Almost bankrupt or budget surplus? Arroyo Grande plans for uncertain financial future
In 2018, the fear of bankruptcy loomed large in Arroyo Grande.
That year, the city cut positions, closed City Hall on Fridays and increased fees to help avoid an anticipated budget shortfall.
At the time, city manager Jim Bergman told The Tribune that if the city hadn’t instituted those changes, and taken a hard look at its other expenses, Arroyo Grande would face bankruptcy within four years.
Now two years into that span, the outlook is looking quite a bit more rosy, though caution among the city’s top officials hasn’t entirely dissipated.
A recent 10-year financial forecast for Arroyo Grande predicted the city’s revenues would actually outpace expenditures starting in 2021, leading to a surplus in funds and significant growth in its reserves over the next decade.
In short, no budget shortfall — no bankruptcy.
But Bergman urged caution when looking at the forecast.
“It’s in many ways just a looking out, trying to predict what is possible,” he told The Tribune in an interview Friday. “What we have in here is a whole lot of assumptions.”
As budget season approaches, it’s more important than ever for residents to be aware of the realities and restrictions of the city’s finances, Bergman said. And that means planning for less-than-rosy outlooks as well.
“I think we closed the gap,” Bergman said. “But we also have these bigger things that will put all of us in a much better position if we start to try to tackle them.”
What did Arroyo Grande financial forecast say?
The forecast found that the city’s revenues would outpace its spending by $125,000 starting in fiscal year 2021. (The fiscal year begins in July.) It estimated city revenues that year at just under $19 million, with expenditures at $18.9 million.
Though both expenditures and revenue were expected to go up over the next 10 years, the forecast estimated a budget surplus each year of between $80,000 and $532,000 per year.
That money would likely in part go into the city’s general fund reserve, and would help bolster it above the city’s target fund balance. Tthe reserves should be about 20% of general fund expenditures, according to a city staff report.
According to the forecast, by 2029, the reserves could hold more than $10 million — roughly 45% of what its expenditures are expected to be that year.
The forecast hinges, however, on a continuously improving economic climate, Bergman said, something that is hard to predict.
Since the 2007 downturn, the economy has steadily been improving each year. In fact, the United States is currently in the longest economic expansion in its history, according to Forbes magazine.
Though there is currently no indication of another recession in the very near future, Bergman said the Arroyo Grande City Council felt it was important to plan for a more conservative budget, rather than rely on the economy continuing to grow.
There are also some large expenses the city needs to budget in when planning for the future, he added
Future city expenses and a potential sales tax
Chief among those expenses is paying down Arroyo Grande’s $20 million unfunded pension liability, Bergman said.
“$20 million is a lot of money,” he said. “It’s nothing to sneeze at, but in the big picture, it’s certainly not the worst. This is a system-wide issue.”
The city is also concerned about maintaining its infrastructure.
According to Bergman, the city needs to set aside about $4 million per year to maintain its roads, pipes and other facilities or structures.
“We know we own a whole bunch of assets and we don’t have enough money right now to keep those assets up the way we want to,” Bergman said. “It’s not just an aesthetic thing — it’s as things wear out, they get more and more expensive. You are maintaining them and replacing them.”
“That’s one of our big challenges,” he added. “How do we keep all of the stuff that we enjoy every day, maintained in a way that it doesn’t cost us more than it needs to cost us?”
On that topic, the city is taking steps to explore support for a potential sales tax ballot measure that could help to supplant some of those expected costs in the future.
A November 2019 survey conducted by True North Research, which cost $25,000, found that about 57% of those queried said they would definitely or probably support a one-cent sales tax. The measure would require a simple majority to be successful.
The fate of Oceano’s Measure A-20 to fund fire services at the community service district will also have an impact on Arroyo Grande’s future finances.
If the measure is unsuccessful, it could mean an additional cost to the city as it has to take on more responsibility for the Five Cities Fire Authority, for which Arroyo Grande, Oceano and Grover Beach currently split the costs.
“We’re all supporting Oceano and we want them to be successful in their vote,” Bergman said. “If it doesn’t go through then we are going to have to sit down — that’s another difficulty in thinking about budgets. We’re all in a waiting game until March 3.”
How to get involved
The forecast is important leading into the city’s budget making process, which begins this spring.
The city council will discuss its budget priorities at its next meeting in March, Bergman said. After that, the city will release a draft budget sometime in May, and is expected to finalize a budget at either of its meetings in June.
Public participation is welcomed during those times, he added.
“We know that it takes a long time to stare at these numbers,” Bergman said. “But we welcome everyone to be a part of that and everyone to give their comments. It’s their community and we want to find a way to be the best for everybody.”
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