Halfway through the fiscal year, city revenues are up 8% over this time last year, and the latest numbers show Carlsbad’s gross regional project remains the second highest in the region. Even so, the local economy continues to send mixed messages as experts try to predict what the post-pandemic “new normal” will look like.

The city uses a variety of data and models to forecast economic activity, which has a direct effect on city finances used to pay for local government services. By receiving quarterly updates, the City Council can closely track city spending and revenue trends to help inform its policy decisions.

City staff shared a January poll by the National Association for Business Economics showing that three-quarters of economists surveyed now predict that the U.S. will avoid a recession in 2024. An even larger number of those economists surveyed predicted growth in 2025. At the same time, the Conference Board’s February numbers show a decline in consumer confidence, following three straight months of increases.

“We are still feeling the ripple effects of the COVID-19 pandemic disruptions plus significant inflation, both of which make it harder to accurately estimate how much things will cost in the future and how much revenue the city can expect to receive,” said City of Carlsbad Finance Director Zach Korach. “When there is a high degree of economic uncertainty, we recommend a more cautious approach to city spending, which is reflected in the current year’s city budget.”

Over 80% of city revenue that funds day to day services like the police and fire departments, parks, recreation and libraries comes from three sources: property tax, sales tax, and the tax visitors pay when they stay in Carlsbad hotels and short-term vacation rentals. All three are influenced by the strength of the economy.

Property tax revenue up 10%
Property tax for the first six months of the fiscal year is up 10% over the same time period the previous fiscal year. The three main drivers are:

• An increase in the value of the airplanes and number of airplanes parked at Palomar Airport. When airplanes park at the airport, they pay property tax.
• Increasing home prices.

Sales tax revenue up 14%, but ….
Sales tax revenue from car sales accounts for a significant amount of the increase, and a large portion of that was due to a correction in how one particular auto dealer was reporting sales tax receipts to the State Board of Equalization.

• This can happen when sales tax from online vehicle purchases are assigned to the manufacturing location instead of to where the vehicle is delivered and/or registered.
• Carlsbad has now been reimbursed for that sales tax revenue that was mistakenly credited elsewhere.

Another contributor to the increase in sales tax is that things cost more now due to high inflation, and when prices go up, it affects the amount of sales tax paid.

• Retail shops and restaurants account for the other two largest contributors of sales tax revenue in Carlsbad.

Even though sales tax revenue is up over this time last year, multiple sectors are down over the first quarter of the fiscal year.

• City finance staff expect sales tax revenue growth to level off or even decrease.
• However, Carlsbad is expected to continue to benefit from healthy sales tax revenue overall due to the mix of businesses in Carlsbad.

Hotel tax revenue down 5%

• Industry officials cite a lessening of the post-pandemic surge in travel for the decrease.
• Room occupancy has remained fairly steady, but room rates have decreased about 3.5%.
• This is a sign that hotel tax revenue may be returning to a more expected pattern.

City spending on trackThe city’s Finance Department conducted a mid-year review of all department budgets to identify any new needs and potential areas of savings.

• At this time, departments have spent about half of their annual budgets and project to end the fiscal year within their allocated funding.
• Korach pointed out that city departments no longer receive an automatic year over year increase as they have in years past.
• Because of this, overall department spending has increased at a lower rate than the rate of inflation for the past couple of years.

The City Council approved two changes to the current fiscal year’s budget:

• Increasing the city’s fuel budget by $245,000 to account for increased costs. Although the city is transitioning to electric and hybrid vehicles, the majority of its fleet for police and fire services, public works and other needs is gas-powered today.
• $80,000 to complete an analysis determining updated storm water fees to pay for two things:

1. Protecting water quality in local lagoons and the ocean from contaminated storm water runoff
2. Maintain the city’s drainage system

Future outlook
Because city department spending is on track with projections, if revenues continue to come in higher than anticipated, the city will likely end the fiscal year with a budget surplus. The City Council can then choose from among several options outlined in its budget surplus policy.

Long-term, the city continues to show a structural deficit, meaning that if nothing changes, future ongoing expenses will increase at a higher rate than future ongoing revenues.

• However, revenues are coming in higher than projections, which combined with ongoing efforts to reduce costs, mean that the deficit is now projected to occur in fiscal year 2029, three years later than previous projections.
• This provides the city with time to continue to work on closing the gap.

The City Council will consider next fiscal year’s preliminary budget at its May 21 meeting. That same week, on May 23, the city will host a community budget workshop for those interested in finding out more about city financials and what is being proposed next year.