The City of Carlsbad’s main sources of income are up an average of 10% for the first quarter of the fiscal year, thanks to a continuing economic rebound following the lifting of COVID-19 restrictions. However, city finance staff caution that high inflation, upcoming pension costs and the possibility of a recession mean the city should continue to closely monitor its financial health and be ready to make adjustments if needed.

During its quarterly financial and economic update to the City Council Tuesday, city staff reported that property, sales and hotel taxes from July 1 to Sept. 30, 2022, are higher than for that same time last year:

Transient Occupancy Tax revenue up 16%

• The increase in tax paid by visitors on stays in Carlsbad hotels and short-term vacation rentals was up mainly due to higher occupancy rates and higher room rates compared to the same time period in 2021.

Property tax revenue up 32%

• The increase in property tax revenue is due to an increase in property values and more aircrafts parked at Palomar Airport than this time last year.
• Home values for the middle tier of housing in Carlsbad ended the quarter at $1.45 million and have increased 18% over the past year.
• Middle tier home values in Carlsbad increased at a slower rate from July to September compared to the previous quarter, dropping for the first time in the past three years.

Sales tax revenue up 5%

• The largest sources of sales tax revenue in the City of Carlsbad are automobile dealers, general merchandise stores and restaurants.
• Together, they generate 82% of the city’s sales tax revenues.
• All did better than this time last year, achieving record highs.

Caution advised 
Based on the first quarter of the fiscal year, not only were the city’s top three sources of general revenue higher than this time last year, but they exceeded staff’s projections. Finance Director Zach Korach said staff took a more conservative approach to forecasting because of several factors likely to affect future city finances in the near term:

• Inflation is increasing the cost of supplies, which makes it more expensive to conduct day to day city operations and to fund large construction projects.
• Global political instability, supply chain issues and higher interest rates contribute to economic uncertainty.
• Lack of available workers, especially in entry-level and low-skilled fields, are hampering some business growth.

Upcoming pension costs
Like cities throughout California, Carlsbad must continue to actively manage its unfunded pension liability, which refers to a funding gap between money available to pay retired employees’ pensions and the total future benefits they are owed.

The money available to pay retirees comes from three sources: contributions by the city based on a percentage of employee salaries, contributions from the employees and investment earnings made by CalPERS, a state agency that manages pension funds for its members, which includes cities, counties, special districts and state government.

This amount varies largely based on how well CalPERS’ pension fund’s investments are doing. The City of Carlsbad started the fiscal year with the second-lowest funded status (percentage of assets compared to liabilities) in the region. In fiscal year 2024-25, the City of Carlsbad will need to contribute more money to CalPERS because investment returns came in less than was expected in fiscal year 2021-22.

Business snapshot
The total number of job postings in Carlsbad from July to September, 15,217, was down slightly from the previous quarter, the first quarterly decrease in the past ten quarters.

• The median advertised salary for these postings was $45,700, which is on average $1,000 more than jobs posted in the previous quarter.
• Of jobs posted, 66% indicated an education requirement of High School/GED or less.
• According to Economic Development Manager Matt Sanford, Carlsbad employers have cited noted challenges in finding and hiring entry-level workers, especially front-line service workers.
• This has limited some industries growth.

National interest rates, which dropped significantly during the pandemic have surged as the Federal Reserve has steadily increased rates to fight inflation.

• One-year rates are currently at 4.05%.
• Ten-year rates are currently at 2.83%.
• 30-year rates are currently at 3.79%.

The Federal Reserve has also indicated further rate-hikes of up to .75% over the next several quarters are possible, as part of a strategy to control inflation.

Commercial vacancy rates improved in the office and retail segments this quarter, but ticked up in industrial.

• The industrial vacancy rate is now at 5.7%, compared to 10.8% pre-pandemic.
• The office vacancy rate is currently 10.8%, compared to 15.3% pre-pandemic.
• Retail, which was disproportionately impacted throughout the pandemic, continues to see elevated vacancy rates, although they have improved the past two quarters.
• Retail vacancy is now at 6.3%, compared to 5.3% pre-pandemic.

See the full report