Revenues

All City Funds

The FY 2024-25 budget across all City funds includes estimated revenues of $135.1 million, a decrease of $1.9 million, or 1.4 percent under the projected FY 2023-24 Revised Budget although an increase of $6.4 million is estimated for the General Fund. The overall decrease is primarily due to $7.1 million in one-time capital grant funding and $2.0 million fire apparatus lease revenue received in FY 2023-24.

General Fund

Estimated General Fund revenues total $107.5 million—an increase of $6.4 million, or 6.3 percent, over the current FY 2023-24 Revised Budget. The City forecasts solid revenue growth in FY 2024-25 mostly due to high property values and a rebound in tourism.

Discussion of Revenue Sources

Nearly 87 percent of General Fund revenue is generated from taxes. Property tax and sales tax are the major sources. Charges for services, transient occupancy tax, and franchise tax/fees make up the remainder of the top five categories. Excise tax for cannabis retail sales was added in FY 2023-24.

Property Tax (Major)

Property Tax is the City’s largest revenue source, representing 62 percent of total General Fund revenue.

Proposed Budget

For FY 2024-25, staff recommends an increase of $4.0 million, or 6.3 percent, based on projections provided by the City’s property tax consultant HdL Coren & Cone with further analysis by staff.

The increase is mostly the result of the annual Proposition 13 inflation adjustment for estimated real property values set at the two percent maximum for FY 2024-25 by the County Assessor’s office (based on the California Consumer Price Index, or CCPI).

Real estate trends for calendar year 2023 influence FY 2024-25 property taxes. In general, homes are still selling and for more than their current taxed value. Calendar year 2023 saw a continuation of the downturn in the real estate cycle that began in late spring 2022 when interest rate increases were implemented to slow the rate of inflation. As interest rates increased between 2022 and 2023, markets saw fewer single-family residential home sales, due in part to insufficient supply as homeowners with lower interest rates were reluctant to give up existing homes to search for others with higher prices and higher mortgage rates. (Source: HdL Property Tax Newsletter, Sept 2023.)

Projections reflect continued growth, although at a more modest pace due to lower sales activity that will affect the assessed value increases from transfers of ownership. Lower sales volume also results in lower Documentary Transfer Tax.

Description

Property Taxes are an ad valorem tax imposed on real property (land and permanently attached improvements such as buildings) and tangible personal property (movable property) located within the state.

California property tax is based on the value of the property rather than on a fixed amount or benefit to the property or persons.

Proposition 13 (Article XIIIA of the California Constitution) limits the real property tax rate to one percent of the property's assessed value.

The property tax is paid to the county tax collector and allocated to local taxing agencies—cities, counties, special districts, and school districts—pursuant to a statutory allocation formula. As shown in the chart below, the Encinitas General Fund receives 24 cents of each property tax dollar.

Sales Tax (Major)

Sales Tax is the City’s second largest source, representing 16 percent of total General Fund revenue. The City has a diversified retail sales tax base and is not heavily dependent on any one business or industry.

Proposed Budget

Staff recommends an increase of $0.8 million, or 4.9 percent, in sales and use tax, based on projections provided by the City’s sales tax consultant HdL with further analysis by staff. Because third quarter adjustments reduced estimated sales tax $1.0 million, the proposed budget is actually lower than the original FY 2023-24 budget.

Estimates for FY 2024-25 are projected to be relatively flat based on mixed economic pressures. Volatile economic indicators such as the Federal Funds rate, unemployment levels, and discretionary spending continue to influence outcomes. For example, in the statewide auto and transportation sector, inventory levels improved for many dealers creating a downward pressure on prices. Although higher interest rates and tighter credit standards continue to make loan financing challenging, leasing activity has improved.

In Encinitas, recent sales activity has shown consumers shifting their discretionary spending away from tangible goods towards leisure, travel, services, entertainment, and restaurant expenditures. Additionally, food and drug sales decreased in recent quarters as consumers redirected their spending from alcohol purchases for home consumption to dining out. While business and recreational travel is expected remain strong, it is unknown whether residents and visitors will continue to enjoy casual and quick-service dining, with higher menu prices likely to result from implementation of AB 1228, a new State law raising the hourly minimum wage rate to $20 for certain fast food workers effective April 1, 2024.

Cities in San Diego County continue to see a reduction in the county use tax pool (where tax on internet sales is recorded and shared proportionally) as e-commerce allocations shift to distribution centers.

Sales tax projections do not include additional taxes paid by cannabis businesses, which are considered excise tax. They also do not include a potential one-cent local sales tax measure, given the unknowns of whether voters will decide to implement the tax.  

Description

Sales tax is calculated as a percentage of the purchase price of goods which is collected by the seller and remitted to the State. Encinitas receives one percent of sales that occur within the City’s jurisdiction.

The 7.75 Sales and Use Tax (SUT) rate in San Diego County is comprised of the statewide 7.25 percent rate along with an additional 0.5 percent tax for the San Diego County Regional Transportation Commission (TransNet) in effect from 1988 to 2044. The rate broadly breaks down to 6% to the State, 0.25% to San Diego County, 1% to the City, and 0.5% to San Diego County TransNet. For a detailed description of the statewide 7.25 percent SUT rate, see the California Department of Tax and Fee Administration website.

Relevant Economic Conditions

As 2024 unfolds, many of the same economic conditions remain in play statewide, with varying effects on the overall outlook. A primary focus is monitoring the Federal Reserve to gauge when interest rates will recede. Monthly unemployment trends and inflation results will determine how swiftly and significantly borrowing costs decrease.

Results from the final quarter of 2023 (October - December sales) confirmed a shift in consumer behavior, with people opting for essential household items over more expensive purchases. Except for Business/Industry and Restaurants/Hotels, all other major industry groups saw negative comparisons to the fourth quarter of 2022.

At the national level, US Real Gross Domestic Product (GDP) grew at an annual rate of 3.2 percent in 4Q 2023, driven by increases in consumer spending, exports, and local and state government expenditures. Despite a decline in confidence, consumer spending rose a solid 2.6 percent, inflation adjusted, over the past year. Top categories for spending growth include recreational vehicles and goods (12 percent), new cars (4 percent), restaurants and hotels (4 percent) and recreational services (4 percent).

The US should experience a reasonable pace of GDP growth in 2024, led by solid growth in consumer demand. Labor markets will remain tight, industrial production will be steady, and long run interest rates will likely stay in the same range. In many ways 2024 will resemble 2023 with a steady, moderately expanding economy. Strong consumer demand suggests inflation will be running hotter than the two percent pace that the Federal Reserve hopes to achieve. (Source: HdL Companies Consensus Forecast April 2024.)

Other Sources of Revenue

Charges for Services

Charges for Services is the third largest source, representing ten percent of General Fund revenue.

Staff estimates an increase of $0.7 million, or 6.6 percent in Charges for Services. Projections assume $0.5 million in new arts program revenue at the Pacific View Arts Center scheduled to open in FY 2024-25. Estimates also reflect CPI adjustments to development (permitting) fees expected to be effective July 1, 2024.

Charges for Services is a voluntary charge imposed on an individual for a service or facility provided directly to that individual. A fee may not exceed the estimated reasonable cost of providing the particular service or facility for which the fee is charged, plus overhead. Revenues include recreation program enrollment, along with planning, building, and engineering fees related to residential and commercial development. These revenues are forecasted on the basis of recent receipts and staff’s knowledge of current trends.

Transient Occupancy Tax (TOT)

TOT is the fourth largest source, representing five percent of total General Fund revenue.

Staff estimates an increase of $0.4 million or 7.4 percent for General Fund TOT, based on analysis of activity since FY 2021-22. Revenues for both hotel and short-term vacation rentals are expected to increase as bookings continue to rebound following the COVID-19 pandemic. Proactive enforcement on unpermitted short term rental sites, which began in FY 2022-23, is projected to generate recurring TOT and rental permit revenue.

Transient Occupancy Tax is a tax imposed on persons staying 30 days or less in a lodging establishment. The tax is collected for both hotel and short-term vacation rentals at a rate of ten percent of the rent charged by the operator. Eight percent of the rent goes to the General Fund, and two percent is restricted to beach sand replenishment and stabilization projects in the Coastal Zone Management Fund (212). These revenues are forecasted on the basis of recent receipts and staff’s knowledge of current trends.

Franchise Tax/Fees

Franchise Fees are the fifth largest source, representing two percent of total General Fund revenue.

Staff estimates a decrease of $0.03 million, or 1.3 percent, in Franchise Fees. Cable and video franchise revenue is expected to continue to remain relatively flat due to limited growth in new subscribers. Gas and electric franchise revenue is projected to decrease slightly due to decreased consumption related to recent rate increases and customers’ ongoing transition to solar energy.

Franchise revenue is generated from public utility sources, trash collection franchises and telecommunication franchises conducting business within the City limits. These revenues are forecasted on the basis of recent receipts and staff’s knowledge of current trends.

A solid waste franchise fee is collected from EDCO for the exclusive right to collect and process commercial and residential solid waste, recyclable, and green waste. These fees are used to help repair wear and tear on roads caused by trash trucks driving on City streets and to help fund street sweeping services. On May 12, 2021, Council approved a franchise fee increase—from the existing five percent to ten percent of gross revenues from Encinitas ratepayers—to be effective June 1, 2021. Revenues related to the 5 percent solid waste fee are budgeted and received directly in the Solid Waste Fund.

Excise Tax

Staff estimates an increase of $0.5 million, or 200 percent, in retail cannabis tax. FY 2023-24 is the first year that included new cannabis revenue, estimated at $0.25 million for one site, which opened in February 2024. Projections assume that all four retail locations will commence operations in 2024. Projected revenues are modest because it is unknown when retail sites will open and how much they will receive in sales. The City has not yet received applications for non-retail uses. 

This new revenue source is a result of the voter-initiated “Measure H” approved on November 3, 2020. City Council approved Ordinance No. 2020-18 adding Chapter 9.25 to the Encinitas Municipal Code allowing certain cannabis-related uses and activities in specified zones. Measure H also requires that the City allow four retail cannabis businesses to operate in the City. 

On November 8, 2022, the voters approved the City-sponsored ballot measure known as the City of Encinitas Cannabis Business Tax Measure (“Measure L”) allowing the City to adopt ordinances to impose a Cannabis Business Tax. On April 12, 2023, staff introduced Ordinance 2023-03 which imposes a gross receipts tax on all cannabis businesses operating within the City. Council approved the ordinance along with Resolution 2023-21 setting Cannabis Business Tax rates at seven percent of gross receipts for retail cannabis businesses; four percent of gross receipts for non-retail cannabis businesses; and ten dollars per square footage of canopy area for commercial cultivation of cannabis and/or hemp.

Licenses and Permits

Staff estimates an increase of $0.08 million, or 27.5 percent, in Licenses and Permits. Proactive enforcement on unpermitted short term rental sites, which began in FY 2022-23, is projected to generate recurring TOT and rental permit revenue.

Licenses and Permits are collected on business operation permits, business registration, short term rental permits, security alarm permits and other miscellaneous permits. These revenues are forecasted based on the basis of actual receipts in recent years.

Intergovernmental

Staff estimates a increase of $0.1 million, or 16.9 percent, in Intergovernmental Revenue. Intergovernmental revenue largely consists of the Cooperative Agreement for Fire Management Services with the Cities of Del Mar and Solana Beach. 

Intergovernmental includes revenue from other governmental agencies, principally the state and federal governments. These revenues include general or categorical support monies called subventions, as well as grants for specific projects and reimbursements for the costs of some state mandates. These revenues are projected on the basis of the City’s current cost sharing agreements as well as anticipated reimbursements of state mandated costs and excess vehicle license fees collected by the State.

Fines and Penalties

Staff estimates an increase of $0.01 million, or 2.8 percent, in Fines and Penalties. This assumes a slight increase in administrative citations resulting from increased code enforcement efforts.

Fines and Penalties include collections for vehicle code and red‐light violations, parking citations and vehicle abatement. These revenues are forecasted on the basis of recent receipts and staff’s knowledge of current trends. In April 2022, City Council passed Ordinance 2022-05 allowing the City to utilize a private parking enforcement company in addition to the Sheriff and City staff.

Use of Money and Property

Staff estimates a increase of $0.01 million, or 1.0 percent, in Use of Money and Property primarily due to an anticipated increase in investment earnings.

Use of Money and Property is generated by rental/insurance payments for use of City property, investment earnings, and revenue from the sale of City property. These revenues are forecasted on the basis of recent receipts and staff’s knowledge of current trends.

Other Revenue

Other Revenue includes interfund revenue, booking fees, cost recovery and other miscellaneous revenue. Revenue in this category remains constant except for the unanticipated one‐time reimbursements from the State for firefighter strike team deployments.  Staff budgets conservatively, as fire conditions and deployments vary year-to-year, then adjusts cost recovery revenue and overtime at mid-year. This category also includes excess net revenue payment from the Encinitas Ranch Golf Authority.

Other Financing Source/Uses

This category is used to account for proceeds of long-term debt, subscriptions, and capital leases. Activity relates to financial statement presentation and typically is not budgeted. Examples include: the Governmental Accounting Standards Board (GASB) Statement No. 87, Leases issued in June 2017 and Statement No. 96, Subscription-Based Information Technology Arrangements issued in May 2020.

Transactions and Use Tax (Local Sales Tax)

On February 28, 2024, City Council approved outreach and possible ballot writing services for a potential one-cent local tax measure. On May 22, 2024, City Council approved Resolution 2024-60 ordering the submission to the qualified electors of the City of a ballot measure relating to a one-cent per dollar transactions and use (sales) tax, requesting that the San Diego Board of Supervisors authorize the County of San Diego Registrar of Voters to render specified services to the City of Encinitas relating to the conduct of the election, and directing the City Attorney to prepare an impartial analysis. No additional revenues are projected in the FY 2024-25 budget, given the unknowns of whether voters will decide to implement the tax.  

Assumptions for Estimates

Forecasts utilizing assumptions based on financial policies and economic trends help determine if the City will have sufficient resources to meet the requirements of ongoing, planned, or mandated programs. Forecasting provides an estimate of the financial flexibility of the City, as well as insight into tax, revenues and service options the Council must address.

The City's general approach to forecasting is to apply a conservative philosophy that does not overstate revenue nor understate expenditures. This approach:

• Underestimates revenues and builds in a layer of contingencies for expenditures. While this might make it harder to balance the budget, it reduces the risk of an actual shortfall.
• Assumes that revenues will be adjusted at midyear when more information about economic trends and actual receipts are available. As a result, the Revised budget tends to be more aligned with actual revenues than the Original budget.

The methodology used for forecasting reflects a combination of internal analysis and locally generated consensus forecasts covering such factors as population growth, retail sales, and inflation.

For proposed revenue estimates, the City evaluates prior year actual collections and projects current fiscal year ending fund balance based on prior year trend analysis along with current information provided by relevant sources.

For the remaining years of the revenue forecast, consensus forecasts—such as the US Bureau of Economic Analysis, University of San Diego Burnham‐Moores Center for Real Estate, and property and sales tax consultants—are used to outline expected trends in key economic and demographic indicators. Typically, these forecasts cover the nation or the state, so adjustments to reflect unique local conditions are sometimes necessary.

In general, sources are matched with the economic and demographic variables that most directly affect year‐to‐year changes in those revenues. For example, sales tax revenue will reflect consensus forecasts related to taxable sales growth; whereas, building permits and plan review revenue will be tied to the expected trends in development.

It is recognized that economic forecasting is not an exact science and at times relies upon professional judgment. To reduce the risks of miscalculation, as many factors as possible are used to identify what may contribute to changes. Budget monitoring and amendments also provide opportunities to adjust revenues and expenditures throughout the year.

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