While acknowledging positive economic indicators, city finance staff advised continued fiscal discipline at the mid-point of the fiscal year, during a presentation to the City Council Tuesday. The City Council reviews the performance of the local economy, economic trends, city spending and future forecasts every three months as part of its stewardship and policy-making role.

City staff cited uncertainty about the timing of the next recession, high inflation and global instability as reasons to continue closely monitoring Carlsbad’s short term financial health. Looking to the future, the city is also working to address a projected gap between the city’s long-term funding needs and anticipated revenues.

“The city remains very financially healthy today, but we need to keep in mind that Carlsbad is entering a stage of life when the needs are changing, along with where the money will come from to meet those needs,” said the city’s Finance Director Zach Korach.

Under the city’s Growth Management Program, much of Carlsbad’s infrastructure and public buildings were paid for, at least in part, by fees from developers building housing projects in Carlsbad. With development patterns changing and the city’s infrastructure aging, the city has started the process of developing a new way to manage growth and pay for its impacts. A citizens committee has been studying the issue for the past year and is expected to bring forward recommendations this spring.

Strong local economy
In 2022, Carlsbad’s economy grew by roughly $1.07 billion, to a total gross regional product of $15.8 billion, second in the region only to the City of San Diego. The key industry clusters driving this growth are:

• Manufacturing
• Wholesale Trade
• Professional, Scientific, & Technical Services (Our innovation economy)
• Hospitality and Food Service

Main sources of funding
The city relies on property tax, sales tax and hotel taxes to fund the majority of its day-to-day services, which is why tracking these three areas is important to the city’s overall financial health. All three are generating more funding than this time last year.

Property tax revenue, up 11%
Property tax is the single largest source of funding for general city services. The City of Carlsbad gets about 19% of the property tax money generated in city limits. The rest goes to fund state and county services as well as special districts, such as school districts.

• Money from property taxes for the first six months of the fiscal year increased by 13% compared to the first half of the prior fiscal year. The primary reasons for the increase are:
• Current taxes are up by $2.6 million or 11% mainly due to increased assessed values.
• Supplemental and surplus property taxes are $348,000 higher when compared with the prior year. (Supplemental taxes cover property taxes paid when there is a change in ownership or for new construction)
• Aircraft taxes are also up $590,000 or 44% due to an increase in aircrafts being housed at the airport.

Sales tax revenue, up 3%
Sales tax is the second largest contributor to the city’s general fund. About 13% of the sales tax generated in Carlsbad goes to fund city services. The rest pays for state and county services.

• For the first six months of the fiscal year, sales tax revenues are $853,000 higher than the same period in the previous fiscal year.
• Automobile dealers, general retail stores, and restaurants account for more than three-quarters of the total sales tax generated in Carlsbad.

Hotel room tax revenue, up 21%
The city’s third highest general fund revenue source is Transient Occupancy Tax, which is the tax visitors pay on room nights at Carlsbad hotels and short-term vacation rentals. The city keeps 100% of this tax to use for local city services.

• TOT collected for the six months of the fiscal year reflects an increase of $3.4 million, or 21%, more than the first six months of the previous year.
• Currently, there are 4,775 hotel rooms available, 668 timeshares and 395 registered short-term vacation rentals in Carlsbad.
• The average occupancy of hotel rooms over the most recent 12 months was 70.5%, which is slightly just down from the previous 12-month period, which was 56.9%.
• Average daily room rates for this past quarter (Oct. – Dec) were $46 higher than the average for the same quarter in 2019.

Unemployment rate lower in Carlsbad
Through most of 2022, Carlsbad unemployment fluctuated between 2% and 3%. In December, the Carlsbad unemployment rate was 2.6%, compared to 4.1% at the state level and 2.9% at the county level.

Mid-year budget review
The city initiated a mid-year review of the fiscal year 2022-23 Operating Budget in November 2022. The goal was to review every department’s budget to ensure city spending was at or below what was planned and to look for new opportunities to save money. The city’s rate of spending was slightly lower during the first half of fiscal year 2022-23 than the same time last year. As of December 2022, the city had 46.9% of its budget remaining, compared to 46.5% the year before. In spite of significant inflation, following the review, no city department required additional funding to deliver the services expected for the remainder of fiscal year 2022-23.

New ambulance approved
The only major change to the current fiscal year’s budget was moving up the timing of a city ambulance purchase by six months to lock in today’s price and help ensure the new ambulance is delivered by the scheduled replacement date in fiscal year 2023-24. Staff had been tracking ambulance costs, which have increased by $80,000 since 2019, $40,000 in the past 18 months alone. Supply chain issues also raised concerns that the city should get its order in sooner than normal.

The city keeps all vehicles and equipment on a regular replacement schedule to avoid gaps in service and costly unanticipated repairs. This includes setting aside money on an ongoing basis so by the time the replacement is needed, money is available. The city had set aside $154,000 for the new ambulance so far. The City Council approved an additional $330,000. The new ambulance will replace one scheduled to be retired.

More information
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