The most recent Seal Beach five-year forecast indicates there might be deficits in the city’s future. The size of the possible shortfall is a question. The trend doesn’t seem to be in dispute: city staff reports potentially flat sales income and rising costs for the city.
This year’s budget is expected to have a surplus of about $20,000.
The five-year forecast focuses on the General Fund of the city budget, according to a Sept. 11 email from Treasurer Finance Director Barbara Arenado.
District Five Councilman Nathan Steele recently raised the issue of potential city deficits in comments at public meetings, social media posts, emails, a guest column in the Sun, and an online survey. He raised the issue again during the public comment segment of the first meeting of the city Parking Committee on Wednesday, Sept. 13.
The issue first came up during the budget approval process earlier this year. (See “5-year forecast shows financial challenges,” at sunnews.org.)
The fifth year in the five-year forecast projects a deficit of more than $5.5 million in 2027-28. (Last year’s forecast did not include a projection/prediction for fiscal year 2027-28.)
In a recent email, Finance Director/Treasurer Barbara Arenado wrote that “while revenues are increasing, the rate of increase is slower compared to growth in expenditures.”
District One Councilman Joe Kalmick argued that the trend was for flat revenues and higher costs.
Since this is a big subject, we’re breaking this down into sections.
Forecast
In a July 31 email, Steele argued that the cumulative forecast was “really a $15 million dollar hole” in the five-year forecast. He emailed a screen capture of the forecast as it appeared in the adopted 2023-24 budget.
He used that figure again in a budget survey he recently emailed to registered voters and again at the Parking Committee meeting.
“While the cumulative amount is approximately $15 million, it’s important to note that the City adheres to the adopted Balanced Budget Fiscal Policy that necessitates the adoption of a new balanced budget every year,” wrote Finance Director/Treasurer Barbara Arenado in an Aug. 9 email.
“Because of the Balanced Budget Policy, the forecast is reviewed on a yearly basis,” Arenado wrote.
“The Five-Year Outlook is based on the current budget built on future assumptions,” Arenado wrote.
“In any given fiscal year, the level of resources, expenditures and year-end balances are the result of countless variables, including the national and state economies; legislative mandates; tax policy; the state’s financial and budget circumstances; changing land use or building patterns; and City Council priorities,” Arenado wrote.
“To the extent these factors vary from the outlook’s assumptions, outcomes will also vary. The City carefully monitors these factors and adjusts its operational and budget strategies each fiscal year,” Arenado wrote.
The Sun requested comments from Steele’s council colleagues.
“I agree with the Financial Director’s response,” wrote District Two Council Member/Mayor Tom Moore in an Aug. 14 email.
“The forecast is a tool to help see where the main areas of concern are so council can start looking ahead at ways to deal with future budgets,” Moore wrote.
“Unlike the federal government, it is required for Seal Beach to balance its budget every year with a reserve set aside as part of the budget,” Moore wrote.
For his part, District One Council Member Kalmick looked at the trend in the forecast.
“I generally agree with Councilmember Steele’s assessment of our projected financial condition. I’m not necessarily tied to a specific dollar amount; it’s the trend that seems inevitable,” wrote Kalmick in an Aug. 8 email.
“I completely agree with each of them,” Steel wrote in an Aug. 18 email.
“We are each acknowledging, in principle, that the forecast is difficult,” Steele wrote.
“We don’t know what the outcomes will actually be in all of myriad factors influencing our future,” Steele wrote.
“But, the trend is clear, the hand-writing is on the wall, it’s going to get bad,” Steele wrote.
In a July 31 email, City Manager Jill Ingram wrote that the forecast shed light on possible shortfalls.
“We base these projections on our best assumptions and current data regarding the financial landscape,” Ingram wrote.
“However, it’s essential to acknowledge that the future inherently carries uncertainty, making it difficult to predict with absolute certainty. Therefore, we recognize that the forecast is subject to fluctuations influenced by various factors,” Ingram wrote.
District Four Council Member Schelly Sustarsic offered her own thoughts.
“While the 5-year budget projections have been noted, the Council has not been briefed on the exact nature of the projected increases,” Sustarsic wrote in a statement sent on Aug. 25.
“Our city has been through the time of the COVID pandemic, inflation, and a host of (unfunded) mandates from the state, which have increased our city’s expenditures,” Sustarsic wrote.
“We have also received funds from the Federal government for COVID recovery and from the American Rescue Plan, which have helped our city’s bottom line but will be ending,” Sustarsic wrote.
“In the last few years our city’s staffing has grown, and salaries, medical and pension costs have as well. As an increasing portion of the budget goes to staffing, along with the increased cost of construction, major capital improvement projects have been pushed out of consideration,” Sustarsic wrote.
Examples
Let’s take a look at some examples from the 2022-23 forecast and the forecast that appeared in the (current) 2023-24 budget. (Space doesn’t allow a look at each of the five-year forecasts from budget to budget in this week’s issue.)
Both forecasts projected deficits in five years, though estimates of those deficits sometimes varied noticeably between forecasts.
Comparing like with like:
• Last year’s budget forecasts projected a surplus of $26,500 in 2022-23.
This year’s budget forecasts projected a surplus of $26,500 in 2022-23.
• Last year’s budget forecasts projected a deficit of $633,411 in 2023-24.
This year’s budget forecasts projected a surplus of $20,183 in the same year.
The Sun will take a closer look at the forecasts in the near future.
Reserves
By policy, the city sets aside a 20% to 25% General Fund reserve and an economic contingency reserve, according to Finance Director/Treasurer Barbara Arenado.
The reserve in this fiscal year’s budget: $10,533,627.
The contingency fund: $1,750,000.
Both figures were provided by Arenado in a recent email.
You can check yourself on page 67 of the adopted 2023-24 budget. It’s on the Finance Department page of the city website. (A word of caution: PDF page numbers and document page numbers don’t always match up.)
In addition to the reserve and the contingency fund, there is also money that has been set aside for other purposes.
For example:
• There is $477,000 committed for College Park East Capital projects.
• There was an estimated $4,395,824 for the swimming pool project in 2022-23. (The column for this year appeared blank on page 67 of the adopted budget.) The project began in 2008.
• There was $866,312 set aside for Revitalization.
Pressure
“We don’t watch sales tax level(s) at council month to month. It is one of 3 major sources of income for the city. It is under pressure with the loss of Bed Bath and Beyond,” wrote Steele.
The city manager reviewed the city’s financial pressures at length. “Presently, the City’s fiscal forecast is under strain and shows ongoing deficits due to increasing economic pressures,” Ingram wrote.
“Rising costs in health care, retirement, contracts, and necessary infrastructure updates present significant challenges.
“Additionally, the City’s operating revenues are struggling to keep pace with growing demands,” Ingram wrote.
“Long-term planning is undoubtedly challenging and has brought forth difficult discussions. Nevertheless, such planning and discussions are crucial to maintaining fiscal responsibility and ensuring the continuity of our well-established services,” Ingram wrote.
“Despite the challenges we face, we remain optimistic that with thoughtful decision making, ongoing discussions, and proactive measures, especially the serious consideration and generation of new, ongoing revenue sources, we will continue to guide our City towards a strong, stable future,” Ingram wrote.
Kalmick looked at the city’s revenues and costs.
“The City lives on and pays its bills based primarily on three sources: Sales tax, property tax, and fee revenues. We are experiencing and projecting pretty flat home sales and therefore flat property tax revenues. Retail sales seem to be recovering, but a recession of some sort is predicted, so sales tax revenue looks to be flat to slightly higher,” Kalmick wrote.
“We have been way behind on fees for service that the City charges, and though we have tried to bring them in line with the cost of providing a particular service, cost recovery is still well below 100%,” Kalmick wrote.
“In addition, Staff is always on the lookout for grant opportunities to help offset project costs or fund new projects,” Kalmick wrote.
“On the expense side, virtually everything the City purchases, from paint to software, fuel to tires, is costing as much as 30% or more. Our contracts for landscaping and tree trimming, infrastructure maintenance and repair, and labor costs, insurance, etc., continue to rise,” Kalmick wrote.
Revenue
“To increase our revenue possibilities and plan strategies to contain costs, I favor a measured approach,” Kalmick wrote.
“By keeping up with the way our town looks, we can ensure that people will want to continue to visit our Old Town area which will translate into more sales for our businesses and therefore more sales tax revenue,” Kalmick wrote.
“By investing wisely in our infrastructure, we can reduce maintenance and repair costs.
“We should immediately apply to the California Coastal Commission for the maximum allowable increase in fees for our three beach parking lots,” Kalmick wrote.
“I have confidence in our Finance Director’s approach to monitoring the economy and paying attention to the signals that indicate even subtle changes in our financial health,” Kalmick wrote.
“Using this information, Council and Staff need to work closely together on an ongoing basis, not just during budget planning,” Kalmick wrote.
Ingram pointed out that revenue opportunities were discussed during the budget workshop earlier this year. Those opportunities included:
“Increasing the Transient Occupancy Tax (TOT) or Hotel Tax
“Reviewing the City’s Business License program
“Reviewing the Barrel or Oil Tax
“Exploring opportunities for Cannabis-based businesses
“Exploring the Street Lighting levy that is subsidized by the General Fund
“Reviewing Parking Equity and the impacts it would have on revenue,” Ingram wrote.
The Sun asked for the meaning of “parking equity.”
“Parking equity in this context refers to the fair distribution of parking within the City’s limited resources. An impact of implementing parking equity may be revenue generating; however, the overarching goal of parking equity is ensuring fair access to public parking. The City has already taken incremental steps towards parking equity. An example of this is the no re-parking ordinance currently in effect on Main Street,” Ingram wrote.
The Sun also asked about cost cutting.
“Balancing measures or cost cutting reductions are reviewed and discussed in detail each budget cycle,” Ingram wrote.
“However, any cost-cutting initiatives must be approached with caution to prevent adverse effects on vital services, staffing levels to provide those services, and our residents’ quality of life,” Ingram wrote.
Preparation?
A reader asked the Sun what the city had done to prepare for or to prevent the situation in which revenues are flat and costs are rising.
The Sun asked the city: What would the city do if the city hasn’t sufficient funds to meet the requirement of a balanced budget? How many deficit years would it take to exhaust the city’s reserves based on current projections?
The Sun emailed those questions on Aug. 18 and requested a reply by Aug. 25.
“Historically, the City has demonstrated a consistent ability to effectively navigate the challenges posed by historic economic downturns,” wrote Finance Director Barbara Arenado.
“Most recently, the City faced one of the worst recessions in current history, compounded by the adverse effects of the COVID-19 pandemic. However, through responsible governance from both the City Council and the City Manager, the City not only maintained a balanced budget despite significant shortfalls but also did so without tapping into City reserves,” she wrote.
“It is worth highlighting that the financial landscape of any given fiscal year has many variables at play which affect the City’s financial outcome,” Arenado wrote.
“The City adheres to a Balanced Budget Policy, which is applied annually to achieve budget equilibrium,” Arenado wrote.
“Predicting the precise duration it would take to deplete the City’s reserves is nearly impossible, given the multitude of factors at play,” Arenado wrote.
“As noted above, the City adheres to strict budget policies, in the event the City were to face insufficient revenues, City Staff and Council could implement numerous options including reassessing service delivery methods, the postponement of staff hiring, freezing vacant positions, the renegotiation of City contracts to achieve cost reductions, deferment of capital improvement projects to conserve financial resources, and prudent limitations on expenses related to supplies, training, and administrative necessities. The City has implemented the Five-Year Strategic Plan for this purpose to ensure discussion and thoughtfully planning is done in advance,” Arenado wrote.
Update to come mid-year
Don’t expect an immediate update on the forecast. For one thing, there is a time lag between when the money is collected and when the information about the revenue comes in. In the summer, HdL Companies released the sales tax information for the first three months of this year.
“Since the fiscal year began on July 1, it is too early to update the outlook as the first month has not been completed yet,” wrote Seal Beach Finance Director/Treasurer Arenado.
“Additionally, the City’s largest revenue sources typically come in the later part of the year,” Arenado wrote.
“Therefore, the City usually waits until mid-year to provide the City Council with an update to the Five-Year Outlook with accurate and relevant data,” Arenado wrote.
