Desert Hot Springs faces $1.5 million deficit, will dip into city reserves. Here's why

Desert Hot Springs is dipping into its reserves to cover an estimated $1.5 million budget deficit. The shortfall is largely due to unforeseen major expenses such as storm repairs and to a projected decline in revenue after a reduction in the city's cannabis tax rate.

“We are reacting to that lower revenue source just as any individual or business would react through their budgets,” said City Manager Frank Luckino.

The city's 2023-24 general fund budget anticipated $32,979,468 in revenue, but expenses are now projected at $34,331,110, according to Deputy City Manager Doria Wilms.

She said Desert Hot Springs expects to use $1,549,914 in reserves, which would leave the city with about $8.4 million in reserves after the fiscal year ends June 30.

“Staff is recommending a one-time use of reserve funding to address this need and ensure proper maintenance of essential core city services like emergency response, roads, police and addressing homelessness as well as clean, safe, well-lit city streets and parks,” said Geoffrey Buchheim, the city’s administrative services director.

He added that reserves can only be used in the short term and that if shortfalls continue, the city would need to either find additional revenues or cut services.

The council approved the budget adjustments with a 4-1 vote on March 5. Councilmember Russell Betts was the dissenting vote.

What's causing the deficit?

In February, the city council approved lowering the city's cannabis cultivation tax from $10.20 to $5.75 per square foot to help relieve some of the financial burden on the struggling industry. This reduced the city’s expected cannabis revenues by $1.9 million for the 2023-2024 fiscal year, according to a city staff report. But due to increases in other revenues like transient occupancy tax from visitors, the city estimates that its overall revenue will only decrease by $188,272.

Hilary, the major storm that walloped the desert in August after being a hurricane at sea, also hit the city's coffers. It caused significant damage that required Desert Hot Springs to spend over $1 million on repairs. Buchheim said the Federal Emergency Management Agency is expected to reimburse the cost for storm clean-up, but that money will probably take more than a year to receive.

Other expenses not planned for when the budget was approved last year include around $700,000 for the city's new homeless shelter and $350,000 to purchase its former library building from Riverside County.

What is the city doing to save money?

Desert Hot Springs removed 12 full and part-time positions. Wilms said four staff members were laid off, five positions were frozen and three contract staff members were released.

This included eliminating the economic development department, which laid off the economic development director and administrative assistant. Economic development is now under the purview of the city manager's office.

The city also eliminated the deputy city clerk position and reclassified one staff member to counter permit tech to avoid a layoff, according to Wilms.

In addition to staff changes, the city staff report states that it also reduced spending on supplies, travel and training, and reduced or terminated certain contract services.

What did councilmembers have to say?

Betts said he voted against the budget adjustments because he doesn't support how the city handled expenditures for the homeless access hub. The city used $629,230 from one of its funds to make improvements at the hub and he doesn't remember the council approving it, he said.

Luckino, the city manager, said the council gave direction to rehabilitate the building where the hub is located during the closed session in which it approved its purchase.

"My point is, always, the public has a chance to weigh in on this stuff and we can't decide these things in closed session," Betts said. "They must come out into open session, specifically for these."

Mayor Scott Matas said the city has been conservative with planning its spending, but this was one of the years where it bought facilities and set policies to improve residents' quality of life.

"But that doesn't come without a price sometimes, and we're balancing that now," Matas said.

What's next?

Wilms said city staff will present adjustments to the 2024-25 budget to the council in May and June, which will keep a balanced budget and not use reserves. The city budgets in two-year cycles, meaning it has already approved a tentative spending plan for 2024-25 and makes adjustments as needed.

 Ani Gasparyan covers the western Coachella Valley cities of Desert Hot Springs and Cathedral City. Reach her at ani.gasparyan@desertsun.com.

This article originally appeared on Palm Springs Desert Sun: Desert Hot Springs facing $1.5 million deficit, will dip into reserves