Law requiring Costa Mesa to invest in capital projects once more on city’s dartboard
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Facing economic headwinds as they chart a course for next year’s budget cycle, Costa Mesa officials are once more considering edits to an ordinance mandating the city set aside at least 5% of its general fund for needed capital projects.
City leaders in 2015 established the capital asset needs (CAN) allocation as a means of ensuring the maintenance and improvement of local streets, buildings and infrastructure in Costa Mesa would continue, no matter what might be happening at City Hall or nationwide.
But last May, faced with declining sales tax revenue midway through fiscal year 2024-25, officials opted to waive a portion of the CAN requirement, ultimately deferring nearly $2.4 million and promising to pay it back in installments over the next five years.
Using the dedicated capital project funding brings Costa Mesa out of compliance with its own capital asset needs (CAN) ordinance, written to ensure projects continue. But with an even bigger shortfall looming in 2025-26, could the CAN be on the chopping block?
One month later, attempting to pass a balanced budget for 2025-26, the City Council once more approved a CAN waiver in the amount of nearly $1.25 million. They vowed this deferral, along with that of a mandatory information technology fund set-aside, would be paid back incrementally over a 10-year period.
Those deferrals were in keeping with Costa Mesa’s municipal code, which allows for exemptions based on unforeseen circumstances, including an “economic downturn.”
Now, Costa Mesa is zeroing in on a budget plan for the 2026-27 fiscal year ahead of a June 30 deadline and talk of altering the CAN requirement is resurfacing.
The subject arose in a study session Tuesday, during which council members reviewed a $33.4-million list of capital improvement projects presented by Public Works director Raja Sethuraman as part of next year’s budget.
In addition to setting aside 5% of next year’s general fund for the CAN allocation — a figure amounting to roughly $9 million — the city must also commit an additional $600,000 to begin paying back portions of the more than $3.6 million in deferrals from this current fiscal year and 2024-25.
After some last-minute reconfiguration, Costa Mesa officials passed a budget that spares using reserves and funds needed capital projects, but stalls some IT infrastructure upgrades.
Sethuraman said his department was determining a monetary value for the time staff plans to spend on capital projects, to count that investment toward the CAN requirement, something the city has not done before.
“We are factoring in the cost of staff involvement in [capital] projects of about $800,000,” he told the council Tuesday.
While staff time is a soft cost, public works officials pointed to language in the city’s municipal code that specifies capital asset funds shall be applied to city-owned assets, “including construction, design, engineering, project management, inspection and contract administration.”
Mayor John Stephens — who’s spoken in favor of amending the CAN or eliminating it altogether — asked whether the value of staff time spent on capital projects might be retroactively applied to the two previous budget cycles to effectively reduce the $3.6-million deferment obligation.
“Why can’t we go back, open up the last two years to … basically redo those, like you would [if] amending a tax return?” he posed. “And that way we don’t have to fiddle around with this $600,000 and all that falderal. Why can’t we do that and retroactively apply this device that we’re doing this year?”
City Atty. Kimberly Hall Barlow said although the books for the past two fiscal years have already been closed and the budgets audited, the city could make a determination staff time should have been included in previous CAN allocations.
“We don’t have to change the budgets to change the deferral and repayment plans,” she reasoned.
While no one else on the dais commented on the maneuver, Councilmember Andrea Marr — who has advocated for adhering to the spirit of the CAN ordinance — said in an earlier comment she might support shrinking the allocation, but only if the city agreed to refocus on needed maintenance and building projects, rather than engineering creative ways to meet a target.
“[This approach] doesn’t feel like it’s meeting the intent of what the previous council set it aside for,” Marr said. “My recommendation to this council is to focus on a way that prioritizes actually spending the money on things that are deferred. And, even if the CAN has to be smaller, at least we’re prioritizing those things, as opposed to counting everything and the kitchen sink to try to get to $9 million.”
It’s unclear what actions the council would have to take to alter its CAN repayment commitment, and whether doing so would require a super-majority vote of five members.
Officials plan to revisit the ordinance at an April 14 council study session that will also include a mid-year update on the current fiscal year’s budget and a preview of Costa Mesa’s proposed 2026-27 operating budget.
