Costa Mesa projects slim surplus but council demands line‑by‑line answers on $8.4M personnel variance

Costa Mesa city staff told the City Council on April 28 that the city is on track to end fiscal year 2025–26 with a small operating surplus and reserves above the council’s $55 million policy, while councilmembers pushed staff for detailed explanations after an $8.4 million difference in salaries and benefits compared with the adopted budget.

City Manager Cecilia Gallardo Daley said the city “remains on steady financial footing and is projected to end the fiscal year in a positive operating position,” and she introduced a finance team that reviewed revenue and spending drivers. Mark Ku, the city’s budget manager, told the council the adopted all‑funds budget was $224.9 million, with about $186.9 million planned for the general fund.

Why it matters: Costa Mesa’s fiscal health depends heavily on sales tax — roughly 40% of general fund revenue — so swings in consumer spending or large, unanticipated expenditure growth can quickly affect the city’s ability to fund services. Council members flagged a roughly $8.4 million variance in salaries and benefits versus the adopted budget and sought itemized explanations and policy fixes for future transparency.

Staff overview and headline numbers Mark Ku said sales tax remains the city’s largest single revenue source and that revenue projections now put general fund receipts roughly $7 million above the amount adopted last year. He said the city is projecting to finish the year with about $61 million in fund balance, above the council’s $55 million reserve policy.

On the spending side, staff said the main drivers are filling previously budgeted vacancies (in public safety and elsewhere), routine step increases and negotiated MOU raises, and large annual CalPERS payments. “We prepaid $31,000,000 to CalPERS this year and saved approximately $1,000,000,” Ku said. Staff also flagged higher insurance premiums and overtime as contributors to expenditure growth.

Council scrutiny: the $8.4 million delta Several councilmembers pressed staff to reconcile how an increase of roughly $6.9 million in projected revenue was nearly offset by higher expenditures. One councilmember summarized the concern: “We’re seeing a difference of 8.4, and we have vacancies … there’s at least $4,000,000 of additional spending unexplained,” and asked staff to identify contributors at the million‑dollar level.

Staff responded that the adopted budget carried a citywide vacancy savings assumption (about $4.4 million) and that filling those vacancies — especially in public safety — reduces the assumed salary savings. Staff also said overtime (projected near $9.7 million this year, down from $10.2 million) and step/MOU increases for bargaining units together account for a large portion of the variance.

Departmental drivers and reclassifications Staff identified department‑level movements explaining some net changes: police personnel and overtime increases account for a large share of higher spending, parks showed higher part‑time and seasonal costs after recruitment and retention efforts, and roughly $7 million of reductions in the “non‑departmental” line largely reflect reclassification of legal costs and transfers into the city’s self‑insurance and capital funds (including moving a $1 million allocation for the Fire Station 2 project into capital).

Public comment and accountability requests A public speaker identified as Ralph urged staff to convert vacancy assumptions into an understandable headcount figure and reiterated concern about a persistent overtime “built‑in overrun.” Several councilmembers asked staff to provide a department‑by‑department breakout and to explain what internal controls or council approvals are in place when midyear spending grows by several million dollars.

Next steps Staff told the council a proposed FY26–27 budget will incorporate the higher, realistic personnel costs and include a 5% target for departmental cost containment. A proposed budget study session is scheduled for May 12; the finance and pension advisory committee (FIPAC) will review materials on May 7; and staff aims for budget adoption on June 2 (with a June 16 backup date if more time is needed).

The council did not take formal votes during the discussion. Members asked staff for detailed followups: (1) a headcount‑equivalent for the $4.4 million vacancy assumption, (2) department‑level million‑dollar contributors to the $8.4 million delta, (3) a list of non‑core operating items proposed for one‑year deferral, and (4) the controls or notification thresholds staff will use when projected spending departs materially from the adopted budget.

The City Council closed the special study session after public comment and council remarks, and staff said they will return with more detailed line‑item information at upcoming committee and study‑session meetings.