San Mateo faces budget concerns

Like many throughout the county and state, San Mateo is the latest Peninsula city to report concerning budgetary projections in light of pension liabilities and uncertain state reimbursements, with a $10 million anticipated deficit beginning next fiscal year.

The city relies heavily on a combination of property and sales tax revenue, however, relatively flat — and in some cases, negative — growth assumptions, coupled with outpacing inflation levels, are creating a tough financial bind.

But a more pressing concern is whether it will recoup its vehicle license fee revenue, or about $11 million from the last couple fiscal years, from the state.

“It has become a major threat to the city’s fiscal stability. This is a really big concern. If you talk to all the financial directors and city managers in San Mateo County, everybody is talking about this VLF shortfall and the impacts it may do to the city’s finances,” Finance Director Karen Huang said.

Historically, the state would reimburse the county and eventually cities for the vehicle fees collected in their jurisdictions. But largely, as a result of the steep state budget deficit, combined with changes in school district statuses — which impact how funds are allocated — municipalities may need to exclude the funding from their financial projections.

That’s adding pressure to many cities this year, such as Belmont and Millbrae and even the county, which have sounded the alarm that the money may not be reimbursed at all to jurisdictions.

The news is an additional blow to San Mateo, as the Marriott Hotel, the city’s largest hotel and convention venue, recently announced its closure. The hotel brought in about $5 million over the last couple fiscal years in transient occupancy tax revenue. About 130 employees will be impacted by layoffs.

Reserve funds will help weather the storm, but the city’s already significantly drawn down on that money, going from about $70 million as of the latter half of last year to a projected $43 million by fiscal year 2024-25, which begins in July. And an ongoing case with the city’s insurance company, which has denied payout over a $25 million lawsuit, may create additional challenges. 

But not even a strong rainy day account would be able to cover its unfunded pension obligations, another ubiquitous concern felt across the state. Due to steep investment losses from the California pension system, CalPERS, the city’s liability went up about $100 million.

“It will be quite a challenge over the next 10 years just to pay this liability,” Huang said. 

Some Bay Area cities have issued pension obligation bonds to put a larger dent in unfunded pension costs although, given the current economic climate, Huang mentioned the bond market is not favorable for such an initiative. 

No specific remedies were approved during the meeting, but Huang mentioned anything from voter-approved revenue measures to job cuts and lowered rates of reserve funding could be on the table. Mayor Lisa Diaz Nash also echoed recommendations to pursue grant funding more aggressively.

“We’ve got a huge revenue opportunity in grant funding. We do next to no grant solicitation,” she said. “We pay our way, and that’s very responsible, but that is also money that could be available to us.”