SH City Council considers raising taxes during budget workshop

Reserve funds will help cover COVID-19 revenue shortfall, but long-term ‘structural deficit’ continues to threaten Signal Hill finances, officials say.

The Signal Hill City Council conducted its annual public budgeting workshop on May 28, reviewing the City’s preliminary budget for the next two fiscal years starting on July 1.

A final 2020-2022 budget will be up for council approval on June 23 and will include other expenses the council discussed related to the police department, community services and consulting costs for assessing the cannabis industry and increasing the sales-tax rate through a ballot measure.

A pie chart showing the distribution of the Signal Hill Police Department’s budgeted expenses for the next fiscal year. Public safety accounts for 42% of total Signal Hill expenses in its proposed 2020-2021 budget. (Courtesy City of SH)

Revenue shortfall
Signal Hill’s total revenue is below budget this year by about $878,000, City Manager Hannah Shin-Heydorn informed the council in a memo introducing next year’s budget.

See related story: Signal Hill feels the pinch

The City will need to draw on its reserve funds to help cover a $2 million shortfall in next year’s 2020-2021 budget because of reduced revenue projections and higher expenses, Deputy Finance Director Sharon del Rosario said during the workshop.

The budget projects lower sales-tax revenue based on decreased auto and restaurant sales due to COVID-19-related closures, del Rosario said. The City also projects lower property-tax revenue due to potential delinquencies.
“Sales tax represents the largest of our revenue sources at 65%,” del Rosario said. “Property tax is at 10%.”

The City is conservatively assuming a longer economic rebound period, del Rosario said, projecting a total revenue of $20.1 million for the next year and $22.1 million in expenses. The following year’s 2021-2022 budget shows a similar imbalance of $1.8 million. ​

“We are in uncharted territory with regard to the current economic landscape,” del Rosario said.

To make up next year’s budget shortfall, each municipal department reduced its projected expenses line-by-line to cut $700,000, del Rosario said. However, higher insurance obligations of $600,000 offset most of those potential savings.

The City was able to further reduce its expense budget by $1.1 million by cutting employee-related costs, including furloughing workers, freezing new hires, and reducing cost-of-living adjustments and health benefits, del Rosario said.

The City will transfer $880,000 from its reserves to its operating fund to cover the remaining budget imbalance, mostly drawing $760,000 from its “rainy day” Economic Uncertainty Fund– which reduces that reserve by 16%– and two insurance funds.

Though those funds are being used to balance the budget and also pay for infrastructure improvements, del Rosario said the City is in good financial shape in terms of reserves.

“The Economic Uncertainty [Fund] with the General Fund ‘unassigned’ balance makes up 72% of operating expenditures, which still meets our strategic target of 50%,” del Rosario said.

However, insurance payments, pensions and other obligated costs continue to increase, del Rosario added.

The State’s mandated hourly-rate increase to $14 per hour as of Jan. 1, 2021 is among those costs, as are city-service costs that increase annually according to contract, such as for street sweeping, trash collection and landscaping, del Rosario said.

She added that premiums for liability, property and workers-compensation insurance are also expected to increase by 17% or $1.9 million. And because CalPERS pension costs are partially covered by market investments, which have been affected by the recent downturn, the City’s portion of those costs may increase.

The City’s unfunded accrued-liability (UAL)– the difference between projected pension-plan benefits and its assets’ current market value– is also increasing over time, del Rosario said.

All those obligations are creating a longer-term budget imbalance, with expenses projected to outpace revenue over the next five years, continued a trend that began four years ago, del Rosario said.

“We are headed toward a future structural deficit, which has now been amplified by the impact of COVID-19,” she said.

Increasing revenue
To help make up the revenue shortfall, the council discussed adding a ¾-cent increase to Signal Hill’s current sales-tax rate as a ballot measure. If more than half of Signal Hill voters approve, the city’s sales tax would increase from its current rate of 9.5% to 10.25%, the highest allowed under State law.

Signal Hill currently gets 1% of its current 9.5% sales tax, Shin-Heydorn said. If approved, the increase could generate an additional $4 million to $5 million per year, she said.​

Shin-Heydorn noted that Long Beach and most other surrounding cities have sales-tax rates of 10.25%. Only Commerce and Downey have lower rates, at 10% each.

The council agreed to add an additional $70,000 to next year’s budget to hire a communications consultant to educate residents on the measure. It also agreed to budget $20,000 to pay Los Angeles County to hold a place on the ballot for the measure. Both expenses will come out of the city’s Economic Development Reserve, Shin-Heydorn said.

She told the council that according to a city survey earlier this year, about 60% of Signal Hill residents said they would approve such a ballot measure. Residents were most interested in the funds being used to maintain streets, sidewalks and park facilities, she added.

The council also agreed to budget an additional $40,000 for a consultant to assess the revenue impact of allowing cannabis businesses to operate in the city. That expense will also come out of the Economic Development Reserve, Shin-Heydorn said.

See related story: Signal Hill City Council approves next step in rebuilding Well No. 8

Councilmember Edward Wilson, who noted that he works for a cannabis cultivator in Long Beach, said that since retail sales have been increasingly moving online, raising the sales-tax rate may not generate enough income for the city.

“It will provide a bump for us for a few years, but ultimately we still need to diversify our revenue base,” he said.

A graph of Signal Hill cannabis-survey results from January indicating approval for allowing certain types of cannabis businesses within the city. (Courtesy City of SH)

All council members agreed to budget the cannabis-consultant expense except Vice Mayor Tina Hansen.

See related story: Is Signal Hill ready for the cannabis business? Residents show 50 percent of support

The public will have an opportunity to comment on the updated budget at the council’s June 23 meeting before it votes to implement the budget on July 1.

The next regular Signal Hill City Council meeting will take place virtually Tuesday, June 9 at 7pm. For information on accessing and participating in the meeting, visit the
council’s webpage
here.