When is a deficit not a deficit? Look no further than Costa Mesa for your answer
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Costa Mesa council members are at odds about how to interpret the state of the 2025-26 budget, which appears balanced but points to a rash of overspending, namely in the city’s police department, barely buoyed by higher-than-expected revenue.
The discussion came Tuesday during a study session, in which the city’s Finance Department provided a mid-year budget update on the financial plan adopted last June, which described a general fund balance of $186.9 million.
Accomplished amid economic uncertainty and anticipating a decline in sales tax, the budget deferred needed information technology upgrades and underfunded a capital project commitment outlined by law, with a promise to pay the funds back in installments.
Those moves — orchestrated by then-Finance Director Carol Molina, who abruptly left City Hall in March — allowed the city to adopt a balanced budget without drawing on reserve funds.
But officials and staff Tuesday offered a much sunnier picture of economic affairs, despite the fact that city expenditures are penciling out to be at least $8 million higher than what was originally budgeted.
“I’m pleased to report the city remains on steady financial footing and is projected to end the fiscal year in a positive operating position,” said City Manager Cecilia Gallardo Daly. “This outcome reflects a careful balancing of revenue and expenditures, coupled with careful budget management.”
Officials confirmed Monday seasoned city financier Carol Molina is no longer employed by the city but wouldn’t comment on the nature of her departure or how the budget process will proceed.
Budget manager Mark Khou explained that, despite inflation pressures due to geopolitical tensions, tariffs and impacts to consumers from the war in Iran, Costa Mesa’s sales tax revenue came in $5.9 million over the budgeted $75 million.
That increase, along with a $200,000 hike in the transient occupancy tax on hotel stays and other revenue gains, should place the city $7 million above what was forecast, at $193.3 million.
And it’s a good thing, too. Because Costa Mesa is on track to exceed this fiscal year’s anticipated expenditures by roughly the same amount, shelling out roughly $145.8 million in salaries and benefits — about $8.4 million than was anticipated last June.
That increase, lessened by a $1.5-million reduction in operating expenses, is attributable to a recent hiring trend in the Costa Mesa Police Department, which was budgeted for $62,820,470 but whose actual spending this year is forecast at $73,282,332, placing the department nearly 17% over budget.
Kingsley Okereke, a retired Garden Grove assistant city manager and finance director working on a consultant contract, explained the overages as positive indicators.
“The good news is you’re fully staffed in your public safety positions,” he said, explaining Molina’s conservative 2025-26 budget relied on historic vacancies within CMPD and underestimated by more than $4 million the department’s annual average of overtime hours, anticipated this year at nearly $9 million.
“When you have all of those positions filled, all of that cost is what’s being reflected in the increase that you’re seeing here. Those are funded salaries and positions that are approved and recruited and filled within your organization.”
Councilmember Mike Buley asked whether the city achieved revenue growth and then found a way to spend it, or whether the windfall just happened to be consumed by unforeseen expenditures.
“It’s just glaring to me how they track so closely,” he said.
Okereke said he had the same reaction, calling it a coincidence. Khou characterized the adopted budget as being too conservative to truly reflect the city’s natural growth, saying negotiated staff salary increases alone will tack on from $6 million to $7 million year over year to the city’s costs.
“It’s just glaring to me how they track so closely.”
— Costa Mesa Councilmember Mike Buley
In July 2024 there were 73 vacancies at City Hall, out of a total of 599 positions. By July 2025, shortly after the budget was adopted, there were 52 unfilled openings. As of March of this year, that number had shrunk to 34. Finance staff said such staffing levels obliterated projections about seeking potential cost savings of up to $4.4 million by keeping vacancies unfilled.
But some officials took issue with the rosiness of the financial picture being painted, questioning why staff applied the revenue overages to an expanding deficit without seeking approval.
“We adopted a budget that was $187 million from our general fund, and what we have in front of us is, ‘Hey, we’re projected to spend $194 million — it’s a $7 million difference that never came to council,” said Councilmember Arlis Reynolds.
“There’s a $7 million swing that we did not have input on. I’m concerned about how that happened and concerned about whether controls were not followed or whether we don’t have controls in place,” she continued. “If there [aren’t] policies in place to make sure there’s daylight on that spending and council approval and public input on $7 million of unbudgeted spending, we need to get those policies in place.”
Councilmember Jeff Pettis questioned a potential structural deficit that could continue into the future.
“If we do not control spending now, we’re going to be forced to raise taxes later,” he said. “And the responsible approach is clear — to reduce, prioritize and stabilize before we ask the public to pay more.”
The council is scheduled to hear a proposal on next year’s 2026-27 operating budget during a May 12 study session, ahead of a June 2 budget hearing in which the panel could adopt a new plan. Each city department has been asked to cut its spending by 5%.
Khou warned officials the coming proposal will be an attempt to “right size” the budget and capture the true cost of doing business.
“You’re going to see a tremendous increase in the salaries and benefits,” he said. “Maybe there was some conservatism in developing this budget. But we now have to go back to what those true costs are going to be — they’re going to be pretty eye-opening.”
