We're gonna' spend. . . updated 

Let’s start our look at Costa Mesa’s finances with a simplified survey of our debt. We’ll try to relate the finances to a home budget; some folks have criticized comparing the City budget to a business’s because “the City doesn't make a profit.”

If we survey what we owe, and when it’s due, we’ll see how much income we need. That’s true whether we’re sitting at the kitchen table looking for money for a Hawaiian vacation, or sitting at a Council desk looking for money to fill potholes.

Short-sighted for the short term

The City’s financial position changed during the 2008 downturn. To reduce expenditures, the Council decided to put off replacing equipment, to defer repairs and maintenance, and to skip funding reserves – the City’s savings account. Personnel pay and retirement was increased, though.

The Council also emptied the savings account (our Reserve) of about $33 million.

That’s like the homeowner deciding not to put money in savings, not to repair the leaking pipes, and to try to keep the old Studebaker running for another year. This helps pay off the MasterCard, but Visa still had a large balance so he empties the savings accounts to pay it off.

To cut expenses, and reduce the credit card bills this year he decides to downgrade the cable plan, buy only generic medicines, and to buy milk at Costco. He won’t paint the house or repair the roof this year to help pay for last year’s vacation, and he won’t replace the car to help cover the Christmas expenses.

Renting money by bonding

Costa Mesa has issued bonds to finance buildings and operations. The interest due this year is about $5.5 million, or a little more than 5% of her anticipated revenue. Municipal bonds are issued by local governments to raise money for public works projects:

A bond issuer (the City) sells the bond to the bond holder (the investor). The bond holder lends the issuer a fixed amount of money for a certain period of time in exchange for regularly scheduled interest payments. Issuing bonds is like renting money.

We have bonds from 1966 and 1988 maturing every year, and pay the principle on them at rates averaging a little over $1.24 million each year. These bonds were issued for construction of the Civic Center, including City Hall, the Police Facility, the Telecommunications Center, and Fire Station 5, with the 1988 bonds issued for widening Victoria Street.

We have issued bonds totaling $2,365,000 for Costa Mesa Community Facilities. The bonds’ annual principal payments range from $120,000 to $210,000; these average about $158K per year.

Back at the kitchen table, the homeowner allocates money to pay for his mortgage – principle and interest, and for a loan to repair his sidewalk. As he sorts through the paperwork, he realizes that he at least knows exactly what he owes for the coming year – and into the future.

How much and when isn't clear -- but it's owed  

Costa Mesa has a couple of debts that aren't that clear. The state has notified us that we have $224 million in unfunded liabilities, and we also have $35 million in unfunded medical benefits. Here’s how that works:

City employees don’t have 401K retirement funds; they have guaranteed payments for life when they retire. While they’re working the City sends a payment every month to the State. CalPers invests the money in the hope that the return on the investments will fund the guaranteed retirement payments. To do that, CalPers’ investments must earn 7.75% each year – otherwise the City must make up the difference as the money allocated for retirements runs out.

If CalPers had invested in the Dow-Jones securities it would have earned 7.26% in FY 2011-2012, but instead it invested in greener and more “politically correct” securities and earned about 0.7%. So, there’s some amount that the City will have to pay for the retiree funds that’re used up, but the exact amount isn't known, yet. We have a similar problem with medical payments we've promised to make, but haven’t allocated money to pay – unfunded debts or liabilities.

Update: CalPers announced that their portfolio increased 13% during the first six months of this fiscal years. That's a lot like a gambler cheering when he hits one slot machine jackpot -- after losing his last two paychecks.

If by magic

Of course, if the State’s investments suddenly increased in value by about 700% we wouldn't have unfunded state liabilities. Or if the homeowner discovered a rich uncle who was very glad to meet him, his debts would be paid.

Adding it up

In Costa Mesa we have about $15.8 million in principle and interest due this year. And, we know that about 75% of our budget goes for personnel expenses. So, we expect to spend more than $63.2 million (four times the $15.8m) for personnel and bonds, before we try to fill a pothole or save for our unfunded liabilities.

Update: the recent audit indicates that we spent a few million dollars less than we took in. Pundits are suggesting giving raises to City Employees, hoping we assume, that the surpluses will continue. That way the raises will be funded by the City's surpluses. 

Setting priorities

Last year the Council sent a preliminary budget back to the staff for rework. They exerted their authority to set priorities for the City’s expenditures. The Council majority funded repairs and maintenance to benefit the citizens. They gave pay and retirement increases a lower priority in the budget. And, they balanced the budget and put money into Reserve accounts.

That’s why we see projects to improve the Westside, repair roads, and improve parks. It’s the City Council’s right – and responsibility – to set the priorities and to keep Costa Mesa financially sound. The Council seems to be putting citizens’ needs high on the priority list. That’s good news, for once.

What source

Now where are we going to get the money to pay the bills that will surely come due, even if we don’t know exactly when?