ENCINITAS — Encinitas will absorb only a 3% reduction in budgeted General Fund revenues for the next fiscal year, which begins July 1, despite major COVID-19 related blows regionwide to hotel and sales taxes.
This relatively minor budget haircut illustrates, in part, differences in the coastal cities’ structural dependence on tourism-related revenues, especially transient occupancy tax.
These revenue losses won’t always translate into budget deficits, but sometimes rather, as in Carlsbad’s case, reduced budget surpluses.
“I think a lot of folks thought that the cuts may have been even deeper,” Encinitas City Councilman Joe Mosca said, at a June 10 council meeting.
City finance staff think Encinitas can get through the next fiscal year — virus-induced economic slump —without tapping any contingency reserves. Staff expects to maintain reserves at the fully funded level of $14 million, or 20% of operation expenditures.
“That’s a pretty good story for us,” Mosca said.
Teresa McBroome, Encinitas’ finance director, credits conservative planning and the buoying effect of high housing prices, which in turn maintain property assessments as a cushion against losses in other revenue sectors.
“Before [COVID-19] happened, [city staff] were already expecting a recession,” she said. “What we’re seeing currently in the housing market is that there’s a low inventory of houses, and so what’s happening is houses are being sold at higher prices. Because we are in the area that we are, during even the 2008 recession we never had a reduction in forecasts. We’ve taken all of this into account, and we’re expecting property taxes to remain strong. … We were really conservative. Usually, when there’s a recession, tourism comes back slowly, so we made really deep cuts [in our revenue forecasts] in that area.”
Transient occupancy tax revenues imploded as business travelers, tourists and spring breakers stayed home. But this revenue category makes up only about 4 percent of Encinitas’ revenue pie, by far the lowest among North County’s five coastal cities.
Likewise, property taxes, which have remained relatively stable, account for more than 70% of Encinitas’ General Fund revenues, the highest proportion among North County’s coastal cities, McBroome said in a June 13 e-mail.
Asked to comment on the huge difference between Encinitas and Del Mar, in terms of COVID-19’s impact on hotel tax revenues, McBroom told The Coast News: “That is primarily due to Del Mar having the L’Auberge hotel which is a high-end hotel that charges $500-$600 per night. So, part of the reason is that while Encinitas has double the [number] of hotels that Del Mar does, we have a different mix of hotels than they do.”
Even so, Encinitas’ relatively rosy budget picture doesn’t mean it’s out of the woods.
“This is not over. We’re coming out of it … quicker than we thought we would. But the future is unknown,” City Manager Karen Brust said at a May 27 budget meeting. “There’s a lot of talk about what may happen [i.e., COVID-19 resurgence], come fall or winter.”
“The regional, statewide and national impacts are quite large,” Mosca said on May 27. “Encinitas relies heavily on funding from all those sources. … A lot of those funding sources will not be going forward, and those opportunities [to address chronic issues in the region] may be missed for several years.”
Over the past year, the council has dipped into its unrestricted General Fund balance — the positive balance maintained in the city’s primary discretionary fund — depleting it from roughly $8 million to $2 million.
As a result, “We won’t have the ability to make these small budget adjustments” next year, Mayor Catherine Blakespear said on May 27. “I fear that we will have, in the next year’s emergent needs, similar to what we had in the last year, maybe even more, given COVID-19’s effect.”