CARLSBAD — Finances have returned to the forefront of city business after expenditures were projected to outpace revenues over the next 10 years.
According to Zach Korach, the city’s finance director, expenditures are expected to increase by 4% annually, while revenues will only grow by 2.1% per year. The city also projects a $9.9 million operating deficit in Fiscal Year 2026-27.
Korach said the city’s projected deficit of $9.9 million was based on a conservative model, while two other models, moderate and optimistic, showed deficits of $6.1 million and $600,000, respectively.
“This is not an emergency, so we have time to thoughtfully make decisions,” Korach said. “Staff will always bring a balanced budget.”
City staff floated options for increasing revenues, such as raising sales, parcel or transient occupancy taxes, and discussed budget cutbacks to tackle Carlsbad’s looming deficit.
After cutting spending by about 2% last year, City Manager Scott Chadwick said city staff is continuing to explore “innovative ways” to slash spending and has eliminated department contingency budgets. Still, to ensure proper funding exists, staff may have to cut deeper and risk “significant service level impacts.”
“My job is to advise you on the city’s finances,” Chadwick said. “If you’re looking a little closer, it’s time to look a little closer to the foundation.”
On April 20, 2022, the city held a workshop with a consultant to review potential revenue sources, including tax increases and cannabis dispensaries. A 1% sales tax increase from 7.75% to 8.75% would generate $40 million annually in revenue for the city, according to estimates. The city further estimates $6 million in revenue per year by raising hotel taxes, or TOT, a prospect the council will consider in the coming months.
The earliest tax increase measure could hit the ballots by 2024.
The city’s general sales tax rate is 7.75%, or 7.75 cents per dollar, and is split between the state (77%), county (10%) and city (13%). Korach said a voter-approved sales tax measure could keep the tax revenues and reduce the risk of outside jurisdictions from securing a portion of those revenues.
While some council members wanted to explore raising taxes, the council was relatively silent on cannabis revenues. Last year, a public survey showed 41% of residents supported establishing dispensaries, 39% opposed and 20% unsure. In 2016, 56% of residents voted to legalize recreational cannabis.
Councilwoman Melanie Burkholder questioned the city’s hiring and staffing practices over the past 12 years. During that period, the city hired more than 100 employees, including 53 new hires in 2022.
Burkholder asked why the city had 107 workers earning managerial salaries.
“Why do we need so many warm bodies,” Burkholder said. “The increase in staff is part of the structural deficit. (The) management positions have a $107,000 average salary. We have to live within our means.”
Employee pensions are one of the most significant drains on the city’s budget. Making matters more complex, CalPERS is usually one year behind in providing municipalities with pension data, creating issues for cities to budget their pension payments accurately, Korach said.
Burkholder hinted some of these managerial positions might need to be cut, a decision that ultimately rests with Chadwick, who listed a string of new costs over the past several years approved by the council: park rangers (at least $250,000); beach lifeguards ($700,000); part-time pool lifeguards ($82,000); reactivated police lifeguard patrol ($112,000); $4.1 million for new ambulances and Fire Station 7; new boards ($137,000); park maintenance ($334,000 per year), traffic studies ($250,000); $2.1 million per year for homelessness, environmental sustainability with a staff of six for $300,000; Clean Energy Alliance ($132,000 per year); data and analytics program ($428,000); and $500,000 for cybersecurity.
“Infrastructure ages, and the investments needed are huge,” Chadwick said.
In the years leading up to his retirement, former Mayor Matt Hall warned the council of a potential deficit due to the number of new hires, pension obligations and cost increases.
Correction: The story has been corrected to reflect a 4% expenditure increase and 2.1% for revenues, per year. Also, the city’s current sales tax rate is 7.75%, not 7.5%. We regret the error.
