On Tuesday, the City Council approved investing unspent money from last year’s budget to reduce future pension payments, replenish self-insurance funds, and pay for public safety equipment, additional school crossing guards, trails maintenance, art programs and other one-time costs not included in this year’s city budget.
Many cities end the fiscal year on June 30 with surplus funds. Carlsbad’s surplus is due in part to stronger than anticipated revenues from sales tax, property tax, and the taxes visitors pay when they stay at local hotels and short-term vacation rentals. Some city positions remained vacant for a period of time after an employee left, which saved money, and staff also found ways to reduce spending overall.
The City Council has a policy about how to invest surplus funds, starting with making sure the city’s rainy day fund, the “general fund reserve,” has at least the equivalent of 40% of the general fund operating budget on hand for emergencies. Carlsbad’s general fund reserve currently has the equivalent of 60% of the annual general fund operating budget, so no surplus funds were needed. Other priorities are to pay down pension debt and replenish various city funds, such as the workers compensation and risk management funds.
Many cities have seen their pension debts go up significantly this year because investment returns over COVID were lower than projected, and there is a delay in when these costs hit. Instead of making a payment directly to the state’s retirement system, CalPERS, the City Council decided to put money aside in a new trust account that allows the city to control how the money is invested. This move is expected to save the city about $8 million over the next five years.
The City Council approved remaining surplus funds to be spent on one-time costs associated with a variety of programs, including traffic safety, crime prevention, emergency medical response, public art, trails, and studies to determine future water and wastewater infrastructure needs.
Under the City Council’s financial management policies, surplus funds cannot be spent to fund ongoing day to day city services. That’s because the city doesn’t always know how much money it may have at the end of a budget year. Instead, ongoing city operations are funded mostly by tax revenues and the fees paid for utility services. The city’s budget is considered balanced when projected spending is at or below projected revenues.
Depending on the assumptions used, the city’s financial forecast for the next several years shows a structural deficit, where the money needed to fund city services at their current levels is more than projected revenues that pay for those services. The last two budget years, all city departments were asked to reduce ongoing spending to help close this future gap.
Because of the strength of current revenues and recent cost-cutting measures, the city has some time to develop a long-term strategy to maintain a balanced budget.
