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Home My WebLink About2020-04-14; City Council; ; Economic effect of the COVID-19 pandemic on the City of CarlsbadCA Review CKM Meeting Date: April 14, 2020 To: Mayor and City Council From: Scott Chadwick, City Manager Staff Contact: Laura Rocha, Deputy City Manager, Administrative Services laura.rocha@carlsbadca.gov or 760-602-2415 Subject: Economic effect of the COVID-19 pandemic on the City of Carlsbad Recommended Action Receive a presentation on how the COVID-19 pandemic has affected the City of Carlsbad’s finances. Executive Summary The public restrictions enacted by state and county health officials to slow the spread of COVID- 19 will significantly reduce the amount of revenue the City of Carlsbad receives from the sales tax and the transient occupancy tax as well as, to a lesser extent, other city revenue sources. This report provides forecasts of the pandemic’s anticipated economic effect on city revenues in coming months. The city is well prepared for this emergency. The costs of the city’s extensive emergency response efforts are being tracked for potential reimbursement by the state and the federal governments (see Exhibit 1). Following direction from the city manager, staff have already begun taking steps to curtail discretionary spending. Department budgets are being reviewed to prioritize projects and identify expenses that can be postponed. And, the City Council has set aside emergency reserves for economic uncertainty necessary for the city to continue providing essential city services through this emergency while working to minimize the impacts on the community. Discussion Background The pandemic of the potentially fatal COVID-19 disease has led to public health orders requiring people to stay at home aside for essential trips or jobs and forced many businesses across the state to suspend or reduce operations. These restrictions have had disruptive effects on the economy, across the nation, the state and in Carlsbad. Consumers have postponed making major purchases as well as routine shopping. Businesses deemed non-essential have had to close or suspend operations. Hotels and resorts and other hospitality businesses have April 14, 2020 Item #3 Page 1 of 7 been particularly hard hit. For the City of Carlsbad, staff is forecasting declines in revenues in two of the city’s three primary revenue streams, in the sales1 and the transient occupancy tax.2 In the budget for fiscal year 2019-20 approved by the City Council, it was estimated the city would have annual General Fund expenses of $167.1 million and General Fund revenue of $170.5 million. Of that revenue, 22% was estimated to come from sales tax, 17% from transient occupancy tax and 42% from property taxes. Revenue from the third major source, the city’s share of property taxes, may decrease slightly in the next fiscal year because the county is working on a plan to assist small businesses and residents who have been financially affected by COVID-19. Staff expects this decrease, estimated to be about $1.2 million in fiscal year 2020-21, to be temporary, and not significant in the long-term. The pandemic’s impact is expected to be much greater on the city’s sales tax and transient occupancy tax revenues. Sales tax Staff worked with Avenu Insights & Analytics, a sales tax consultant, to make informed forecasts of sales tax revenues if the COVID-19 restrictions continue through April 30, 2020, or through May 31, 2020, and follow with a recession through the end of fiscal year 2020-21. These forecasts used a model that considers which businesses have shut down or have had to cut back on their operations, and which ones remained open. This model factored in how much sales taxes these businesses have historically paid the city. The city’s sales tax is generated from a diverse set of businesses, and the effects of COVID-19 are expected to vary. The city’s sales tax decrease will primarily be the result of lower sales at businesses in general retail, industry, construction materials, automotive sales and at restaurants. Some of these decreases are expected to be offset by online sales. However, overall, consumers are expected to have a lower demand for products and services, and to postpone many or least their major purchases until after the end of the COVID-19 crisis. This chart shows the financial scenarios for two forecasts, one based on the COVID-19 restrictions continuing until April 30, 2020, the second based on the restrictions continuing until May 31, 2020. 1 The sales tax rate in Carlsbad is 7.75%, of which 1% is allocated to the City of Carlsbad. The city also has a share of the San Diego County sales tax pool. 2 The transient occupancy tax is a 10% surcharge on the cost of hotel rooms and other lodgings in Carlsbad, including short-term vacation rentals April 14, 2020 Item #3 Page 2 of 7 Sales tax revenue forecast scenarios Both forecasts predict an initial drop in the city’s revenue from the sales tax, followed by a return to pre-COVID-19 levels near the end of 2021. This analysis anticipates a temporary increase in sales tax revenue above pre-COVID-19 levels in fiscal year 2021-22 because that is when the city is scheduled to receive sales tax proceeds that have been deferred during the current emergency. This deferred sales tax revenue is estimated at $5 million. Transient occupancy tax With its location, beaches and Legoland, Carlsbad is a destination resort city that provides lodging for visitors at 45 hotels in 4,750 rooms as well as other short-term vacation rentals. Each of these lodgings contributes to the city’s revenue through the transient occupancy tax. Such hospitality businesses have seen their occupancy rates drastically decline and some have had to curtail their operations because of the COVID-19 pandemic. To develop this forecast, staff assumed that occupancy at hotels, resorts and other short-term lodging under the stay-at-home health orders will drop to 0% and that the average daily rates charged by these businesses will be 10% less than what it was at that time. April 14, 2020 Item #3 Page 3 of 7 Transient Occupancy Tax revenue forecast scenarios Leading hospitality industry experts say tourism businesses may rebound from the economic effects of the pandemic more slowly than other sectors, which indicates the City of Carlsbad is likely to see its sales tax revenue return to a pre-crisis level before its transient occupancy tax revenue does so. However, if the virus is brought under control, the hospitality industry is expected to return to is previous operations in 2021. Other City Revenues Staff also anticipates a COVID-19-related drop in many other revenue sources such as interest income, driven by lower market interest rates, parks and recreation revenues and other fees the city collects. However, these are ancillary sources of revenue and staff does not expect these decreases to be financially significant. Expenses so far by department City staff have met the demands of the current crisis with the funding in department budgets for the current fiscal year. The expenses as of April 8, 2020 have included $83,994 in information technology equipment (to enable teleconferencing and other demands of remote work), $43,243 in overtime compensation, $15,738 for protective equipment, $11,002 for cleaning services and supplies and $42,028 for public outreach and the signage needed to inform community members of the closure of parks, trails and other areas under the COVID-19 restrictions. A list that breaks these expenses down by department, as requested in a minute motion approved by the City Council on April 7, 2020, is attached as Exhibit 1. That list provides a general description of the expense, how much has been spent to date and how much has been committed to be spent on these COVID-19-related items and services. April 14, 2020 Item #3 Page 4 of 7 Controlling expenses Just as the City Council has prepared the city for crisis expenses that cannot be predicted by setting aside emergency funds, the city manager and staff have been preparing the city to continue to provide essential public services despite these revenue declines. On April 2, 2020, the city manager directed staff to take immediate steps to curtail any spending that is not required to deliver essential city services. These steps include:  Holding off on spending for new programs and new funding requests for the rest of the fiscal year  Reassessing all discretionary spending  Postponing non-essential purchases  Not filling vacant positions without the approval of the city manager, and evaluating open recruitments based on critical need City leaders have also reprioritized non-essential projects and redeployed employees to cover core services and to assist with the city’s emergency response efforts. Next year’s budget The city manager has directed staff to keep these reductions in revenue in mind in developing the city budget for fiscal year 2020-21. In keeping with that guidance, the budget that is to be offered to the City Council for approval by June 30, 2020, will adhere to these guidelines:  Priority will be given to the community’s most critical needs, with a focus on health and public safety and providing essential city services  Discretionary spending will be limited  Work on previously funded Capital Improvement Program projects will continue but budget requests for new projects will be extremely limited  New full- or part-time personnel will not be requested, unless there is a critical need to continue to provide essential city services These guidelines may be revised if the economic situation changes. Staff plans to present a preliminary budget to the City Council for consideration on May 19, 2020. Fiscal Analysis The City of Carlsbad has taken appropriate measures to adjust to the decline in its sales tax and transient occupancy tax revenues in this fiscal year because of the COVID-19 emergency. Following the direction of the city manager, staff has curtailed non-essential spending and made the budget adjustments required to respond to the crisis while continuing to provide basic city services and protect the community’s health and safety. The city has $19.1 million in its economic uncertainty reserve. In addition, because of previous City Council financial decisions, the city has a total unassigned General Fund balance as of June 30, 2019 of $79 million, or just over 45% of the General Fund in the adopted budget for fiscal year 2019-20. These reserves have put the City of Carlsbad in a stronger financial position than many other cities. April 14, 2020 Item #3 Page 5 of 7 However, following the direction of prudent fiscal management set by the City Council, staff is factoring these revenue declines into its calculations for the budget for fiscal year 2020-21, to make sure the budget for the coming fiscal year aligns with the city’s latest revenue projections. Next Steps Staff will continue to track COVID-19’s financial impact on the city and provide department- level statements of related expenses at each City Council meeting during the crisis, in keeping with a minute motion approved by the City Council on April 7, 2020. The city will adhere to the financial guidance of the city manager to curtain non-essential spending while dedicating the resources needed to respond to this crisis. As noted above, staff will factor in the effects of the COVID-19 emergency in their calculations for the fiscal year 2020-21 budget to be presented to the City Council in coming months. Environmental Evaluation (CEQA) Emergency projects are statutorily exempt from the California Environmental Quality Act under CEQA Guidelines Section 15269. Public Notification and Outreach This item was noticed in accordance with the Ralph M. Brown Act and was available for public viewing and review at least 72 hours prior to scheduled meeting date. Exhibits 1. COVID-19 expenditures up to April 8, 2020 April 14, 2020 Item #3 Page 6 of 7 Department DescripƟon of Item or Service Purchase Order Amount Remaining Expenditures to Date Committed Funds City Manager Cleaning supplies - 15 15 Communication & Engagement Public notification - 28,041 28,041 Signage - 2,996 2,996 Community Development Cleaning supplies 411 - 411 Environmental Management Cleaning supplies - 5 5 IT equipment - 118 118 Facilities Cleaning services 90,000 - 90,000 Cleaning supplies 13,346 - 13,346 Fire Cleaning services 14,400 - 14,400 Cleaning supplies - 156 156 Other - 530 530 Protective gear - 8,563 8,563 Information Technology IT equipment 70,178 83,876 154,054 Parks & Recreation Cleaning supplies 3,584 5,031 8,615 Meals and meal supplies 112,982 14,991 127,974 Other - 1,341 1,341 Signage - 10,992 10,992 Police Cleaning services - 3,300 3,300 Cleaning supplies - 2,337 2,337 Protective gear - 7,175 7,175 Salaries and wages Overtime - 43,243 43,243 Parttime salaries - 20,463 20,463 Salaries - 334,615 334,615 Utilities Cleaning supplies - 158 158 Grand Total 304,902 567,945 872,847 Notes Cleaning supplies includes disinfecting wipes, hand sanitizers, etc. Meals and meal supplies are for adults 65 and older. Protective gear includes, masks, gloves and other protective wear. IT equipment includes laptops, earbuds, adapters, etc. Salaries and wages represent staff hours worked on COVID-19 activities. COVID-19 Purchase Order and Expense Tracking as of 4/8/2020 Methodology: The below amounts were compiled using data from the city's accounting system and inputs, estimates and data, from department management analysts. Exhibit 1 April 14, 2020 Item #3 Page 7 of 7 Laura Rocha, Deputy City Manager, Administrative Services Roxanne Muhlmeister, Finance Manager April 14, 2020 Economic Effects of COVID-19 COVID-19 Pandemic •The pandemic of the potentially fatal COVID-19 disease has: –led to public health orders requiring people to stay at home –allowed only essential trips or jobs and forced many businesses to suspend or reduce operations –restrictions causing disruptive effects on the economy, across the nation, the state and in Carlsbad 2 Effects of COVID-19 3 U.S. gross domestic product 10% Recession -10 -20 -30 2006 Source: Commerce Department; Goldman Sachs (projections) Projections ➔ -24% 2020 THE WASHINGTON POST 4 How the Virus Transformed the '\Nay Americans Spend Their Money +50% Change in credit and debit card spending T More spending 0% Less spending l -50% -100% Jan.8 Jan. 22 First U.S. coronavirus case $ -4.; ... :. ... ?-.-...... . ---- March 1 Source: Earn l R ,earch Groceries Transportation Shopping Travel March 19 April 1 California issues coun try 's first stay-at-h ome order 5 7rnillion 6 Initial jobless claims,. per week Seasonally adjusted 5 4 3 RECESSION 2 1 0 '04 'OB '09 Source: Department of Labor 16,, 780,,000 Claims were filed in the last three weeks '12 '16 By The New York Times '20 Effects of COVID-19 6 201~ ;.1:)14 20'6 2018 1% 0% c:::, = ---................. ...., ...., C:::,C:::,C:::,C:::,00 N N N N N N ~~~~~~ •'l::tn,::t:111 :::~~~~~ N N N N N N N N :>-0.C >-0..C :>,,Q. "' Q,I «i fO Q: t1;1 fO 111 'l:: V)--, :E 1,/)..., ~ v" ;;~a~~~~~a~~ NNNNNNNNNNN >-0.. C >,. 0.. C ~ 0.. C >,. 0.. fO Ill ~ fO 111 ~ fO III fO ~ 111 :Er.1'1..,'l::v"""""':,;:t.l)•:i:'-'> • Unemployment Rate • Forecast ~~ggg N N N N N >-a. C >,. 0.. fO W IQ fO 111 ::E t.l) , :t: V) Effects of COVID-19 7 Funding Available to California in the Coronavirus Relief Fund (In Mil/Jons) State Government Funding $8,445.5 Alameda County 278.8 Cootra Costa County 192.3 Fresno County 165.8 Fresno city 88.4 Kern County 149.7 Los Angeles County 1,703.5 Los Angeles city 670.4 Orange County 534.8 Riverside County 406.2 Sacramento County 256.6 Sacramento city 84.1 San Bernardino County 361.6 San Oiego County 559.4 San Diego city 237.9 San Francisco County/City 148.2 San Joaquin County 124 9 San Mateo County 129 3 Santa Clara County 324.9 San Jose City 173 5 Sonoma County 84 5 Stanislaus County 918 Ventura County 143 2 Local Government Funding $6,910.0 Total Funding to California $15,355.5 California Jobs in Industries Most Immediately Impacted by COVID-19-Related Business Reductions and Closures Industry Arts, Entertainment, and Recreation Hotels and Other Lodging Special Food Services Drinking Places (Alcoholic Beverages) Full-Service Restaurants Limited-Service Eating Places• Retail facluding Grocery. Pharmacy, and General Merchadise Stores Air Transportation Truck Transportation Warehousing and Storage Personal Care Services•• Child Day Care Services ~ Includes fast-food, fast casual, takeout sandwich, and pizza shops ~ • Includes barber shops, beauty salons, nail salons, and other personal care seNices. Number of California Jobs, 2019 321,433 238,133 77,933 33,817 654.400 699,842 1,056,350 SS,783 133,242 148,108 85,233 77,683 Note: Number or jobs reflects 2019 annual average of non-seasonally-adjusted monthly employment data Source· Budget Center analysis or Employment Development Department data California Budget & Policy Center Effects of COVID-19 8 Job Losses Stagger Sait Diego's Economy Friday, March 27, 2020 REAL ESTATE NEWS San Diego home demand slips, inventory up Since coronavirus closures happened, the number of pending sales is dmvn in San Diego County CORONAVIRUS -Published March 25 Coronavirus concerns in homeless community spur San Diego to use convention center as shelter during pandemic Effects of COVID-19 9 Figure 4. Sectors of San Diego County's economy Retail. Leisure. & Hospitality Education & Human Development Professional Services Health Care Energy, Construction, & Ut1l1hes Public Administration Advanced Manufacturing Finance & Real Estate Security & Maintenance Military Wholesale Trade Life Sciences R&D ICT & D1g1tal Media Advanced Transportation & Logistics Nonprofit Agriculture 100,000 200,000 300,000 Jobs 1n sector 1n San Diego County 400,000 500,000 City Beaches From San Diego To Carlsbad Closed As COVID-19 Cases Keep Climbing Tuesday, March 24. 2020 By City News service PARK CLOSED All Public Access is Prohibited Economic Effects to City •COVID-19 will have a detrimental effect, increasing expenditures and reducing revenues •Hit to economic growth from ensuing recession will exacerbate the situation •Federal relief package to aid state and local governments in the near term for COVID-19 expenditures, not revenue declines 10 Economic Effects to City •Public restrictions significantly reduce the amount of revenue the city receives •Sales and uses taxes; leisure and hospitality revenue; licenses, fees, and permits; and motor fuel taxes will be the hardest hit •Other city revenue sources are also expected to decrease •Unforeseen costs incurred to protect residents 11 FY 2019-20 Budgeted General Fund Revenues $170.5 million Property Tax 42% Sales Tax 22% Transient Occupancy Tax 17% Franchise Taxes 3% Business License Tax 3% Development Revenues 1% All Other Revenue 12% General Fund Revenue Impacts 13 Permanent Loss Timing Difference TOT Business license Recreation fees Interest income Property tax Sales tax Building fees Rentals/leases Sales tax Sales Tax Impacts •California is providing broad assistance to small businesses and employers impacted by COVID-19. This includes: –Small business interest free deferral of sales/use tax up to $50,000 for businesses with less than $5 million in taxable sales. –90-day extension to pay on all businesses filing a return for less than $1 million in taxable sales. 14 General Retail Construction Apparel Stores Building Materials - Wholesale Department Stores Building Materials - Retail Furniture/Appliance Drug Stores Business to Business Recreation Products Office Equipment Florist/Nursery Electronic Equipment Miscellaneous Retail Business Services Energy Sales Food Products Chemical Products Restaurants Heavy Industry Food Markets Light Industry Liquor Stores Leasing Food Processing Equipment Biotechnology I.T. Infrastructure Transportation Green Energy Auto Parts/Repair Auto Sales - New Miscellaneous Auto Sales - Used Health and Government Service Stations Miscellaneous Other Miscellaneous Vehicle Sales CITY OF CARLSBAD SALES TAX BY ECONOMIC SEGMENT 15 r r r ~ ~ ~ + + + + + + + ~ ~ ~ ~ ~ ~ + + + + + + + + + + ~ ~ ~ + ~ + I I + Sales Tax Assumptions •Complete shutdown estimates: –Revenue loss thru April -$3.2M, May -$5.3M –18 month recession after shutdown •Approx. $433k per month loss –$50,000 sales tax delay for one year for small businesses results in deferred payments •Negative $5 million in fiscal year 2019-20, •$0 in fiscal year 2020-21 •Positive $5 million in fiscal year 2021-22 16 Sales Tax Forecast 17 $25M $30M $35M $40M $45M $50M $55M fy 2018-19 (Actual) fy 2019-20 (Forecast) fy 2020-21 (Forecast) fy 2021-22 (Forecast) fy 2022-23 (Forecast) fy 2023-24 (Forecast) Pre-COVID-19 Restrictions through April 30, 2020 Restrictions through May 31, 2020 Hotel Tax Assumptions HOTELS SHUTDOWN AS OF MARCH 31 THRU MAY 31 , 2020 JUNE 2020 AND JULY 2020 OCCUPANCY AT 50% OF LAST YEAR AND ADR DOWN 10%. AUGUST 2020 OCCUPANCY AT 75% OF LAST YEAR AND ADR DOWN 10%. SEPTEMBER 2020 AND OCTOBER 2020 OCCUPANCY AT 90% OF LAST YEAR AND ADR DOWN 10%. THE REMAINDER OF CALENDAR YEAR WILL SEE THE COMBINED OCCUPANCY RATE AND ADR DOWN BY A TOTAL OF 10%. CALENDAR YEAR 2021 WILL SEE OCCUPANCIES AND ADR RATES GO BACK TO NORMAL. ~4,764 Hotel rooms, 45 hotels, plus other rentals Hotel Tax Forecast 19 $M $5M $10M $15M $20M $25M $30M $35M FY2018-19 (Actual) FY2019-20 (Forecast) FY2020-21 (Forecast) FY2021-22 (Forecast) FY2022-23 (Forecast) FY2023-24 (Forecast) Pre-COVID-19 Restrictions through April 30, 2020 Restrictions through May 31, 2020 $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 2017 2018 2019 2020b 2020e 2021e 2022e 2023e 2024e Property Tax Sales Tax Transient Occupancy Tax Top 3 General Fund Revenue Sources (in millions) 20 Other General Fund Revenue Impacts Investment yield is projected to go from 1.7% in fiscal year 2020-21 , growing by 0.2% per year, and capping at 2.5% in fiscal year 2024-25. Interest Income Business license revenues are forecasted to decrease by $800,000 in fiscal year 2019-20, then recovering $400,000 in fiscal year 2020-21, and another $400,000 in fiscal year 2021-22. Business License Revenues Development related revenues are projected to slowdown during the next couple of years, and then pick up after the mild recession. Development Related Revenues Recreation revenues are projected to decrease in fiscal year 2019-20, and then drop again in fiscal year 2020-21 due to a potential slowdown in recreation activities during the summer of 2020. Recreation Revenues Total General Fund Revenues (in millions) 22 $150,000 $160,000 $170,000 $180,000 $190,000 $200,000 FY 17 FY 18 FY 19 FY 20b FY21e FY22e FY23e FY24e FY 2019-20 Budget FY 2020-21 Budget Preparation (as of Jan/Feb 2020) FY 2020-21 Budget Preparation ( With COVID-19 Impacts) Non-General Fund Impacts •TransNet: •FY21 original projection was $3.4M, reduced to $3.1M, 10% reduction for FY21 •This is a minor impact since we have enough held at SANDAG in our TransNet balance to cover all current projects. •Gas Tax: •HUTA (Hwy Users Tax), estimates show 15-30% reduction in current FY, 10-20% reduction in FY21. •RMRA (Road Maintenance and Rehabilitation), estimates show 10-20% reduction in current FY, 5-10% reduction in FY21. 23 COVID-19 related costs as of April 8, 2020 24 Description of Item or Service Committed Funds Cleaning Supplies $132,743 IT equipment 154,172 Meals and meal supplies (seniors)127,974 Other 1,871 Protective Gear 15,738 Public Notification 28,041 Signage 13,987 Salaries (related to COVID-19 activities)334,615 Part-time salaries (related to COVID-19 activities)20,463 Overtime salaries (related to COVID-19 activities)43,243 Total Costs $872,847 Citywide Response During crisis, it is important for the city to: •Have proactive and nimble management, and adhere to governance policies •Carefully monitor liquidity, particularly as revenue streams start to falter, access external liquidity sources when needed 25 Citywide Response •Financial strength and city's revenue base, anchored by property taxes, should help from potential steep revenue losses in the near term. •As the situation unfolds over the course of 2020, we will respond quickly and adequately to major budgetary shifts 26 FY 2019-20 Budget Management •Safety of residents and employees comes first •Controlling expenses –No spending on new programs or new funding requests –Reassessing all discretionary spending –Postponing non-essential purchases –Case by case evaluation of recruitments •Recoupment of COVID-19 expenses •Utilize reserves, only as needed 27 FY 2020-21 Budget Development •Priority will be given to the community’s most critical needs •Discretionary spending will be limited •Budget requests for new Capital Improvement Projects will be extremely limited •New personnel will not be requested, unless there is a critical need to continue to provide essential city services 28 Next Steps •Return with updates to City Council on COVID-19 to include response efforts and expenditure report every two weeks •Priority areas identified by City Council on Jan. 21: Growth, Traffic & Mobility, Homelessness •Preliminary FY 21 budget will be presented May 19 Thank you 30