The city’s budget at mid-year came in with $3 million more than anticipated, an anomaly among most Orange County cities this year.
“The only general consensus I’ve heard is cities struggling to make due,” said Lacy Kelly, president of the Orange County League of Cities.
The surplus is largely due to an unexpected $960,000 in revenue from arrears in residential property taxes and late-payment fees. City Manager Ken Frank described the windfall as an “unbelievable, extraordinary increase” that is unlikely to happen again. Newport Beach received a similar unexpected $880,000 in property tax revenue, according to Dan Matusiewicz, deputy administrative services director.
“This reflects the fact that houses were selling, via maybe forced sales, but we were getting accumulated back taxes along with penalties and interest of what was being sold,” Frank explained at the previous week’s City Council meeting.
Before the property tax money was received, the city was running a $1.5 million deficit for the second year in a row, Frank explained. The deficit, he said, is partly due to an investment loss incurred by the state’s Public Employee Retirement System, known as PERS, which most California cities are being asked to replenish. To amortize the loss, Laguna is contributing $1.5 million each year over the next four years. Minus the windfall this year, that deficit is expected to run until mid-2014.
Even though the city’s budgeted expenses of more than $66 million outweigh revenue of nearly $65 million, the property tax windfall is helping keep the current budget in the black. “The expenses are more than revenues,” Frank explained in a later interview, partly due to some project expenses being carried over from the previous fiscal year. “Our deficit really isn’t that big. It’s a little difficult to compare revenue and expenses in the mid-year budget.”
The municipal code requires that 10 percent of the overall budget is set aside as a reserve. Laguna has set aside nearly 14 percent, totaling $6.3 million, according to Frank. The City Council also established a “recession-smoothing account” three years ago as a rainy-day measure, which now totals $4 million.
Despite presenting the “good news” on the budget, “not everything is sanguine,” said Frank, referring to the continued drop in hotel and retail sales taxes. “Revenues from the Montage,” he added, “like other hotels, are down 20 percent; they’re down to a measly $2.7 million a year in hotel tax revenue.” In the previous two years, Montage bed tax contributed $3.1 million and $3.6 million, respectively, according to previous budgets.
He described the $2-million loss in city income over the last two years as “unbelievable, even with the recession.”
City Council challenger Emanuel Patrascu, the only non-incumbent in the race for three available council seats, has made fiscal policy a campaign issue, calling the revised budget figures more a card trick than a balancing act.
“That’s a one-time deal,” Patrascu said, referring to the property tax windfall. “The budget is still structurally unsound. The budget is still projected to have a general fund deficit for the next two years.” The solution, he said, is reviving in-town business. “Sales taxes are 22 percent below what they used to be.”
Mayor Pro Tem Toni Iseman disagrees with Patrascu’s budget characterization. “That doesn’t mean we weren’t prepared with our recession-smoothing fund,” she said. One of three incumbent candidates, she also defended efforts of the city’s business task force to boost local business. “We’re doing a lot to rebuild, recruit and encourage locals to shop locally.”
Incumbent Kelly Boyd and incumbent Mayor Elizabeth Pearson, also a member of the task force, are considered proponents of local business. Both are on record to reduce red-tape for new businesses and to establish shopping “districts” to attract tourists to other parts of town.
Pearson spearheaded the idea of hiring a part-time economic development consultant to help fill empty storefronts. “We have also worked with the Chamber of Commerce to encourage our residents to shop locally and I believe our residents ‘get it’ and want to help,” Pearson said in a statement.
Of the $3 million surplus, nearly half is already spent, as allocated and approved by the City Council last week. Though the city attorney’s budget came in $300,000 less than anticipated, $750,000 of the overall surplus was earmarked to pay for increased liability claims handled by the city’s insurance fund. Of this year’s reduced attorney’s fees, $250,000 will be carried over to the city’s 2010-2011 budget.
The liability claims are due in part to what Frank calls “trip and fall” cases. “Even though our sidewalks and streets are in excellent shape,” Frank said, “people seem to find places where they can hurt themselves.” Other liability lawsuits are due to flooding disasters and sewer back-up emergencies.
Another $700,000 will be used to purchase and replace city equipment. “You’ll need to come up with some big bucks for the transit system,” said Frank, who is retiring this year after nearly 32 years as city manager. The city is using $960,000 in annual sales tax from the Orange County Transit Authority to maintain and replace city buses and recently purchased three new trolleys at $200,000 apiece using federal stimulus money.
“The summer shuttle system is so expensive we’re spending that whole $960,000 just on the operating costs,” said Frank. “We no longer have a source of funds to buy new buses or replace buses. That’s a problem. When buses come due to be replaced, there’s not going to be any money set aside.”
The city will also buy two adjacent “unbuildable” lots in Arch Beach Heights for $15,000 to maintain as open space. Frank said the city has purchased 50 similar lots over 30 years to keep “non-building sites out of private hands so people don’t keep buying them and think they have an investment.”
Another chunk of change came from city parking meters, with tallied $320,000 over estimates. “People are still coming to Laguna Beach. We have seen no slow down whatsoever in parking revenues,” Frank said.
Savings also came from not filling vacant employee positions, worth $400,000 annually, specifically in the city’s police and public works departments. With recent repaving completed, the street crew will be disassembled and the city will hire outside contractors for future repairs when necessary. “There probably is not a pothole in town right now,” Frank said.