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!

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).