A mid-year budget update to be presented to the City Council at its March 5th meeting reveals that while improving, the budget of the City of Sonoma continues to be very tight.
In response, City Manager David Guhin will continue to focus on improving the city’s financial picture, including postponing some capital improvements and other expenditures. The revenues from the recently voter-approved sales tax increase will not immediately begin to make a positive contribution, and to balance the budget, the city will transfer nearly one million dollars from its reserves. This is less than the original nearly three million dollars projected when the budget was approved.
Significant sections of the budget report are as follows:
Introduction
Mid-Year Financial Report As of January 31, 2025
This Mid-Year-End Financial Report provides an analysis of the City’s General Fund and Proprietary Fund revenues and expenditures for the fiscal year 2024-25 as of January 31, 2025.
Management’s Overview
The City’s annual budget for fiscal years 2024-25 was adopted by the City Council on June 19, 2024, covering all City funds, including a capital budget aligned with the five-year Capital Improvement Plan (CIP). The purpose of the mid-year financial report is to provide regular updates to the Council regarding revenue and expenditure trends to ensure the City Council has a strong understanding of the City’s current financial condition. The numbers in this report are based on the unaudited FY 2024-25 revenues and expenditures. A discussion of the significant budget items is presented below.
FY 2024-25 General Fund Budget
The FY 2024-25 General Fund budget, adopted in June 2024, initially projected revenues of $24.3 million and expenditures of $27.1 million, resulting in a $2.89 million deficit. This shortfall was primarily due to a minimal 0.02 percent increase in revenues compared to the previous fiscal year, while expenditure rose by 4.8 percent.
During the fiscal year, the expenditure budget was amended by $57.5K to cover costs related to the District-Based Election and the purchase of two EV chargers. Additionally, $25.0K in salary savings was reallocated to fund consulting services for monitoring the Garbage Contract under SB 1383. As a result of these adjustments, the total amended General Fund expenditure budget for FY 2024-25 is $27.2 million.
The General Fund supports essential City services, including Administration, Community Development, Public Safety (Fire and Police), Public Works, and Community Activities. The primary sources of General Fund revenue are Property Tax, Sales Tax (General, Measure V and Measure T), and Transient Occupancy Tax (TOT), which together account for 76% of total General Fund revenue. Other notable revenue sources include Emergency Medical Services (EMS) revenue, Fees & Charges for Services, Franchise Tax, and Business License Tax.
While the five-year General Fund forecast projected modest revenue growth, the City was facing an ongoing structural deficit due to rising operating costs. Key financial pressures include increasing CalPERS Unfunded Accrued Liability (UAL) payments, a downward trend in Sales Tax revenues, and growing contractual obligations for Police and Fire services.
To address the structural deficit and increase services for our community, the City placed Measure T, a half-cent Transaction and Use General Tax Measure, on the November 5, 2024, election ballot, which was successfully approved by voters. The passage of Measure T establishes a dedicated, locally controlled revenue source aimed at ensuring the long-term fiscal stability of the City. The estimated $3 million in annual revenue generated by the measure will support essential city services, including public safety, emergency response, street and sidewalk maintenance, youth recreation programs, parks, and affordable housing initiatives. By securing additional funding, Measure T enables the City to sustain and enhance vital community programs while addressing rising operational costs.
Forecasted actual expenditures for FY 2024-25 are now projected to total $27.2 million. Salary and wages are expected to come in slightly below budget due to salary savings, while professional services are anticipated to remain flat. However, the City is exploring opportunities to defer non-essential projects to future dates. Additionally, internal service costs and purchases of software and equipment are forecasted to be lower than initially budgeted.
As a result, the anticipated use of reserves to balance the budget has been reduced to $0.8 million, a significant improvement from the originally forecasted $2.89 million deficit.
General Fund Revenue
The forecasted General Fund revenue for Fiscal Year (FY) 2024-25 is now estimated at $26.3 million, representing a $2.0 million increase over the adopted budget. This upward revision is driven by higher-than-anticipated revenues from key sources, including Property Tax, Emergency Medical Services (EMS) revenue, interest earnings, and Measure T local sales tax.
The increase in Property Tax revenue reflects continued growth in assessed property values, while EMS revenue has exceeded expectations due to increased service demand. Interest earnings have also contributed to the revenue growth, benefiting from favorable investment returns. Additionally, Measure T, the half-cent local sales tax approved by voters in November 2024, will begin generating revenue starting April 2025, further strengthening the City’s financial outlook.
This overall increase in revenue enhances the City’s ability to sustain essential services while reducing reliance on reserves and mitigating the long-term structural deficit.
Transient Occupancy Tax
The Transient Occupancy Tax (TOT), commonly referred to as a hotel tax, is a tax imposed on guests staying at hotels, inns, and other short-term lodging facilities for 30 days or less. The tax is applied to the total lodging bill and is remitted by all approved lodging operators within the City of Sonoma. As a general tax, TOT revenue is deposited into the City’s General Fund, supporting essential municipal services.
TOT revenue from Sonoma’s lodging community accounts for more than one-fourth of the City’s General Fund revenue, playing a crucial role in funding police protection, fire and paramedic services, emergency preparedness, street and traffic maintenance, recreation services, parks and open space upkeep, City building maintenance, infrastructure improvements, and general municipal services that benefit both residents and visitors.
For overnight stays through November 2024, the City has received $2,614,475, representing 43.4% of the $6,022,256 budgeted revenue. The year-end TOT revenue forecast stands at $6.0 million, which is 99.6% of the forecast amount.
Property Tax
Property tax payments are received from the County in two primary installments: the first in December and the second in April, with a final “clean-up” payment in June. As of January 2025, the City has received payments through the first installment period. Current projections indicate that Property Tax revenues will exceed budgeted levels by $0.3 million, primarily due to increased assessed property values and steady growth in the local real estate market. This positive variance reflects the City’s ongoing economic development and the robust health of its property sector.
Sales Tax, Measure V and Measure T
Sales tax revenue, which is received two months in arrears, has been collected through November 2024 and currently stands at 32.4% of the $6,778,967 budgeted revenue. The City’s sales tax consultant, HdL, projects that total sales tax revenue for the fiscal year will be $6,476,991, representing 95.5 percent of the budgeted amount.
Additionally, Measure T, the half-cent general tax measure passed in November 2024, is expected to generate $0.7 million in revenue from April 2025 to June 2025. However, the above estimates do not include revenue from Measure T.
EMS Revenue
The Fire Department provides Advanced Life Support (ALS) medical services through dual- role firefighting personnel, who are trained as paramedics and emergency medical technicians (EMTs). All staffed engines and ambulances are ALS-equipped and include at least one paramedic on board.
Under the Sonoma Valley Fire District agreement, the City receives 100% of Emergency Medical Services (EMS) revenue. Ambulance billing revenue has shown steady growth, with FY 2024-25 EMS revenue forecasted at $3.3 million, representing a 43.5% increase over the budgeted amount of $2.3 million.
Other Revenues
Business License Tax revenue is forecasted to exceed the FY 2024-25 budgeted amount. As of January 2025, the City has transitioned Business License Administration to HdL, with an expected 10% annual revenue increase due to improved compliance and enforcement. For the period January to June 2025, Business License Tax revenue is estimated to exceed the budget by $24,696, driven by Discovery Compliance efforts.
Fees and Charges for Services revenues is expected to surpass the budget amount by $0.1 million, with revenues reaching $1.1 million.
Franchise Tax received for FY 2024-25 is expected to exceed the budgeted amount by 1.9 percent, totaling the estimated revenue to be $0.7 million.
Other Revenues, which includes Transfers, License and Permit fees, Real Property Transfer Tax, Interest and Rents, and Fines and Forfeitures, projected to be $1.4 million for FY 2024- 25, which remains flat for the year.
pg. 5 Interest revenue – As of January 31, 2025, Interest Revenue for FY 2024-25 has already
exceeded the budgeted amount by $141,617, reflecting stronger-than-anticipated investment returns. Given the current Federal Reserve interest rate environment, higher yields on City investments have contributed to this increase. As a result, total interest revenue for the fiscal year is forecasted to reach $340,692, surpassing the initial estimates.
In late fall 2024, the City began efforts to modernize its investment strategy by exploring a partnership with professional investment advisors. The goal was to improve the management of its financial assets through expert guidance, reflecting the City’s commitment to optimizing its investment portfolio and ensuring prudent financial management. This strategic shift has led to a significant increase in actual Interest Revenue, surpassing budgeted projections. Additionally, similar growth trends in Interest Revenue are being observed across other City funds.
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