Mayor’s Message: Tightening the Belt at City Hall

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Mayor Will O’Neill

By Will O’Neill, Mayor of Newport Beach

As Newport Beach’s Mayor and Chair of our City’s Finance Committee, maintaining a sound budget has been a priority from my first day on our City Council.

It is abundantly clear at the moment that some cities plan for black swan events and some have been proverbial ostriches with their heads in the sand hoping to ride crests of economic prosperity.

Newport Beach has always been a planner for the long-haul, which positions us better than most cities to maintain our core services during this pandemic-induced economic calamity.

An old adage states that a “budget is your plan reduced to numbers and spread over time.” In Newport Beach, we have always prioritized public safety and core infrastructure.

We have also prioritized the long-term view rather than short-term political victories. In other words, we plan for the maintenance and replacement of a building before we even break ground. This long-term planning ensures that every resident will not lose any of the services that they expect when they pay taxes when crises hit.

Our City’s Finance Committee met last week to discuss our current year’s budget that ends June 30, 2020. We also previewed next year’s budget that starts July 1, 2020.  Needless to say, the revenue projections are bleak.

For perspective, the Newport Beach general fund’s revenue estimate for budget year 2019/20 was $231.4 million just a few months ago. The three largest sources of revenue are property taxes, sales taxes, and transient occupancy (hotels, etc.) taxes.  Additional revenue comes from hundreds of other sources such as the millions of dollars from beach parking, which is currently closed.

Our finance department projects a decrease of approximately $13.5 million compared to the mid-year revenue estimates for fiscal year 2019/20. The precipitous decline is due largely to the staggering drop-off in our hospitality industry, restaurants, general consumer goods, and auto sales.

We also anticipate a significant revenue reduction due to the cancellation of nearly all recreation classes and facility rental fees, and a reduction in business license taxes, marine charter taxes, and parking revenue.

In response, our City Manager has cut expenses by $13.7 million with immediate actions that instituted a hiring freeze, cut outside contract expenses, reduced purchasing supplies, used an unallocated budget surplus from our prior fiscal year, cut employee travel and training, and reduced workers compensation transfers thanks to prior years’ prudence.

We anticipate a fairly austere budget for next year (2020/21) that will likely require cuts of $24.4 to $30.7 million as compared to 2018/19. Our City Manager presented her plan for meeting these extraordinary revenue reductions at our Finance Committee last week, and will present the same information to our City Council at our meeting on April 28, 2020.

Her plan includes a five-tiered approach totaling $37 million in reductions if all tiered reductions were implemented. By carrying forward some of the reductions from this fiscal year, next year’s budget is immediately reduced by $3 million. Tiers 1-3 include extending a non-safety hiring freeze, significant deferred capital spending, and maintenance and operations reductions that total approximately $21.7 million. Tier 4 removes $8 million from our general fund contingency reserve that currently contains approximately $52.6 million. Tier 5 includes reducing a $5 million discretionary transfer to CalPERS to cover pension obligations. Cuts beyond these reductions will result in service level cuts that we will do everything we can to avoid.

We have built up significant reserves for moments like this and any use will require rebuilding the reserve once past this crisis. Any reduction in amounts paid to cover pension costs will accrue interest of at least 7 percent, which makes pension payment reduction an expensive proposition.

To that latter point, it would be a miracle if CalPERS earned the 7 percent investment return for 2019/20 that is built into municipalities’ default payment schedule. Every government agency with money invested in CalPERS will assuredly see an increased unfunded pension liability when June 30, 2020 strikes.

CalPERS does not bill cities until two years after the fiscal year ends, but charges interest on the two years of payments not made. In other words, cities that can weather this immediate storm must still plan for a significant pension payment hike in two years; a hike some cities may simply be unable to meet.

We know how incredibly difficult self-isolation has been for so many of our residents and businesses. We remain absolutely committed to maintaining our core services and infrastructure without service level cuts. We are here now, and we will be here for our residents and businesses throughout.

It’s belt tightening time at our City, and we are prepared.

Will O’Neill is the Mayor of Newport Beach and is Chair of the City’s Finance Committee.

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