fiscal year 13 GENERAL FUND REVENUES Revenue category Actual FY 2022-23 Actual FY 2023-24 $ difference % difference Property tax $3.4 $4.3 $0.9 27% Sales tax 13.3 15.7 2.4 18% Transient occupancy tax 11.6 11.6 0.0 0% Other taxes 2.3 2.6 0.3 11% Income from inv. and property 1.3 1.7 0.4 25% Development related revenue 1.2 1.0 -0.2 -15% Other revenues 4.6 5.8 1.2 26% Total $37.7 $42.7 $5.0 13% first quarter of fiscal year (in millions) 14 Revenue category Expected FY 2023-24 Actual FY 2023-24 $ difference % difference Property tax $3.2 $4.2 $1.0 31% Sales tax 12.1 15.7 3.6 30% Transient occupancy tax 11.1 11.6 0.5 5% Other taxes 2.3 2.6 0.3 13% Income from inv. and property 1.2 1.7 0.5 46% Development related revenue 1.0 1.0 0.1 17% Other revenues 4.5 5.9 1.4 29% Total $35.4 $42.7 $7.4 21% GENERAL FUND REVENUES (in millions) 16 GENERAL FUND BUDGET ECONOMIC AND FINANCIAL UPDATE •Adopted budget of $216.9 million •Working budget of $241.2 million •Available budget remaining of $168.7 million, or 70% •Includes actual expenditures through Sept. 2023 •Includes open purchase order commitments 15 GENERAL FUND EXPENDITURES & ENCUMBRANCES first quarter of fiscal year 16 GENERAL FUND EXPENDITURES (in millions) Category FY 2023-24 Appropriation QTR 1 EXP FY 2023-24 % of Budget Spent to Date OPEN POs at 9/30/23 Personnel $130.1 $34.8 27%$0.0 Maintenance & operations 70.7 11.4 16%15.8 Transfers out 28.2 5.5 19%0.0 Capital outlay 6.5 1.5 24%3.4 Village Trenching 5.2 0.0 0%0.0 Contingency 0.5 0.0 0%0.0 Total $241.2 $53.2 22%$19.2 17 WATER AND WASTEWATER ECONOMIC AND FINANCIAL UPDATE Compared to prior year through Q1: •Water revenues are down 1% and expenses are up 9% •Wastewater revenues are up 42% and expenses are up 35% 18 GOLF COURSE ECONOMIC AND FINANCIAL UPDATE Compared to prior year through Q1: •Net income $285,000 higher than last year •Golf Course revenues are up 6% and expenses are down 3% 19 NEXT STEPS •Monitor revenues and expenditures •Publish economic and financial status reports: carlsbadca.gov/doingbusiness carlsbadca.gov/departments/finance/financial-reports •Return in February 2024 with mid-year update ECONOMIC AND FINANCIAL UPDATE 20