After peaking four years ago and then dropping 4 percent to a low of $44.8 million last year, the city’s general fund budget is showing signs of life, City Manager John Pietig said during a City Council budget workshop Tuesday.
Even so, the city is projecting a $718,000 deficit, the city’s third year in the red, though revenue is inching toward $45 million in the fiscal year that ends June 30, 2012, Pietig said. Despite a smaller deficit compared to last year’s $1.2 million, Laguna Beach, he said, “still has problems.”
“We’re in better shape financially than most of the cities around us,” Pietig stated, “but we still have challenges ahead of us, including increasing pension costs, health costs and who knows what’s going to happen with gasoline and other utility costs.”
With $8.6 million in two reserve accounts to cover spending deficits and balance the general fund, Pietig still cautioned the council against overspending. “The city has to address the structural deficit,” he said.
Should revenue remain unchanged for the next two years, increased expenses, including inflation, health care and pension payments, would equal deficits of $1.2 million and $2.1 million, respectively, Pietig calculated. To eliminate the deficits, the budget would be balanced by tapping a recession-smoothing account that now stands at $3.9 million and would shrink to $600,000.
Pietig said this scenario is unlikely because the City Council is willing to reduce costs and the economy appears to be recovering. Even so, municipal employees foregoing pay raises for a second year, trimming 10 jobs and a hold-down on equipment purchases, minimized the current deficit.
The consistent economic “bright spot,” said Gavin Curran, the city’s financial director, are property taxes, contributing more than half of the city’s operating budget at $21.4 million. Other cities have experienced decreases in property tax revenue as property values and assessments have fallen, he said.
Expecting a zero-percent increase in property tax revenue last year, instead it climbed by 1.8 percent, which added $350,000 to the city’s general fund. It is expected to increase by another 2 percent in fiscal year 2012-13. The county assessor’s office is projecting a 1 percent decline or a 1 percent gain in property tax revenue countywide. Every 1 percent change in property tax revenue in Laguna equals $210,000, he added.
As a destination resort city, Laguna’s two other substantial sources of income are hotel and retail sales taxes, which are also “good news,” said Curran, and expected to contribute $4.3 million and $3.9 million, respectively. Combined with property taxes, hotel and retail sales taxes, which include food sales tax, comprise 75 percent of the municipal operating budget.
“We’re starting to see recoveries in our food products and restaurants,” said Curran. “General retail still appears to be struggling. It’s still down below 30 percent and hasn’t seen much of an improvement.” Sales tax revenue hit its all-time low at $3.6 million in 2010.
Curran pointed out that income from construction is worse than it was a year ago. Despite sluggishness in those areas, Curran said the city has seen increases in the last two quarters of hotel and sales tax revenues and he expects that to continue.
To prevent lay-offs and reduce costs, municipal employees and management forfeited 10 percent pay raises over the last two years, a $1 million savings, Pietig said. “We pared the allowance for exceptional performance pay by $170,000,” he added. Police accepted a one-year contract without raises, though fire department employees took their 5 percent raise as scheduled last July. The city refinanced a pension debt to the state and saved $150,000 this year, Pietig pointed out.
Over three years, the city also eliminated 10 employee positions, half by cutting the street-paving crew, a cumulative savings of $920,000, Pietig said. Street repairs will now be scheduled as needed with an independent service. The city also reduced two full-time positions to part-time.
Saving another estimated $750,000 in general fund expenses, the city put a freeze on replacing office and field equipment costing $1,000 or more per item. “I do not recommend this as a long-term strategy,” Pietig said, “but with the economy in its current condition, it will work for a couple more years.”
The estimated $718,000 deficit, the new city manager explained, is primarily due to anticipated increases of $800,000 in retirement costs, $172,000 in health care costs and $73,000 in gasoline purchases. With the Board of Realtors raising funds for last summer’s $28,000 July 4 fireworks display and using remaining money to pay for half of this summer’s show, the city will again pick up the tab next summer. Another new expense, added Pietig, was adding more brush-eating, fire-preventing goats on the hillsides.
The budget also includes $5 million in city improvement projects, which include $1 million to replace a 50-year-old wood retaining wall on Alta Vista Way, $600,000 to improve the streetscape on Broadway from Cliff to Forest Avenue, $400,000 for an Agate Street beach stairway and $40,000 for sidewalks on a Laguna Canyon frontage road. A $300,000 debris basin for Sun Valley may be reallocated to the city’s Disaster Relief Fund.
The council agreed to establish a new budget line-item called public pathways and complete streets using the $300,000 freed up by reallocating the Sun Valley debris basin as a placeholder for the new category. The budget item was established under the auspices of improving public pathways and sharing city streets with cars, bicyclists, skaters, runners and walkers. The council also requested $60,000 for a lobbyist to find more grant money for the city.