Hermosa Beach staff warns of $3.2M structural deficit; outlines cuts and revenue options

Hermosa Beach City Manager Steve Napolitano and staff opened a seven‑meeting budget review on April 28, presenting a high‑level fiscal outlook that projects a $3.2 million structural deficit in the general fund for the coming fiscal year.

Brandon Walker, who led the presentation, said: “Staff right now is projecting the city will have a $3.2 million structural deficit in the general fund next year.” He told the council that past surpluses were often one‑time windfalls — federal ARPA funds and vacancy savings — and that those sources are exhausted or shrinking.

Why it matters: The general fund pays for core services — parks, police, street repairs and basic public works — and Walker said relying on one‑time funds leaves the city unable to sustain those services without either structural revenue or spending reductions. “The city's current fiscal path is unsustainable,” Napolitano said, framing the workshops as an effort to identify a combination of spending cuts and revenue enhancements.

What staff showed: Slides and charts outlined vacancy savings over the last five years, carryover balances used to seed the capital improvement program (CIP), and a five‑year projection that assumes modest revenue growth but faster expense growth from negotiated labor settlements and rising contract costs. Walker emphasized there is no ongoing general‑fund dedication for capital projects and that FY‑26 currently shows no surplus the city can redirect to CIP.

Key risks and cost drivers: Staff flagged two county contract negotiations as significant upside risk to the city budget. Walker summarized an informal county proposal that would phase a roughly 26% increase in the fire contract over three years, and a lifeguard and beach‑maintenance proposal that could phase toward full cost recovery of about $3.4 million annually by year three. Those figures are proposals under negotiation and not yet final.

Near‑term actions and potential revenue: The presentation listed items already implemented or under active consideration: a parking‑rate increase (projected to add $1.5–$2 million annually), higher citation rates, improved business‑license enforcement (roughly $100,000 projected), and a pending cost‑of‑service fee study that staff estimates could yield up to about $1 million in recurring revenue if adopted. Walker also discussed options that would require voter approval, including applying the transient occupancy tax (TOT) to short‑term rentals and traditional sales‑tax increases (each quarter‑cent of sales tax was presented as a rule‑of‑thumb ~ $1 million annually).

Policy options and trade‑offs: Staff grouped options into immediate operational changes, near‑term policy options that may require council direction or voter approval, and long‑term economic development steps such as targeted up‑zoning, hotel/mixed‑use priorities, and maximizing sales per square foot. Walker cautioned that grant funding is competitive and rarely covers basic paving or routine infrastructure, so grants are not a structural substitute for local revenue.

Next steps: Staff scheduled a joint CIP meeting May 5, department budget presentations May 12, and potential budget hearings in late May and June with final adoption targeted for June 23. Staff requested council authorization to deliver the formal budget on May 30 (rather than the municipal‑code May 15 deadline) to allow incorporation of council and public input from the upcoming workshops.

Council and public reaction: Councilmembers questioned staff about short‑term‑rental revenue assumptions, the lifeguard proposal, and rising overtime costs; staff said more detailed departmental presentations will follow. Public commenters voiced a mixture of caution about tax increases and support for pursuing visitor‑paid revenue and parking modernization.

The meeting recessed to continue the budget study session after the regular council meeting; no council votes on policy measures were taken tonight.