San Mateo’s city deficit narrows

“Accounting-wise, we have a balanced year, but funding-wise we are actually in the hole $5 million,” Huang said.  

Similar to other cities, including Belmont, the city’s sales tax revenue is lower than anticipated, which Huang attributed to macroeconomic and consumer trends. 

“Online sales actually increased, but retail sales have dropped, and it also has to do with auto sales and fuel and service stations. Those elements are part of the major sales tax components, and they all show decline in our current review,” she said. 

Transient occupancy tax, or hotel tax, is also declining, in part due to the Marriott Hotel’s closure last year. 

But investment earnings are expected to take in $1 million more than original projections, and Measure CC is also expected to bring in $6 million this fiscal year. The measure was passed in November 2022 and slightly raised the real property transfer tax for properties with values of $10 million or more.  

The city also anticipates a $7 million shortfall of another volatile revenue source. Like many cities in San Mateo County, the complicated funding source — property-in-lieu-of-vehicle-license-fees — hinges on state reimbursement. In light of a large budget deficit last year, the state held off on its commitment to pay back cities until well after many of them had already made their budget projections.

The funds are related to vehicle license fees paid by residents, which are directed to the state and subsequently reimbursed to cities, typically by the following fiscal year.

But the payback process is not straightforward. Instead of simply giving cities and counties back the amount of vehicle fee revenue collected in their respective jurisdictions, the state uses a reimbursement formula based on jurisdictions’ nonbasic aid school districts, or those that don’t generate enough property taxes to meet their state-mandated minimum school funding needs.

That works out for most counties, which mostly have nonbasic aid schools. And even though San Mateo County has only a few nonbasic aid school districts — meaning most are fully funded via the area’s property taxes — the money from the property-tax-in-lieu-of-VLF is still critical for cities’ general funds, which help pay for numerous projects and services, ranging from housing to police services and infrastructure needs. 

This year’s precarity is further exacerbated by potential freezes in federal funds, as well as the wildfires that devastated parts of Southern California. 

“The estimated general fund balance is projected to come down a little bit, ending the year with $112 million, which is still a really high balance,” Huang said.