Long Beach’s fiscal future looks hazy, officials say

[aesop_image img=”https://signaltribunenewspaper.com/wp-content/uploads/2019/12/LB-Budget-1.png” panorama=”off” credit=”Courtesy City of Long Beach” align=”center” lightbox=”on” captionsrc=”custom” caption=”Map marking Long Beach’s budgeted FY 2020 capital-improvement projects, funded in part with Measure A sales-tax revenues that have been consistently higher than projected.” captionposition=”left” revealfx=”off” overlay_revealfx=”off”]

During a special meeting last week, the Long Beach City Council conducted a study session on its budget projections for the next few years. Despite expected surpluses this year and next, projected budgets for fiscal-years 2021 through 2023 show shortfalls of up to $22 million.

Tom Modica, acting city manager, told the city council on Dec. 17 that while Long Beach is doing well in terms of overall economic activity, job opportunities and credit ratings, it also faces several financial challenges.

Chief among those are municipal expenses– especially labor, pension and insurance costs– growing faster than inflation and new revenue.

“Revenue is increasing year after year,” Budget Manager Grace Yoon said. “[But] revenue growth is just growing at a slower pace than the overall expenditure growth.”

The City also faces significant costs to update its aging infrastructure, Modica said.

“We know that our infrastructure is old,” he said. “We’re making the biggest investment we’ve ever made through Measure A, but of course there’s still deferred costs.”
Long Beach voters had approved Measure A– a 10-year added sales tax to help fund infrastructure repair and development and public-safety services– in 2016. Under the measure, the City will continue collecting a 1% sales tax through 2022, reducing the rate to .5% during the measure’s remaining four years.

Yoon said that the City’s projected general-fund surplus at the end of fiscal-year (FY) 2019, though indefinite right now, will be higher than budgeted in the range of millions of dollars, partly because Measure A generated larger revenues than expected.

However, she said that the additional surplus is not enough to cover critical needs, especially labor costs.

Revenue and expense projections for FY 2020 tell a similar story, but FY 2021 projections are uncertain, partly because of a new accounting system limiting how much data is available, Yoon said.

“There’s also very little information at this point on FY 20 trends,” she said. “Many revenue sources require more information to analyze.”

Yoon said that staff will have more accurate projections by the council’s next budget update in March or April 2020. Those projections will be used to develop the FY 2021 budget.
Nevertheless, Yoon indicated that the City is currently projecting budget shortfalls in FY 2021, 2022 and 2023, ranging from $5 million to $22 million each year.

The shortfalls assume no economic downturn through 2023 and no change in municipal service levels, Yoon said. But they include higher expense impacts from the City’s new labor agreements with its police and fire departments.

Yoon added that the City may be able to take advantage of some adjustment opportunities to reduce the projected shortfall– including tax measures to increase revenue, and pension reform and insurance-cost reductions to decrease labor expenses– but those would be more limited than in the past.

“Over the past several years, major adjustments became available to help mitigate the shortfall and avoid major service reductions,” Yoon said. “These adjustments were able to mitigate the underlying issue that ongoing revenue growth was not enough to support the cost increases of our normal services.”

Yoon also said that making changes such as reducing workers-compensation insurance increases the City’s risk of having to pay for an unfunded liability in this area.

Instead of depending only on adjustments, Yoon said staff will look into other opportunities to decrease the City’s projected shortfall, such as increasing parking fees and fines, finding ways to reduce costs for municipal services, including not replacing department vacancies, and siphoning more gas-fund revenues to the general fund, within the 12% that the city’s charter allows.

“The projected FY 21 shortfall of $5 to $12 million is expected to be a significant challenge,” Yoon summarized.

She noted that if the budget-balancing adjustments are not enough to eliminate the shortfall, individual department budgets may have to be cut, leading to reduced city services.

“Any remaining shortfall amount that needs to be issued as reduction targets to departments may result in noticeable service impacts, [since] many departments have already reduced and streamlined their budgets,” Yoon said.

When the City develops its FY 2021 budget this coming spring, it will include departmental expense-reduction options, including potential cuts to public safety, Yoon said.

“Any necessary reduction targets will be issued to departments, with potential adjustments made to the targets issued to public safety, depending on the size of the shortfall,” she said.

There may be other factors that come into play by then, including continued higher than expected sales and property taxes on the plus side, but also negative impacts from reduced oil revenues and higher liability-insurance costs, Yoon said. Lower fund-reserves may also impact the City’s bond ratings.

But Yoon cited the City’s financial oversight and Long Beach’s resilient economy as strengths.

“We recognize the strong economy as a very positive factor that may help our future outlook,” she said.

During public comment, resident Larry Goodhew suggested that the City sell its new city hall and move to a lower-cost facility to help cover the impending budget shortfalls.

And during the city council’s regular meeting later that evening, a group of students led by Prof. Katie Dudley in CSULB’s Dept. of Recreation and Leisure Studies gave a
presentation showing that Long Beach would benefit economically from a dedicated tourism department.

During that meeting, the council also gave final approval to reduce some cannabis-business tax rates from 6% to 1% to encourage more such jobs, though staff had indicated it might not lead to higher revenues.

While these and other ideas might or might not help balance future budgets, Yoon said City staff relies on economic forecasts to determine whether or not to adjust the its budgeted revenue streams.

“The outlook looks a little bit positive,” she said. “At least what the economists are saying.”