Op/Ed: Newport Beach’s Financial Rebound

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Will O’Neill

By Will O’Neill, Newport Beach City Council Member

I will never forget our city’s March 12, 2020 Finance Committee meeting. The Minutes state that our Finance Director “reported COVID-19 has changed the budget strategy.”  That turned out to be an understatement.

Our city’s Finance Committee and City Council took swift action. We had three months left in our 2019/20 fiscal year and reduced our general fund budget’s expectation from $231.4 million to $217.9 million. This revenue reduction needed expenditure reduction too, which we quickly adopted.

The pandemic hit right as we were ramping up our budget planning for our 2020/2021 fiscal year too. As “two weeks to flatten the curve” stretched longer, we drastically reduced our budget expectations.

Fortunately, our budget relies heavily on property taxes. This fairly consistent revenue source does not yo-yo like other taxes thanks to the stability built into the system by Prop 13. Sales tax and the hotel bed tax (“TOT”) are the most reactive to system shocks. A city like Anaheim, for example, was always going to take a harder fiscal hit due to its reliance on tourism at Disneyland and the convention center.

Despite approximately half our budget relying on the consistent revenue source, we still reduced our revenue expectations from $231.4 million to $199.6 million; a nearly 14 percent reduction.

Which meant that we needed to close the revenue and expenditure gap. Giving credit to our City Manager and Finance Director, the Finance Committee recommended that the City Council adopt a “tiered” short-term budget reduction strategy that required quarterly review to move up or down the tiers depending on city revenues.

We prioritized public safety and never defunded any portion of our police, fire, or lifeguard departments.

We had also accumulated surplus funds from fiscal years 2018/19 and 2019/20 of $24.1 million (typically used to pay for one-time neighborhood enhancements and pay down long-term liabilities) in addition to the $52.6 million reserve to ward against this kind of “black swan” event.

Thanks to this accumulation, we needed to use only a small fraction of the reserve to balance our budget, which we re-filled before the 20/21 fiscal year was out.

Throughout the 20/21 fiscal year, we carefully monitored our tax and fee collection. As the economy lifted up, so too did our sales taxes and TOT. The stronger-than-expected revenues allowed us to put $15.9 million back into the city’s capital program and roll back some of the service cuts.

The city’s Finance Committee met to discuss how we ended the 2020/21 fiscal year on this past Thursday.  he tone was markedly different than our meeting from nearly nineteen months ago.

Our expenditures remained well below the pre-COVID budget figures and solidly below our revised budget, resulting in savings of $7 million. With better-than-expected revenues, too, our budget surplus coming out of the unstable fiscal year 2020/21 is projected to be an eye-popping $31 million.

Now, a few caveats must be explained. First, this is really three years of accumulated budget surplus. Only $7 million of that is from this past year, while the remaining $24 million is from prior years’ surpluses that we held as a backstop to the pandemic economy. Second, we did not rely on any of this money to balance our 2021/22 budget.  Third, this is one-time money. Which means that as a matter of policy we should not use this to add recurring costs to our city.

Instead, we can and should use this money to further pay down long-term liabilities (pension obligations and future facilities replacement costs) and fund our future investments in capital improvement projects and neighborhood enhancements. This approach will remain consistent with our City Council policies.

I thank everyone in our community whose resilience through this past year has placed us and our business community in better footing going forward. I thank our City Council and Finance Committee for their efforts to monitor and adopt proactive and reactive budgeting processes. And I thank our City Manager and staff for their diligence throughout last year.

We are indeed a resilient city built on firm foundations of community bonds.  #NewportStrong

Will O’Neill is the Chair of the Newport Beach Finance Committee, a current City Council Member, and was Mayor of Newport Beach in 2020.

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