The COVID-19 pandemic closed down much of the Long Beach economy in 2020 and the city's budget closed the year with a nearly $20 million deficit. Photo by Thomas R. Cordova.

City’s operating reserves could drain to near zero as officials work to plug $19.7 million budget hole

The COVID-19 pandemic blew a $19.7 million hole in Long Beach’s city budget in the 2020 fiscal year, but the impact could have been much worse, a city budget official said.

City officials originally projected that the deficit could be as large as $41 million, but the influx of federal and state aid and and some city revenue sources outperforming projections led to a smaller deficit, according to a memo sent to the City Council this month.

However, there is still concern over the city’s short term financial health as it will have to borrow from its reserves to cover the shortage. The City Council will vote next week to approve the withdrawal to the cover the shortfall.

Both the city’s operating and emergency reserves could be reduced below minimum levels outlined by city financial policy, with the operating budget being drained to near zero if the council approves the proposed budget adjustments Tuesday.

The operating reserve would be reduced from $13.5 million to about $860,000 and the emergency reserve from $46 million to $39.2 million.

The city’s emergency reserve is used to cover costs associated with natural disasters like an earthquake, while the operating reserve is used to cover general fluctuations in city costs, explained Grace Yoon, the city’s budget manager.

Yoon said the pandemic is an example of when operating reserves could be used as it produced unexpected costs that the city needed to create a buffer with reserve funds.

“It is not great,” Yoon said. “But we’ve never dipped into our emergency or operating reserves as long as I’ve been here.”

She acknowledged that having the reserves so low is a significant concern for the city, but added that the budget could be replenished quickly if city leaders prioritize saving parts of anticipated federal funds it may receive in the future.

If the city doesn’t receive an infusion of outside money, or if the council chooses to spend the funds rather than save it, replenishing the reserves could take longer and require budget cuts to rebuild the city’s reserves, Yoon said.

The city’s current fiscal budget was approved in September and required city staff to close a $30 million shortfall with a combination of furloughs and cuts to city departments.

Using budget cuts to build back up the reserves would be a “slow burn” method of accomplishing that and would likely take years to replace the tens of millions of dollars needed for the city’s reserves.

The $19.7 million deficit

When the first stay at home order was issued in March, businesses closed for what was expected to be a short amount of time. However, some of those closures and the limitations placed on others have stretched into 2021.

Two of the city’s largest revenue sources are connected to sales tax, which were reduced by businesses closures and residents having less disposable income amid rising unemployment.

The city also lost revenue from hotel taxes that weren’t collected due to the decrease in convention and leisure travel and from parking tickets, which it briefly put a moratorium on over the summer.

Other business licenses and fees were forgiven or given extensions as part of the city’s effort to prop up small businesses last year.

While sales tax was down from pre-pandemic levels, it still outperformed bleak projections and finished “around budget,” according to a city memo. However, Measure A sales tax, property tax and public works permit revenues all finished above budget.

There were other unexpected revenue increases in the city, Yoon said.

“Our cannabis revenue came in really well,” Yoon said. “It was a banner, banner year.”

Cannabis revenue, which includes sales tax and business licenses and fees, outperformed projections by $6.3 million.

The city’s vaccine rollout is giving hope to the budget team; the economic downturn could be shorter than the multi-year impact officials had predicted, Yoon said.

The struggle for the city as it recovers from the pandemic will be striking a balance with its limited financial resources. The city’s expenses are still outpacing its revenue, and now those needs will contend with economic recovery from the pandemic. The city is projecting shortfalls for the next three fiscal years, including another $32 million deficit for the next fiscal year.

“How do we prioritize funds and how do we find that balance between fiscally prudent but being responsive to health, life and safety needs that are eminent right now?” Yoon said. “That’s going to be our big challenge.”