DEL MAR — The tourism-dependent city of Del Mar is projecting healthier financials for the year ahead thanks to the recovery of two major revenue sources, local hotel and property taxes, but sales taxes continue to recoup more slowly from the COVID-19 pandemic.
Despite seeing a $1.9 million loss in revenue over the past two years from the transient occupancy tax, also known as TOT or hotel tax, the city is now enjoying a boom in revenue exceeding even pre-pandemic times.
Following a series of record-breaking months for hotel tax revenue in the spring, the city has made $1.2 million more during the third quarter than last year and around $133,000 more than the same time in 2019. According to Del Mar finance manager Monica Molina, the city expects to see these receipts increase in the 2022-23 fiscal year.
“This source was one of the two general fund revenues that were hit the hardest during the pandemic,” Molina said. “On the positive side, it recovered faster than expected.”
Recovery is expected to continue with this month’s reopening of the Del Mar Hotel, the city’s iconic oceanfront inn now rebranded as the Del Mar Beach Hotel following a massive two-year renovation.
City staff shared these and other updated revenue projections with the Del Mar City Council on Monday while discussing the two-year budget adopted in June 2021, adjusting the city’s expected revenues and expenditures for the following year.
While sales tax is a smaller revenue source for the city’s General Fund, making up 10% of the fund versus 18% from TOT, the city faced larger financial losses during the pandemic in this area at $2.2 million.
Unlike the hotel sector, sales tax is still lagging behind pre-pandemic levels. The city brought in over $2 million in annual revenue in the year before the pandemic, with a projected revenue total of $1.8 million this year.
City staff expect a slight revenue increase next year to around $1.9 million, with hopes of further growth during the 2023-24 fiscal year.
“While it is improving, this revenue source is experiencing a slow recovery,” Molina said. “It’s expected to return to pre-pandemic levels in 2024.”
Del Mar officials are also waiting to see how sales tax will perform from the San Diego County Fair since the city receives a portion of this revenue. While this year marks the fair’s first full-scale return since 2019, the shorter 21-day run is expected to bring in less revenue than average.
Since the fair runs from June 8 to July 4, a small portion of its sales tax revenue will be counted during the 2022-23 fiscal year beginning July 1. According to City Manager Ashley Jones, the rest will be counted as part of the fiscal year 2021-22.
This year’s property tax revenue, which makes up 41% of the General Fund, came in around 4% higher than the previous year. As part of next year’s budget, the city is conservatively planning for another 4.4% rise.
The city also adjusted the list of capital projects set to receive funds over the next year, adding around $525,000 in additional priority projects identified during a goal-setting workshop in March.
These include a tot lot renovation project at Powerhouse Park, improvements to pedestrian walkways and ramps at the Beach Colony apartment complex, backup power systems for intersection signals, and initial design and assessment for San Dieguito Drive, the lifeguard driveway on 20th street, and the Hoska Avenue alley.
Saving for the future
With finances appearing to recover, the city will resume annual contributions to various crucial reserve funds this year after deferring payments during the first two years of the COVID-19 pandemic.
This year’s planned contributions include around $607,000 to the Pension Reserve Fund, $100,000 to the Equipment Replacement Fund and $200,000 to the Housing Reserve Fund.
With this contribution, staff expects the pension reserve to have a balance of around $4.4 million at the end of the 2022-23 fiscal year, enough to cover three years of pension payments if needed.
The pension fund is a particular stress point for the city, with around $13 million in projected retirement benefits that are currently unfunded.
In the coming months, the City Council will discuss their pension reserve policy to establish a yearly contribution amount to keep reserves stable. The choice between saving money for pensions and spending funds on current projects is difficult every year, but many council members worry about not having enough in reserves.
“It’s worth having a policy discussion, but I’m really loath to reduce contributions to the pension fund. We’ve just gone through two years of really hard knocks on that pension fund, and there are many good reasons … that we really need to pay attention to those contributions,” said Councilwoman Terry Gaasterland.
Like many jurisdictions, Del Mar is planning how to use the last bits of COVID-19 recovery dollars from the federal government, known as American Rescue Plan Act (ARPA) funds. The city was allocated $1 million in these funds, with the second half set to arrive this month.
While there are many areas of financial need in the city, ARPA funds have several restrictions and are mainly intended for one-time use. The money cannot be put toward pension funds or replenishing reserves and cannot be allocated in the budget before it arrives.
As the city waits for its arrival, staff introduced the option of putting the money toward a new fire engine, estimated to cost between $850,000 and $1 million.
Jones also advocated for the money to be used at least partially for road repairs and maintenance, noting there are also funds in the city’s equipment reserves that could go toward the fire engine.
“We had really significantly reduced the city’s road repair and maintenance budget during the pandemic, and I would say from a city management standpoint, our streets and roads are one of the things we consistently hear about from our residents, and that’s another eligible use of the money,” Jones said.
However, other primary equipment needs are vying for limited equipment reserve dollars over the next year, including the city’s financial software system, which will cost approximately $1.5 million to replace.