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Carlsbad officials cautiously optimistic about financials

CARLSBAD — While tax revenues have exceeded earlier projections, the city’s finance department is keeping a watchful eye on economic trends as the threat of a national recession continues to loom.

Carlsbad’s finance director, Zach Korach, and Matt Sanford, the city’s economic development director, updated the Carlsbad City Council on Nov. 15 with a presentation on the city’s first-quarter results and economic trends.

The financial assessment revealed property, sales and transient occupancy (hotel) taxes were up a combined $3.1 million year-over-year.

The city’s working budget for the fiscal year 2022-23 is $223 million, compared to a $198 million adopted budget. Carryforward encumbrances (transfers closing balances of financial commitments to next fiscal year) from June 30 and appropriations from last year total $25 million to cover the budget, according to Korach.

“It’s been a positive quarter,” Korach said. “Total revenue is up $3.5 million (10%) compared to last year.”

Property tax earnings rose largely due to additional revenue from aircraft parked at the McClellan-Palomar Airport. The Crossings’ net income is $60,000 higher than last year, a “very positive sign considering the golf course brought in record revenue last year,” Korach said. 

Councilwoman Teresa Acosta questioned the city-owned golf course’s outstanding $55 million loan still owed to the city’s general fund.

Korach said staff is preparing a policy to divert surplus revenue into a reserve account for capital improvements and to pay back the loan.

For the big three revenue sources — property, sales and transient occupancy taxes — Korach said the city collects 11% of an individual or business owners’ property taxes, or roughly $78 million for the adopted budget. The city gets 1% of sales tax revenue, giving the rest to the county and other entities. The city collects 100% of hotel taxes.

“The city applied conservative estimates with sales tax,” Korach said. “The first three months were quite different. We anticipated a reduction, but rising and sustained levels of inflation served as a boost to sales tax revenues. While this is good news, there is a level of uncertainty that continues to grow as we move forward.”

From a broader perspective, Sanford said the national economy is still seeing challenges with inflation, increasing interest rates and fuel prices, supply chain issues and a global semiconductor shortage impacting the production of products.

The city’s unemployment rate is at 2.7%, falling below pre-pandemic rates, according to Sanford, who cited major tech layoffs as a kind of “right sizing” from pandemic hiring and retention.

Also, retailers are projecting lower seasonal hires for the holidays, which is another sign of a potential recession or at least slower holiday season, Sanford said.

In 2021, Carlsbad’s gross regional product was $14.6 billion, growing by $1 billion from the previous year. The city’s gross rating point is the second highest in the county only to San Diego. Home values in Carlsbad ended the quarter at $1.45 million and have risen 18% over the past year, while home builder optimism is rising despite the ongoing challenge of costs. 

Another trend Sanford said is cropping up globally is tourism, which has recently experienced a steep decline due to the impacts of inflation and recession. But Sanford said Carlsbad is positioned as a destination city that could see strong tourism amidst a recession.

Mayor Matt Hall said while the numbers look positive, many of the same signs from the 2008 recession are surfacing.

“Those are very positive numbers but go back to ‘08 and ’09,” Hall said. “Property values went down 20% to 30%. As you work your way through it, it’s going to go down. When some people say it’s positive, to me it’s ‘Oh my God, this is going to hurt.’”

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