Opinion Piece

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Why Do Dana Point’s Financial Reserves Matter?

As a member of the now disbanded Financial Review Committee (FRC), many people have asked me whether they should be worried about rumored efforts to reduce Dana Point’s financial reserves. The short answer is “yes.”

In its Amended Budget for June 30, 2018, the City is projecting having only $4.4 million in unassigned funds plus “reserves” of $13.5 million in its general fund. Just before I left the FRC, I was assigned to a subcommittee tasked with reviewing “reserves.” It is my position that the City’s emergency and cash flow reserves should not be considered a source of funds to plug the impending structural deficit caused by growth in expenditures outpacing the rate of revenue growth.

I will explain why this would be a bad idea.

Members of the City Council majority will argue there is no issue, since the Fiscal Year 2017-2018 Amended Budget reflects $26.1 million in total projected governmental funds (including the general fund) as of June 30, 2018; therefore, we have nothing to worry about regarding Dana Point’s financial reserves. Not true.

When we break down the numbers, we find that about $8.2 million is restricted (such as the Coastal Transit fund) or in trust for others, and cannot be reallocated to general operating use. There is another $13.5 million set aside for emergency, cash flow and capital projects’ “reserves” that cannot presently be reallocated unless Council changes its policy. This leaves just $4.4 million which is unassigned and available for “discretionary” purposes.

Actually, “discretionary” is somewhat misleading. For example, how do we pay for the revitalization of Doheny Village with only $4.4 million in available reserves? Keep in mind that the city spent $20 million of its savings on the recent Lantern District infrastructure upgrades. And what about improvements in parks, medians and general beautification? The current budget has no funds for anything other than basic road maintenance.

The Council is justified in eyeing the $13.5 million in reserves and arguing that they are simply too high and should be used to plug our budget deficits. Not so fast though. One of the reasons we have reserves is because our main source of revenue, TOT, is quite volatile. In the 2008 recession, Dana Point’s revenue took a $12 million hit before it returned, 5 years later, to “normal” levels. It is simply imprudent to dip into reserves and gamble that the tourism sector will remain stable forever. Dana Point’s financial reserves are there to protect the City from emergencies and unanticipated cash flow declines. We weathered the storm in 2008 because we had a positive margin between revenue and expenses. With those two lines meeting and eventually, crossing, we need to find real savings — not dip into reserves to band-aid deficits caused by runaway spending.

So the next time a member of the City Council majority tells you we have nothing to worry about because we can always dip into reserves, maybe tell him… not so fast!

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About the Author

Joe Jaeger

A former member of the now disbanded Financial Review Committee, who chose to take a stand for fiscal responsibility in city government. Joe has an MBA from NYU, and attended Harvard’s Program for Management Development. He has served as CFO to both public and privately held companies, and currently serves as Treasurer for the Ritz Pointe Estates HOA in Monarch Beach.

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