On Monday, October 19, at a special meeting of the Cypress City Council to review the City’s budget, Matt Burton, Director of Finance for the City of Cypress, began his unprecedented presentation on the City’s financial status by reviewing the fear that blanketed budget discussions leading up to the adoption of the 2020-2021 City budget.
The presentation was unprecedented because the lockdown ordered by California Governer Gavin Newsom in March 2020 knocked the props from under the State’s economy. With no real way to even guess about the effects on the City’s revenue from sales tax and the hotel bed tax, the Cypress City Council thought it would be prudent to receive budget updates quarterly, reporting on changes in both money coming in and money going out.
Unprecedented also because no one is saying how long the lockdown will continue. Until a vaccine is vetted by the State? Until the rate of new cases vs. tests given drops below 2%? Until the State averages fewer COVID-19 deaths than influenza deaths?
Mr. Burton has stuck to the historically cautious budget management that is traditional in the City. On graphs illustrating five-year projections, he has struggled to keep the the red line (money out) below the green line (money in). Every year that the red line didn’t cross the green line was a win.
At Monday’s presentation, the graph showed roughly parallel lines with no crossing — but the red line was entirely above the green line, showing an annual deficit between $2.1 million and $3.1 million.
But… the reliability of these projections is highly questionable because nobody will know what’s really happening until it has already happened.
So plan for the deficit. The City Council voted to borrow $2.1 million from reserves to cover the projected deficit for the next year. Those reserves are robust because of the City’s aforementioned historically cautious budget management, and are meant to be used under just these sorts of circumstances.
Then comes the unexpected.
Under the category of not knowing until it’s already happened: the City unexpectedly finished the 2019-2020 fiscal year with about a $4 million dollar surplus!
How did this good news come about?
Revenues were a bit above mid-year estimates, with surprising sales tax resilience, new property tax allocations, and CARES Act funding. This good news was tempered by a slump in hotel bed taxes and tax revenue from Los Alamitos Race Course (which is within the City of Cypress).
Expenditures were below mid-year estimates due to major City-owned facilities being closed and services cut back from March to June. For example, part-time and hourly employees at the Community Center have not had any work hours scheduled, and were effectively furloughed. Further, the Police Department has about 10 unfilled patrol officer openings. While the hours are covered through overtime, savings comes from not paying benefits for the 10 open positions.
Finance Department staff recommended that $2.1 million of the unexpected surplus be used to repay the money drawn from reserves. That will leave $1.9 million for later use.
About that unexpected sales tax revenue
The final sales tax revenue for fiscal 2019-2020 came in at merely about $100,000 lower than projected before the coronavirus lockdown. A number of factors contributed to this happy surprise:
- residents turned to buying stuff online rather than in a store, and did not pinch pennies;
- State and Federal stimulus funds;
- residents’ disposable income moved into new types of purchases;
- business adapted quickly to changing conditions.
On the other hand, sales from one business to another, gasoline consumption, and going out to eat all shrank.
While fiscal year 2020-2021 trends are encouraging, peering ahead in order to make plans is hard because we do not know how long pandemic conditions will last, we do not know the ongoing impact of changed spending patterns, possible further government response is unknown, and the volatility of sales from one business to another makes forecasts into guesses.
Another thing to keep an eye on is the departure of a major sales tax producer from the City by the end of 2020.
About flat-lined hotel bed tax revenue
The hotel bed tax revenue (or Transient Occupancy Tax) was down $600,000 from the mid-year forecast. The steep drop was due to business and tourism travel coming to a virtual standstill. All the major hotels in the City are suffering through a high vacancy rate and low rental rate.
The next budget review will be in January, when the members of the new Cypress City Council will review what everyone can hope will be ongoing positive budget news.