Costa Mesa may have to dip into reserves for the upcoming fiscal year as the city continues to grapple with challenges posed by legal and homeless shelter-related expenses and rising employee salaries and benefits, according to a preliminary budget discussed during a City Council study session Tuesday evening.
Increasing costs, combined with the possibility of an economic slowdown — a particularly chilling prospect given Costa Mesa’s reliance on sales tax revenue — also have the city forecasting potential operating deficits of about $11.6 million to $14.2 million over the following five fiscal years.
Sales and use taxes account for 42.6% of the city’s projected general fund revenue for fiscal 2019-20, which begins July 1.
“We knew we were going to have challenges, but our goals were to present a balanced budget to council, to maintain the excellent service levels, maintain staffing with no reductions and no hiring freezes and, again, that focus on addressing the new council goals and priorities,” said Finance Director Kelly Telford.
Though there could be changes ahead of the budget’s official adoption next month, Telford said staff is proposing to use $3.15 million in general fund reserves to shore up the spending plan for fiscal 2019-20.
Of that, $1.4 million would go toward renovating the city’s permanent homeless shelter site — expected to be at 3175 Airway Ave. The remainder would go toward shelter operations and legal costs, according to staff.
The legal costs are primarily associated with several lawsuits filed against the city, many of them related to sober-living homes.
The overall preliminary budget is $173.8 million.
Also presenting a challenge are negotiated salary and benefit increases for city employees, which will total $6.6 million in the coming fiscal year.
“This definitely was one of the toughest budgets that our departments have prepared because there was so much in unavoidable costs,” Telford said. “Without a large increase in revenues, we had to absorb as much of that as we possibly could. Every year is hard, but with the shelter, litigation costs … we really looked for every possible opportunity to reduce operating costs.”
But, she added, “even though it sounds doom and gloom, we’re able to provide the same level of services to the community.”
“We’re able to maintain level staffing. … While it will be a challenge, I think it’s very much doable within these parameters,” she said.
In fact, the preliminary budget proposes increasing the number of full-time city employees from 484 to 495 by reclassifying some part-time jobs and adding new positions such as an energy services manager, lead equipment mechanic, engineering technician, network administrator, financial analyst and accountant.
Some council members and residents questioned whether it might be better to hold off on creating those titles until new City Manager Lori Ann Farrell Harrison has a chance to weigh in. She’s expected to come aboard by July 1.
Assistant City Manager Tamara Letourneau — who has served as acting city manager since November — said “there’s no problem in doing that” but added, “The departments all have lots of plans for these positions.”
“There are a lot of positions here, but we are desperate for people to help to do the incredible workload that we have,” she told the council. “We take great care in presenting this to you. There’s a lot of work to do. … I feel like a broken record sometimes; I’m always telling you all, ‘We don’t have the staff to do that.’ That will continue, because we need help.”
Telford pledged that staff will continue searching for possible cost savings or revenue sources — potentially in the form of grants or additional state funding.
“We’re proposing using reserves; however, we will continue applying for every possible grant opportunity and we truly do hope that this number gets down to zero,” she said.
Additionally, staff is proposing a comprehensive study of Costa Mesa’s fees to see whether adjustments are necessary to better recover the city’s costs.
Staff also is requesting that the council deviate from the city’s capital asset needs ordinance, which requires that 6.5% of budgeted general fund revenue goes toward local infrastructure projects. Such a move would free up additional operational funding but would need a supermajority council vote.
Councilman Allan Mansoor said he believes the city and the council need to be more proactive in addressing potential budgetary problems.
“We seem to put ourselves in these predicaments first and then find ways to bail ourselves out later,” he said. “In the future, we should really look and identify how we’re going to fund things in advance before getting ourselves into these situations where we’re short millions of dollars.”
Mayor Pro Tem John Stephens acknowledged there are significant costs associated with things like the homeless shelter, but he said “it’s good money we’re spending for good reasons.”
“We’ve been literally kicking the can down the road for 30 or some-odd years regarding homelessness,” he said. “And this council stepped up and did something and made a tremendous fiscal commitment to that issue.”
In wrapping up Tuesday’s meeting, Mayor Katrina Foley urged her colleagues to comb through the budget to find potential cost savings.
“I’ll be cutting $3.1 [million] from the budget,” she said.