Show Me the Money

For the past five years, we’ve been hearing about the drop in Costa Mesa’s reserves and the need to replenish our reserves.   We’ve heard politicians brag about rebuilding the reserves.  Then why are our reserves still so low, even with record revenues?

This evening, March 5, the City Council will decide what to do with the City’s “extra” money.  The problem is defining what’s “extra”.  Many would consider the “extra” to be excess of revenues over expenditures.  You take in $80 million, you spend $75, and then you decide what to do with the remaining $5 million if you have no other obligations.

Unfortunately, that’s not what’s currently being suggested for Costa Mesa.  At the end of the fiscal year, we took in $4.5 million more than we spent.  But the adopted budget would have put us $5 million in the hole. So we’ve got $4.5 million more in our bank account, but we're $9.5 million ahead of the dire financial straits projected earlier in the budget year.

Now, instead of being glad we dodged a bullet, we’re thinking about a shopping spree.  Yep, we saved $4.5 million and to celebrate the City’s poised to adopt a plan to allocate $9.5 million.   Of course,  $2 million of that $9.5 million would go back into our general fund balance, so we’d only deplete our savings by $3 million.  But that’s nothing to celebrate.

The Council has been presented with a policy that would enshrine this sort of shell game.  Instead of allocating only excess revenues, future City Councils would allocate what’s called the “positive variance”, i.e. the sum of excess revenues plus money we might have pulled out of savings but didn’t.  It’s positive as long as we don’t do any worse than our conservative worst case scenario.

But does it really matter? How different are these?  

The positive variance has exceeded revenue minus expenditures every year since 2010 except 2012.  In 2010, there was a “positive variance” of $3.5 million even though the City depleted our general fund balance by over $7 million.  We just didn’t eat up as much of our reserves as originally feared.  Does anyone think the City should have spent the $3.5 million “positive variance” as well?

The total difference since 2010 years adds up to about $10 million.  Spending our "positive variances"  would potentially cut our reserves by $10 million over just a few years.  

The City's proposed financial policy does include priorities  for allocating the funds in question.  However, while replenishing reserves is listed first, this apparently doesn’t reflect its priority over other uses.  Paying off unfunded pension obligations is listed second, with capital spending last.  Yet, recommended use of the “positive variance” is mostly to capital spending.  Only $2 million would be returned to reserves, for a net loss of $3 million in reserves. 

This is barely greater than the low point of the recession.  

It’s actually lower if even our current modest rate of inflation is taken into account.  The $41.5 million low in 2010 would have to have grown to about $45.4 million to have the same buying power.

How is it that a general fund balance of $41.5 million was considered a disaster a few years ago, but in 2015 about the same amount is suddenly OK?

Look How Much We Saved!

Should Costa Mesa dip into its savings account when the City has record breaking revenues?  That’s what’s been suggested in our mid-year budget report to be considered at the Tuesday, February 10, Study Session (link).

Were we to adopt the suggested spending plan, our general fund balance would drop lower than at any time since the recession.  And it would be barely $1,000,000 more than the low point in 2010, at the close of the recession. That’s not even keeping up with inflation!

But how can that be?  Didn’t we run a surplus?

Yes we did, but the report suggests spending nearly double the surplus.  Spending proposals address the “budget variance” instead of the surplus.

So what’s the difference?

The net increase in revenue over spending is what we commonly call the “surplus”.  This is sometimes called the “increase in fund balance”.  For 2013-2014, audited figures (here) show a net increase of $4.55 million in the general fund balance as of June 30, 2014. 

The variance is the difference between where the City was projected to be and where it ended up, financially speaking.  If the budget projected a surplus of $2 million to the general fund and we ended up with a $5 million surplus, the $3 million difference would be the variance.  Cash on hand would have increased by $5 million, but since a $2 million increase was already anticipated, only the $3 million would be the variance.

Similarly, if the budget projected using $20 million out of savings but we only used $12 million, then $8 million would be the variance.  Sure you’re not as bad off as anticipated, but no one with an iota of fiscal responsibility would see that as time to start an $8 million shopping spree.

The 2013-2014 budget projected dipping into general fund reserves to the tune of $5 million.  Fortunately, the City spent less and generated more in revenue than anticipated, resulting in a general fund surplus of $4.55 million.  Instead of going into the red and using $5 million out of our savings account, we are $4.55 in the black.  The total variance (NOT surplus) is the amount previously anticipated to be in the red ($5 million) plus the amount in the black ($4.5 million), i.e. $9.5 million.

About $3 million is already spoken for, leaving a $1.3 million surplus.  Since our general fund is still so far below pre-recession levels, you might think common sense would dictate saving all of the remaining $1.3 million surplus.  Especially since the midyear budget report says we are pretty much on track to come out even in the current year, without a surplus. 

Instead, it’s suggested that the City go ahead and use not just the entire surplus but the rest of the “variance”, too, continuing to gut the General Fund.  Remember, every penny over the $4.55 million surplus means additional draining of our reserves. 

As proposed, $4 million would be allocated to capital projects, and $2 million would be returned back to the general fund reserve.  This would result in a net loss to the general fund of about $3 million, but is being billed as “an opportunity to increase reserves”.  Huh?!?!?

As seen above, our general fund hasn't increased much since the recession—less than use of savings included in the $9.5 million variance.

The variance includes funds saved BEFORE the recession even started. 

Wow! At this rate, pretty soon they'll be spending funds we built up during my previous stint on council, twenty years ago.

It could be worse.  What if the entire variance (NOT surplus) were spent?  That would bring the general fund balance lower than it’s been at any time since well before the turn of the millennium!

But look how much we saved!