Due to the COVID-19 pandemic, San Mateo is facing an estimated $7 million structural deficit starting next fiscal year, which begins in June, and cuts will be necessary to right the imbalance, officials said Monday.

“We’ve got a structural imbalance where our ongoing revenues are $7 million lower than our ongoing expenditures so we have to close that with permanent ongoing reductions,” City Manager Drew Corbett said during Monday’s remote City Council meeting. He added the reductions will likely come in the form of cuts to services or restructuring the way the city pays its employees.   

But the cuts likely won’t have to come until next year, as there is currently enough money in the city’s coffers to cover the deficit in fiscal year 2020-2021 and without dipping into the city’s operating reserve, Corbett also said during the meeting.

Corbett noted the budget for fiscal year 2020-2021 has been “trimmed to get as lean as we could without impacting service levels.”

Once the structural deficit is dealt with, then officials will move on to addressing the impact the COVID-19 crisis has had on the city’s pension debt as contributions to California Public Employees Retirement System, or CalPERS, are expected to increase starting in 2023.

“It’s a daunting challenge,” Mayor Joe Goethals said, referring generally to the city’s financial challenges.

Before the COVID-19 crisis, San Mateo enjoyed a $10 million surplus that already has been wiped out by the drop in revenue due to the COVID-19-induced economic shutdown.

And the full impact of the crisis remains unknown, not only because the crisis is ongoing, but also because it takes time for data on certain revenue sources to be made available to the city.

“There’s a challenge we have on sales tax in that the data we get is essentially six months in arrears. The most recent sales tax data we have is for the third quarter of 2019,” said Finance Director Richard Lee. “We won’t see the true impact of COVID-19 for another six months. … It’s a similar concept for [hotel] tax.”

Sales tax and hotel tax are the city’s second and third largest revenue sources respectively.

Lee added that the city will be eligible for reimbursement by the Federal Emergency Management Agency for some COVID-19 impacts, but expects “it will be some time” before those claims are funded.

Deputy Mayor Eric Rodriguez felt the estimated $7 million deficit is optimistic.

“My concern is that that estimate is a little too optimistic and as we learn more and go through [the deficit] will be potentially higher than that,” he said.

Staff is recommending several short-term strategies to addressing the city’s financial challenges, including a hiring freeze on vacancies and eschewing previously planned $2.4 million additional payment to CalPERs as well as a $1 million housing set aside contribution. Savings have also been realized given how many services currently are not being offered in the city.

But staff is recommending the council continue to move forward with an additional $2 million contribution from the city’s general fund to the capital improvement program because deferring maintenance costs will cost the city more in the long run, officials said.

Certain projects, including the levee and wastewater treatment plant, will continue to move forward as planned, Corbett added.

While councilmembers acknowledged the challenge ahead, some also expressed optimism moving forward.

“There will be tradeoffs no doubt,” said Councilwoman Diane Papan. “I’m confident that we can be within our budget and still keep things going.”

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