The City of Hermosa Beach is projected to end the current fiscal year with a General Fund shortfall of almost $550,000, according to a midyear budget review due to be presented to City Council next week.

Staff is recommending the council close the gap entirely with one-time savings: $235,594 from the salary and benefits of the deputy city manager position eliminated last June, and $312,413 from a contingency created through a Proposition A fund exchange agreement with the City of West Hollywood.

It is the third consecutive year the city has relied on non-recurring funds to balance its operating budget. A total of $909,362 in one-time money will have been used to balance the FY 2025-26 budget when the original adoption and midyear adjustments are combined.

The review paints a picture of a city where costs are accelerating faster than its tax base can support. General Fund revenues are projected to increase by $552,347, or about 1 percent over the amended budget. Expenditures are projected to increase by $1,835,257, more than three times the revenue gain.

Where the money comes from

The revenue picture is mixed. The largest positive movement comes from parking meters, where the rate increases adopted in October 2025 are projected to generate roughly $635,000 in additional revenue this fiscal year. Plan-check fees are also running ahead of budget by approximately $240,000, reflecting construction activity in the first half of the year.

Those gains are partially offset by softness in property taxes, the city's single largest revenue source. The secured property tax estimate dropped 1.89 percent from the original budget due to higher-than-anticipated delinquency rates and successful valuation appeals from the prior fiscal year. The revised estimate for current-year secured property taxes is $21.4 million, within a total property tax line of $26.6 million.

Sales tax revenue is down a projected $46,000, with growth in restaurants and hotels offset by declines in food and drug stores and auto sales.

Transient Occupancy Tax, the city's hotel tax, is holding steady at its budgeted level of $5.19 million through the first half of the year.

Two facility closures are dragging on revenue. The Kelly Courts closure has reduced pickleball reservation income by an estimated $45,500, and the delayed reopening of the Clark Building is further cutting into community center rental revenue. The PARK After School Program is also under-enrolled by roughly $50,000.

A one-time $100,000 reimbursement from the 2025 bond issuance for the Greenwich Village North undergrounding assessment district accounts for most of the $130,000 increase in the other revenue category.

Where the money goes

Labor costs are the primary driver of the expenditure increase. The recently negotiated memoranda of understanding with the city's employee bargaining units account for approximately $1.3 million of the $1.84 million midyear spending increase. The Police Department alone absorbed $913,000 in additional labor costs from the new contracts.

The City Attorney budget is increasing $200,000, from $480,000 to $680,000, a 42 percent jump attributed to activity in the first half of the year. The staff report does not specify what legal matters are driving the increase.

Community Development needs $157,000 more for contract services, including $60,000 for a contracted permit technician to support new Accela permitting software activation and state-mandated reporting, $50,000 for outside plan review, $37,000 for the city's match to the South Bay Regional Housing Trust (approved by council on March 10), and $10,000 for departmental training.

The prospective expenditures account, a contingency fund originally budgeted at $200,000, was nearly depleted in the first half of the year. It covered the CSG consultant contract amendment, the city manager executive recruitment, recreation management software implementation, and a janitorial services contract. Staff is requesting it be replenished to $200,000.

Management Support includes a $60,000 increase for third-party collection fees tied to an expected increase in parking citations, and a net $9,275 increase in the city manager's budget to fund studies of parking operations and the Downtown Lot A.

Donations become capital projects

Staff is requesting $550,000 in capital appropriations from restricted donation fund balances for two projects. The larger is a $500,000 monument sign funded by a donation from Chuck and Missy Sheldon, accepted by the council in December 2025. The smaller is a $50,000 marquee sign funded by a historic donation from the Hermosa Beach Chamber of Commerce dating back over a decade.

The five-year picture

The staff report includes a five-year General Fund forecast presented during the June 2025 budget adoption. The projection shows expenditures and revenues nearly converging in the current year but then diverging sharply through FY 2030-31, when the gap is projected to reach approximately $4.2 million.

Staff attributes the structural pressure to several factors: pending contract negotiations with the Los Angeles County Fire Department for fire protection, beach operations, and lifeguard services; the need to replenish the capital improvement fund for critical infrastructure projects; rising contract service costs; and personnel and benefit cost increases.

The report recommends that the council approve all proposed fund transactions and assign the remaining $2.2 million in unspent FY 2024-25 funds to support development of the FY 2026-27 budget.

The midyear budget review is on the council's regular agenda for Monday, March 24.

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