Costa Mesa study session: staff outlines $6.4M sales-tax shortfall, recommends CIP deferrals and soft hiring freeze

Costa Mesa City Council members examined a midyear budget update on Tuesday, March 11, 2025, after Finance Director Lorraine Molina told the council staff now projects about a $6.4 million reduction in general fund revenues for FY 2024–25, largely tied to weaker sales tax receipts in retail and the auto sector.

The shortfall has prompted staff to present a series of options: realign $1.4 million of street‑sweeping costs entirely into the gas tax fund (which would free roughly $700,000 in the general fund); temporarily defer about $2.9 million in general‑fund‑supported capital improvement program (CIP) projects that have not started; and consider using up to $3.6 million from the city's economic reserves. Staff also proposed a soft hiring freeze for non‑sworn positions effective April 1 and said it would continue monitoring federal grant obligations.

Molina opened the presentation with the city's revenue picture: the adopted All‑Funds 2024–25 budget is $239.8 million with a general fund of $189.9 million. "Sales tax represents 43% of our general fund revenues," Molina said, and staff now projects sales tax receipts will fall to about $75.2 million for the year, a decline that produces roughly a $6.4 million hit to revenues. Property tax and some other categories remained close to adopted estimates; cannabis tax receipts are slightly higher than expected, Molina said.

Why it matters: Costa Mesa currently holds roughly $60.4 million in general fund reserves, including an $9.0 million economic‑reserves category that staff proposed could be tapped to cover the projected $3.6 million shortfall. Molina presented the tradeoffs of using reserves versus trimming CIP and other expenditures, noting that using the full $3.6 million would still leave the city about $1.8 million above the council's $55 million minimum reserve threshold.

Staff recommendations and examples of proposed deferrals - Move the entire $1.4 million street‑sweeping appropriation to the gas tax fund (staff described this as restoring the original intent of the funding split and said it would free about $700,000 in the general fund). "We are recommending to move the full $1,400,000 into the gas tax fund," Molina said. - Defer roughly $2.9 million of general‑fund‑supported CIP projects that have not yet started; staff identified items such as a butterfly garden, certain city hall projects, senior‑center improvements and a Westside restoration line item as candidates for temporary delay. - Implement a soft hiring freeze for non‑sworn vacancies beginning April 1; the city manager described the freeze as a higher level of scrutiny before filling positions, with HR and department heads reviewing whether openings are essential to deliver council priorities.

Federal grants and outside risks Finance staff also flagged federal actions that could affect some funding streams. The presentation noted federal grant awards supporting projects in Costa Mesa (Adams Avenue multipurpose project, signal modernization, Fairview Road improvements and others) totaling several million dollars, and called out annual federal allocations such as CDBG and HOME funding (together about $1.4 million annually) that the city uses for housing and program support. "On January 7, the president signed an executive order essentially freezing federal funding," staff said, and staff told the council it is monitoring the legal situation and expects to seek reimbursement for work already performed if courts allow reimbursements to continue.

Public comment and council reaction Several members of the public criticized the staff report as presenting a single option and insufficient detail. Resident Ralph Debota said the staff report offered "only 1 option" and urged the council to ask staff to present more scenarios and a year‑to‑date breakout of capital expenditures. James Peters and other commenters urged fuller transparency on line‑by‑line expenditures and pressed for more options to balance the budget.

Council members pressed staff for more detail before making final decisions. Council Member Andrea asked for a prioritized CIP list ("red alert, needs to get done, nice to have") and suggested exploring energy‑savings performance contracts for HVAC work. Councilor Lamar asked for scope details about senior‑center HVAC replacements; staff said the work would replace old rooftop units that are nearing failure. Several council members asked for a reordered CIP that shows which projects are truly at risk of higher costs if deferred and which are safe to delay because work has not started.

On bonds and public safety facilities, City Manager Raja said the administration is planning a bond for Fire Station No. 2 within the first six months of the next fiscal year and described an approximately $10–12 million bond sized to cover that station; he said smaller, short‑term improvements are planned for the Westside Substation while the city evaluates longer‑term financing for other stations.

Process and next steps Council members did not take a formal vote on the staff proposals at the study session. Staff said it would "put a pause on the $3.6 million recommendation" to allow more time for council deliberation and promised additional, more detailed materials: a midyear agenda report at the March 18 council meeting, a more comprehensive CIP presentation (staff proposed an April 22 study session and additional committee reviews), and recommendations on which vacant positions (if any) to remove or defer as part of the FY 2025–26 budget process, with targeted follow‑up in May.

What was not decided and what remains uncertain No final action was taken to tap reserves, and the council withheld direction on CIP deferrals pending the requested priority list and additional data on which projects would actually begin this fiscal year. Staff said roughly half of the projected sales‑tax loss is already realized in collections; the remainder is a projection for the coming months, and staff will continue to work with HDL (the city's tax‑analysis consultant) and with department heads to refine assumptions.

Ending City staff emphasized the city's comparatively strong reserve position and said the recommended actions are intended to protect core services while the council considers longer‑term structural adjustments. Council members requested a deeper prioritization of CIP projects, more detailed vacancy and position analyses tied to council priorities, and billing/fee/cost‑recovery updates to be returned with the April–May budget discussions.