Long Beach city officials are projecting higher than expected budget deficits for the next two fiscal years as oil revenue continues to decline, but they add that strong economic growth in other sectors will help mitigate negative impacts.
In a presentation on the city’s fiscal outlook at a special meeting of the city council earlier this month, financial management staff said the city is expected to face budget deficits totaling $10.6 million from Fiscal Year (FY) 2017 to 2018. The new forecast anticipates a $5.9 million deficit in FY 2017, which begins October 1, and a $4.7 million deficit in FY 2018.
The combined deficits are $300,000 more than what was predicted last November but $4.7 million less than what was estimated last July at the release of the current budget for FY 2016, which city officials said is on target to end with a $675,000 surplus. City officials added, however, that they are carefully monitoring the city’s financial situation the rest of the year.
City of Long Beach Budget Manager Lea Eriksen said the sharp drop in the price of oil has had a major negative impact on city revenue.
After reaching nearly $100 a barrel in FY 2014, United States crude oil fell steeply last year and then in January hit a 12-year low, dropping below $30 a barrel. Experts have blamed the price drop on a global oversupply of oil and geopolitical factors. The price of oil has since started to rebound in recent weeks and as of March 11 was above $37 a barrel.
After the city downgraded its budgeted baseline for the price of oil to $55 a barrel last year, the city is now budgeting oil at an average of $35 a barrel, Eriksen said.
“We’ve had to again adjust our projections for oil since there is no indication that prices will return to the $100 level,” she said.
Since FY 2014, total oil revenue for the city has decreased by nearly $60 million, with uplands oil revenue, which covers some General Fund operations and one-time investments, dropping by $26.7 million and tidelands oil revenue, which covers operations and capital investments in the tidelands area, decreasing by $32.8 million, Eriksen said.
Oil revenue tied to the General Fund now accounts for just 1.4 percent of the budget ($5.8 million) while in FY 2014 it was 4.4 percent of the budget ($17.5 million), Eriksen said.
The oil price drop has also negatively impacted revenue derived from Proposition H (a 25-cent increase in the city’s oil production tax approved by voters in 2007), the city’s oil barrel tax, oil-related property tax and a portion of sales tax, Eriksen said.
In addition, the city has seen less tax revenue from gasoline service stations because of lower gas prices at the pump and from pipeline franchises because of lower natural gas prices, she said.
At the same time, the city is forecasting increases in employee pension costs related to paying off unfunded liability and changes the California Public Employees’ Retirement System (CalPERS) board made to its investment strategy in November to minimize risk, requiring cities to contribute more toward pension plans, Eriksen said.
In addition, portions of park maintenance previously covered by the County of Los Angeles will now be paid for by the city, she said, adding that the city is also expected to see higher employee costs for maintenance at expanded parks, staffing at the new Michelle Obama Branch Library in North Long Beach and implementing the city’s new minimum wage policy.
Though oil revenue continues to decline, Mayor Robert Garcia said projected deficits, representing about 1.5 percent of the entire city budget, are “manageable” and relatively comparable to what was projected last November thanks to “conservative budgeting practices.”
“Even though oil continues to tank beyond our expectations, our General Fund budget deficit has essentially remained the same for the next two years,” he said. “We’ve still got to keep the belt tight, but we’re looking forward to seeing where this goes.”
Garcia added that a rebound in the price of oil, which he said has been predicted, would help fund needed tidelands projects, such as the new Belmont Plaza pool, but the city isn’t counting on it.
Eriksen also pointed out that the city’s financial situation would have been worse if not for fiscally prudent decisions made by the city council and mayor in recent years, noting that the upcoming deficits aren’t nearly as much as the city dealt with during the recession.
Over the past 10 years, the city has made about $134 million in budget cuts and has eliminated nearly 700 positions while employee labor unions have agreed to pension reform, expected to save the city more than $250 million in pension costs over a decade, she pointed out.
In addition, Eriksen said the city council has “held the line” on new spending to minimize future budget issues and has invested in efficiencies, critical infrastructure and technology innovation to reduce operating costs.
The city’s strong economic health, particularly with regard to sales tax revenue, will also help offset the decline in oil revenue and labor cost increases, she said.
Still, the upcoming deficits will likely result in service cuts to some departments, Eriksen said, adding that the community will have an opportunity to weigh in during the budget process.
City Manager Pat West said the upcoming budget shortfalls are going to be “difficult” to handle but smaller than previous deficits thanks to the mayor’s and city council’s “fiscal discipline.”
“We’ll be taking steps to proactively address the shortfall, looking at all options, focusing on public safety and our core services,” he said.
West said the city will develop structurally balanced budgets regardless of the outcome of the proposed ballot measure for the June 7 election in which city officials are calling for an increase to the sales tax to cover public infrastructure needs and boost police and fire departments.
The city is currently negotiating new contracts with most of the city’s unions, with police and fire union contracts expiring September 30. At this time, it is not known how much money will be needed if pay raises are approved later this year.
The city manager is expected to present the FY 2017 proposed budget to the mayor, as required by the city charter, by July 3. After a series of budget meetings, the city council is required to approve the budget no later than September 15.