Costa Mesa adopts budget, closing gaps without cutting public works projects

After some last-minute reconfiguration, the Costa Mesa City Council Tuesday passed a 2025-26 budget that prevents the city from dipping into reserves and moves ahead with public works projects, but at the expense of some planned IT infrastructure upgrades.
Officials had been grappling over how to compensate for projected revenue declines without violating a local ordinance mandating 5% of the city's $186.9-million general fund be set aside for capital improvements. Given its other expenses, namely employee salaries, the city could not cover the $9.3-million earmark for such improvements.
The capital asset needs (CAN) requirement had been funded in prior years but was breached last month when city leaders needed to close a $2.9-million gap forecast for the current fiscal year, in the face of slumping sales tax receipts.
Exercising an emergency exemption clause that includes unforeseen economic downturns, council members waived the mandate for 2024-25 but promised to pay back the money over the next five years.
As the city headed into another daunting economic forecast for 2025-26, with a projected $3-million decrease in revenue, finance staff Tuesday recommended another CAN exemption during a council budget hearing.
Finance Director Carol Molina explained a portion of the $9.3-million funding requirement could be covered by CAN balances left over from prior years ($2.2 million), lease revenue and money from a bond payment for a new fire station ($3.8 million) and an increase in city user fees ($300,000), approved earlier at Tuesday's meeting.
The proposal would spare layoffs, but the remaining $3-million capital needs deficit would mean having to postpone nearly $1.8 million in public works projects earmarked for CAN funding, including upgrades to the city's TeWinkle and skate parks, a new roof at the Norma Hertzog Community Center and City Hall maintenance, among others.
Addressing concerns provided by council members during earlier budget discussions, Molina floated three options for addressing the gap.
The council could waive the $3 million in required funding through the CAN exemption, pay the full amount back over 10 years and not move forward with the $1.8 million in public works projects.
If council members wished to keep the projects on track, they could alternately take $1.8 million from a general fund facilities reserve account, narrowing the CAN gap to $1.2 million, then pay that back over the next decade. Or, they could do essentially the same thing, but apply $1.2 million in slated IT infrastructure upgrades toward the leftover gap, then pay back the IT fund.
Molina said using the IT money now would not harm the city's tech maintenance plans, as the department was in the process of developing a five-year strategic plan.
'There is technically no plan in 2025-26 for these dollars. As a result, I am OK moving forward with reallocating that $1.2 million,' she said.
Council members debated the merit of postponing capital projects, particularly those already being designed or bid out to contractors, and potentially dipping into the city's reserves, which could tarnish Costa Mesa's AAA credit rating as the city seeks to use $12 million in bond funding for renovating Fire Station No. 2.
Mayor John Stephens proposed continuing the budget talk to later in the month, saying he needed time to approve recently incoming information regarding the city's consultant contracts and employee positions and vacancies — areas that could potentially result in suggested cuts.
But Councilmembers Arlis Reynolds and Andrea Marr supported moving forward with waiving the full $3 million CAN requirement now and possibly revisiting the budget, and the ordinance itself, during the city's mid-year review process next year.
By that time, Reynolds reasoned, a facility condition assessment already in the pipeline would be completed and could provide new direction for prioritizing capital projects.
'Let's give ourselves some runway, get the assessment in and see what the economy looks like,' she said. 'I just think we're going to be a lot smarter at the mid-year than we are now.'
However, Reynold's plan later shifted to an un-presented 'fourth alternative,' proposed by Molina. The finance director suggested the $1.2 million IT funding could be used, along with an additional $600,000 in leftover CAN balance money, to prevent taking $1.8 million from facility reserves.
It would still leave the city $1.8 million short of the $9.3-million CAN ordinance requirement but would leave reserve funding in place, while preventing any interruption in public works projects.
Reynolds made a motion, and Molina's fourth option was approved in a 6-1 vote, with Stephens opposed. In remarks, Marr said she'd like to revise the CAN ordinance mandate, potentially applying it to only hard infrastructure improvements and capital maintenance and not broader items, like the repayment of bonds.
'The idea that we've got a separate pot of money that is sacrosanct, that we won't touch because we're going to use it for infrastructure, that's actually not true — that's not how we're using the CAN,' Marr said, suggesting a narrowing of the law's scope.
'I'm OK with waiving it [now] because I think we can do better and we can continue to do it in a way that serves the original intent of why, I believe, the CAN was created.'

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