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?

It Just Doesn’t Add Up

Costa Mesa City Hall has issued a press release  telling us the City will have a surplus of at least $6 million this year.  The press release also asserts that “Over the past four fiscal years, the city’s budget surpluses have added up [emphasis added] to $19.4 million.”

So our General Fund should really be growing, right?  We don’t have audited numbers yet for the 2013-2014 Fiscal Year, but the Comprehensive Annual Financial Reports (here) show less than a $5 million increase from 2010 to 2013.

This shows a decrease in the General fund from 2012 to 2013.  

Sometimes money is transferred between different City funds.   Let’s look at the balance in all of our government funds.

Hmmm.   There’s a drop in total fund balance from 2012 to 2013, too.

With all those surpluses, our fund balance should be well on the way to pre-recession levels.  Then why have our assets crept up so little? 

We did take a loss due to closure of the Redevelopment Agency.  The City Council had little to no control over that.   

On the other hand, the Council majority is crowing about revenue increases over which they had had little to no control, either.   If they want to own the up side, then they need to own the down side as well.

Where did the “up side” come from?  Obviously, a big factor was the recovering economy.  City budgets  show that annual sales tax revenue increased from $34.6 million in FY 2009-2010 to $45.8 million in FY 2012-2013. 

In addition, Costa Mesa voters approved an increase in the hotel tax in November 2010, the same election which put our current Mayor in office.  Just the increase in the hotel tax rate brought in a little under $4 million over 2010-2013, with additional increases due to the economy.

We also got over $5 million from narcotics asset seizures from 2011-2013.  Since it takes a few years for the Feds to process these funds, we may still have a little of that trickling in from past seizures, but with our decimated Police Department don’t expect to see much of that generated in the future.

Speaking of decimation, we also got a couple million as our share of the assets remaining in the now-defunct helicopter program.

Wow with all that money coming in, Costa Mesa should be rolling in dough.  Our reserves should be way up, shouldn’t they?

Sure, if the City didn’t spend the surplus.  In November of 2013, also before the audit was released, the City began making plans for spending the “FY 2012-2013 surplus of $7.1 million”.   Ultimately a spending plan for $5.5 million of the surplus was adopted.   

At the same time, proposed spending for Fiscal Year 2013-2014 was increased by a $1.568 million.  That means “extra” money at the end of 2013-2014 includes a carryover of the “extra” $1.568 million from 2012-2013.  Has anything else been double counted?

We do know one thing that isn’t counted in the overall figures for government fund balance—decreases in the self insurance fund recently analyzed by Anna Vrska (link).