Costa Mesa dips into ‘CAN’ to fill $2.9M budget gap, next year could be worse

To fill a financial shortfall, caused by a slowdown in sales tax receipts, Costa Mesa officials Tuesday approved deferring $2.9 million in public works projects that were included in the the city’s 2024-25 budget.

Using the funds earmarked for such projects brings the city out of compliance with a local capital asset needs ordinance also known as the CAN, passed in 2015, which mandates 5% of the city’s general fund revenue be set aside to pay for capital improvements.

The CAN ordinance includes an exemption for “economic downturn, natural disaster, emergency or other unforeseen circumstances,” which the Costa Mesa City Council exercised in a regular meeting Tuesday.

Officials agreed to operate below the 5% threshold to square away $2.9 million remaining from a $3.6 million 2024-25 budget gap and to pay back “the CAN” over the next five years by building repayments into future budget plans.

But as an even worse economic forecast looms in the foreseeable future — with Costa Mesa finance staff projecting a possible $6.5-million gap between revenue and expenditures in the coming fiscal year — those who helped craft the law warn such waivers set a “dangerous precedent” for the city’s finances.

Talk in council chambers Tuesday largely focused on which improvement projects would be cut, staff having already recommended authorizing the CAN’s “Emergency Exception” clause.

City staff initially put forth a list of 10 projects that could be deferred, amounting to a collective $2,872,776 in savings, including several building and infrastructure upgrades at City Hall, a $450,000 west side restoration project, a butterfly garden and a $400,000 modernization of the Costa Mesa Country Club.

Two other alternatives featured edits offered by the city’s Finance and Pension Advisory Committee (FiPAC) — which spared City Hall heating and air handler upgrades but put proposed senior center and sewer line improvements ($250,000 apiece) on the chopping block — and a modification proposed during an April 22 council study session.

Public Works Director Raja Sethuraman said even with the deferrals, this year’s list of projects was more than enough to keep department staff busy.

“With the requested deferral of approximately $2.9 million we’ll still have 96 projects in our capital improvement projects, with $90 million in projects to be implemented over the next two to three years,” he told the council Tuesday.

While the action taken by the council sews up an immediate fiscal hole, questions still linger about what could happen to the CAN fund next year as an even more protracted slowing down in revenue is projected.

Former Costa Mesa councilmembers and mayors Steve Mensinger and Jim Righeimer issued warnings about dipping into the CAN in a letter addressed to the council and submitted it as a public comment at Tuesday’s meeting.

They said the ordinance specifies the capital fund set aside can only be canceled by a declared fiscal emergency.

“What’s happening today doesn’t follow that legal path,” the pair wrote. “Instead, the council is trying to reframe a raid on the CAN fund as a ‘budget adjustment’ or a technical allocation change. That’s not honest.

“If you’re reaching into the savings account, just say it: you’re declaring an emergency. Because by law, that’s the only time you’re allowed to do this.”

Neither Righeimer nor Mesinger appeared at Tuesday’s meeting. But Mayor John Stephens challenged their interpretation of the ordinance.

“We don’t need to declare an economic emergency, we just need to declare that there’s an economic downturn, which I think there clearly is,” he said. “[And] the language of the CAN ordinance is not entirely clear it has to be an unforeseen economic downturn.”

In addition to proposing the $2.9-million withdrawal be replenished via budgeted payments, Stephens asked staff working on the 2025-26 operating budget to be on the lookout for cost-saving solutions — including using reserve funds, eliminating job vacancies, cutting consultant contracts and a possible repeal of the ordinance.

“We need to be very creative there,” the mayor said. “That includes putting the CAN ordinance on the table for repealing or amending, and it includes using reserves we’ve built up and all the other items I mentioned.”