Though they currently have the happy problem of choosing how to spend a budget surplus of more than $10 million, Costa Mesa City Council members likely will have to consider belt-tightening or moneymaking measures to stave off shortfalls in coming years, according to figures discussed this week.
Thanks to a combination of revenues that came in above expectations and expenses that were lower than anticipated, Costa Mesa has a nearly $10.7-million surplus from fiscal 2015-16.
The money can be used to build up reserves, pay down pension debt and fund software and capital improvements, according to Stephen Dunivent, the city's interim finance director.
But during a City Council study session Tuesday evening, Dunivent unveiled an updated five-year financial plan showing that Costa Mesa could face growing annual budget deficits ranging from $2.5 million in fiscal 2018-19 to almost $7.8 million in 2021-22.
Those shortfalls are forecast even though total revenues are expected to climb steadily in coming years — from $117.4 million in the current budget to almost $134.8 million in fiscal 2021-22.
"That's really concerning," Councilman Allan Mansoor said.
A major force behind the potential deficits is increasing expenses related to city employees.
In 2015, Costa Mesa's pension debt totaled about $246 million. Annual retirement costs are expected to rise sharply over the next five years, from just under $21 million in the current budget to almost $37.4 million in 2021-22.
Total budget expenditures are projected to rise from $117.4 million to about $142.5 million during that time frame, according to figures Dunivent presented to the council.
Contributing to the rise in expected employee costs is a recent decision by the California Public Employees' Retirement System to reduce the assumed annual rate of return on the system's investments from 7.5% to 7% over the next three years.
That will pass on additional costs to cities, Dunivent said.
Mayor Katrina Foley noted that the city is still in contract negotiations with some employee unions, so calculated costs could change. She also said Costa Mesa should work with other cities to find solutions to pension problems.
"It seems to me there have to be some options, because it's not sustainable," Foley said.
"Even if we fired every single employee today, we don't get rid of our pension obligation," she added. "So what can we do to work with other cities to address this at the state level?"
Councilman Jim Righeimer agreed that Costa Mesa should collaborate with others to seek a state-level solution but said the city also needs to work with employee unions to try to come up with ways to reduce the pension burden.
He said he believes the current retirement system is unsustainable and "will blow up," possibly leading some cities to bankruptcy.
"When those cities file bankruptcy, there will be a point when the employees do not get their pension checks," Righeimer said. "At that point, the state will have to do something, and the discussion is going to be whose ox is going to be gored."
Councilman John Stephens said he doesn't think it's realistic to expect employees to pay for the underfunded pension liability. But given the magnitude of the issue, he said he too thinks the city should work toward some kind of cooperative solution with cities and bargaining groups.
"Honestly, I think people care more about fireworks than they do about pensions, and when you look at these numbers, that's a little ridiculous, because it's going to cost our city a lot," he said.
Council members are expected to consider tactics for addressing potential deficits during their regularly scheduled meeting next week. Some options staff presented Tuesday include examining ways to provide services more efficiently and exploring cost reductions for lower-priority items.
"I think we really need to be careful about what's a need and what's a want," Mayor Pro Tem Sandy Genis said.
The council also could consider updating the amount the city charges for permit or licensing fees, or implementing new fees to help offset costs.
"Our general feeling is if you look at many of our fees compared to our neighbors or other cities in Orange County, they're quite a bit lower," City Manager Tom Hatch said.
Council members also are scheduled next week to decide how to spend the current surplus.
If staff's recommendations are adopted, about $1.2 million of the surplus would go toward meeting the council's goal of having $55 million in reserve.
An additional $500,000 would be used to pay down pension debt, and $1.9 million would be applied to improvements at local police and fire stations, a new trail system that will filter urban runoff along Arlington Drive between Fairview Road and Newport Boulevard, and protection, restoration and master plan implementation efforts at Fairview Park.