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City Financial Update
Tom McGreal | Stratford Court

In October the Finance Committee and the City Council reviewed the preliminary annual results for the fiscal year ending June 30, 2020 and the First Quarter estimates for fiscal year 2021 covering the three months ended September 30, 2020.

As you know the City Council made budget cuts earlier this year in response to the expected revenue impacts of Covid – 19. In April the City cut the fiscal year 2020 budget by $3 million (fiscal year ending June 30, 2020) and then in June the City cut the fiscal year 2021 budget by $4 million (year ending June 30, 2021).
Although the audit of the FY 2020 results is still underway, the Preliminary FY 2020 results show that revenues exceeded the Covid budget by $234,329, Expenses came in below the Covid Budget by $132,471, and the Capital and Special projects cost $196,800 less than expected. As a result, the General Fund Reserves finished the year $640,000 higher than expected. The Contingency Reserve is $2.5 million or 17.38% (63 days of operations). Measure Q Reserves ended the year with $1.2 million. These are good results compared to the Covid budget estimates.

The FY 2021 Covid Budget review was very challenging given the uncertain timeframe for an economic recovery from the ongoing pandemic. Ultimately, cuts were made across the budget with $1.6 million reduction in Operating expenses including $1 million in employee layoffs and concessions, the deferral of all non-essential Capital and Special projects totaling $1 million, and the reduction of Reserves in the amount of $1.4 million from the original adopted budget. City Council also decided to place all Measure Q Projects on hold pending further review later in the year.

Based upon the very preliminary 1st Quarter FY 2021 estimates, the City is on track to achieve the FY2021 Covid Budget with some minor expenditure adjustments and several unexpected donations from the Del Mar Foundation, the Rotary Club and an anonymous donor. As a result, the Contingency Reserve will total $2.1 million or 14.6% (53 days of operations) and the Economic Uncertainty Reserve was increased to $300,000. Measure Q Reserves are expected to finish the year at $2.2 million.

The next chance to review financial results will be in February 2021 when the six-month results become available. The City’s biggest challenge stems from the current spike in Covid cases and the worrisome expectations that this will get worse going into the winter months. The economy will not return to normal until Covid is under control and while the prospect of a vaccine is encouraging, the timetable for economic recovery remains very uncertain.

What does all this mean for the City?

The City has taken the necessary budget actions, but given the outlook for the pandemic there is a significant risk that more will have to be done. Prudent financial management dictates that the City develop a contingency plan now that models further revenue impacts from Covid and sets trigger points for specific budget actions.

Here are some of the key questions that should be addressed in this planning process. How severely could an extended pandemic impact revenue? What level of operational spending is sustainable in declining revenue scenarios? How would these scenarios impact important Capital projects? When will reserves reach dangerously low levels if spending isn’t reduced fast enough? What is the effect on service levels in each scenario?

Doing contingency planning now will position the City to be ready to react quickly with well thought out actions. Prepare for the worst, but hope for the best!

 

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