DEL MAR — In anticipation of COVID-19 shrinking the city’s revenue portfolio by roughly one-fifth for the upcoming fiscal year, the Del Mar City Council will be forced to consider deep budget cuts at its June 15 meeting.
In order to close the projected deficit, councilmembers must decide what spending to cut, prioritizing essential over non-essential public services.
Non-essential items, according to city staff, include certain traffic and parking enforcement, lifeguard presence, undergrounding utility poles, citizen advisory committees, climate initiatives and maintenance of parks, medians and other “aesthetics.”
Staff forecasts a 19 percent revenue shortfall for the Fiscal Year 2020-21, which begins July 1. Those projects losses are at the high end of expectations for cities statewide.
The forecast for Del Mar assumes a steady pace of recovery throughout the year, though staff remains cautious, noting in their report: “This type of abrupt sudden economic recession has never occurred, and it is unknown how quickly the economy will recover, and local revenues will be restored.”
Property, hotel and sales taxes — the city’s largest revenue sources, normally accounting for two-thirds of General Fund income — will all take a hit.
Staff suggested that property tax growth will slow to 2 percent annually, down from a pre-pandemic expectation of 5 percent. Transient occupancy and sales taxes could each shrink by nearly half, as tourists and travelers stay home. Half of all sales tax comes from the Del Mar Fairgrounds and non-room related hotel sales.
The city generates myriad other General Fund revenues — from parking meters, facilities rentals, business licenses — all of which are expected to shrink.
The city operates water, sewer and runoff management through separate “enterprise funds” — which generate revenues through user fees rather than taxes — to the tune of $8 million annually. The city hasn’t published forecasts for how COVID-19 might affect these revenues, but staff doesn’t expect losses so severe as to require a General Fund bailout.
“If anything, there’ll have to be a deferral [of] capital projects” in order to balance reduced enterprise fund incomes, said Monica Molina, a city accountant, at a May 16 council budget workshop.
To address the looming budget shortfall, the council could tap its $5.3 million General Fund balance, portions of which are earmarked as various reserves — including $2.2 million for general contingencies and $1.2 million to cover pension liability. The deficit is large enough that “some use of reserves will be necessary in order to maintain essential city operations,” according to the staff report.
But the council can’t draw too much from reserves without risking the city’s credit. Maintaining some positive account balance communicates resiliency to creditors, enabling the city to borrow at more favorable interest rates when debt-financing large public investments.
In order to safeguard its AAA credit rating, the council should use no more than about $700,000 of the $2.2 million general contingency set-aside, said Ashley Jones, the city’s administrative services director, at the budget workshop.
“The City Council’s policy is to maintain a [General Fund contingency] reserve balance of 10-20 percent of the total General Fund operating budget,” Jones said in a May 28 email. “The current balance of reserves falls toward the high end of that range. Council intended to boost the reserve funding level to 25 percent, adding 1 percent annually, but COVID-19 puts that aspiration on hold.”
Jones sees little relief from higher levels of government on the horizon. The city is currently only eligible for $7,300 through the federal CARES Act, and potentially $77,000 from the County of San Diego.
“The coronavirus induced budget squeeze is unmasking the city’s preexisting heavy reliance on tourism-related taxes,” said Deputy Mayor Terry Gaasterland in a June 1 interview. “We haven’t needed to prioritize spending to the extent now required since the last decade of economic plenty kept visitors coming to the city and spending money.”
Gaasterland said she wants to see the city less reliant on hotel taxes, especially by negotiating with the state agency that runs the Del Mar Fairgrounds to repurpose that land.
“The fairgrounds is in trouble, and they have been since way before coronavirus,” Gaasterland said, citing shrinking revenues from horse races and the San Diego County Fair.
Gaasterland suggested the land could go to new office spaces, noting that on-site renewable energy would reduce building operating costs to attract tenants and grow the commercial tax base.
Druker believes taxes will eventually return to relatively normal rates.
“The assumption is that within a year or two [hotel] and sales tax will come back to similar levels,” said Councilman Dave Druker in a May 30 interview, citing rebounds after the terrorist attacks on 9/11 and the 2008 financial crisis.
Regarding alternative revenue options, Druker said it’s pretty limited as to what a city can really do.
“We just don’t have a ton of places to sell that would not cause other problems,” Druker said.
During a recent budget workshop, Councilwoman Sherryl Parks said the city missed an opportunity by not raising the transfer tax on real estate sales, referring to Proposition N, which voters defeated by a 50 percent margin in 2004.
Proposition N would have increased the transfer tax to $6 per $1,000 of a property’s sale price, up from the present rate of $1.10 per $1,000 of the sale value.
“The city has discussed exploring additional opportunities for future revenue generation, but I do not have any specifics on that at this time,” said Jones in her May 28 email.