Irvine is in the midst of a three-year plan to tap reserve funds to avoid major budget cuts. The plan has caused the reserve to fall to $7.9 million at the end of fiscal year 2010-11 (if estimates are correct), from $23.5 million for fiscal year 2007-08.

Tuesday, June 15, 2010 | Tonight, Irvine city officials will seek to preserve their progressive approach toward the bailout economy by continuing to tap into reserve funds to protect residents’ quality of life.

Council members are set to vote tonight on the city’s budget for fiscal year 2010-11, which will see $12.8 million in cuts and the leveraging of $14 million in reserve funds.

That kind of leveraging has been rare in Orange County, where many jurisdictions such as the county and the Orange County Fire Authority have instead protected reserves and opted for cuts in recent years.

However, as the economy continues to sputter, Councilwoman Christina Shea is openly questioning whether Irvine can continue to spend its reserves.

Mayor Sukhee Kang defends a three-year city plan to use reserves to preserve services along with limited cuts.

It’s in addition to what officials term their “four pillars approach” regarding city services for the next year’s budget — a stated promise not to increase taxes, lay off staff, give pay raises, or reduce core services.

But the approach has also caused reserve funds to dwindle, prompting Shea’s concerns.

Director of Public Affairs and Communications Craig Reem said the city started with $23.5 million in its rainy-day reserve for fiscal year 2007-08. If budget estimates are correct, the fund will be down to $7.9 million after the 2010-11 fiscal year.

According to the city’s three-year “bridge plan,” which calls for leveraging reserve funds — as well as budget cuts — into fiscal year 2011-12. The cuts this year include the attrition of 26 full-time-equivalent positions and a $400,000 reduction in legal services.

The city’s budget strategy is progressive by the standards of many Orange County cities and organizations that refuse to dip so much into their reserve funds. For example, the Mission Viejo City Council set targets for its reserve funds such that rainy day funds for the 2010-11 fiscal year will amount to 15 percent of the general fund, or $6.9 million.

Compare that to Irvine — a city with a population twice Mission Viejo’s: Its rainy day fund for this year is projected to be at 5.8 percent of total general fund monies.

But Kang says the steep leveraging of reserves this year is all part of the “bridge plan” and that Irvine’s reserve fund leverage estimate is a “worst-case scenario.”

“This is probably one of the most conservative projections we’ve made,” Kang said.

And Reem said that over the last few years, overestimates in expenses mean a lot of money ends up back in the reserve fund.

For example, in fiscal year 2008-09 the city overestimated the cost of some capital improvement projects, leading to $2.2 million being returned to the reserve fund. And in fiscal year 2009-10, workers’ compensation was over funded; $3.2 million from that fund went back into the reserve fund.

Councilwoman Beth Krom said that in practice, the dip into the reserve fund is never as much as projected when the city puts together its budget.

Krom acknowledged that budgets are often the product of overly conservative estimates, which often turn out to be wrong. The tapping of reserves helps balance those conservative estimates, she said, and allows the city to maintain its core services — which include police services; public-transit programs like the iShuttle; and recreation programs for children, the disabled and seniors.

“We have always focused on maintaining the strength and focus of our community,” Krom said.

The city’s revenue estimates aren’t all doom and gloom either.

Although the city is expecting a whopping $7.3 million drop in sales tax revenue this year, as well as a $1.4 million drop in hotel tax revenue, the city is expecting modest revenue increases in franchise taxes ($248,000) and community service fees ($128,000).

Reem attributes the uptick in those revenue streams to population growth. According to an estimate the city goes by, the city is expecting a 2.4 percent jump in population. That means more people are watching cable TV — contributing to franchise tax revenue — and taking advantage of services like swimming lessons and softball leagues.

However, there are some who doubt the budget policy. Councilwoman Shea says the “bridge plan” is no longer working and that the city should be looking at making more cuts rather than leveraging reserve funds.

“I’m going to have difficulty approving this budget if we don’t have a good plan for next year,” Shea said.

The problem, she said, is that the city has been digging into its reserve fund at an average rate that isn’t sustainable.

Shea says there are nonessential services that can be cut to avoid dipping further into reserve funds. One example of a prudent cut, she said, would be the iShuttle, which she says has seen such low ridership that the city pays $700 a month for each rider.

Shea said that for that kind of money, the city could “pay for a rental car and buy lunch” for each rider every day.

And, Shea said, revenue to the city isn’t expected to pick up any time soon.

“Everyone wants to believe it’s going to be rosy, but we’re not looking at an increase in sales tax,” Shea said.

Shea says that if the city can bring ideas that are “concrete and reasonable,” she might sign off on the budget.

The city doesn’t pretend to be able to leverage its reserve funds forever. Reem said that although it’s feasible for now, maintaining a balanced budget in the future is going to depend on an improved economic climate for the country at large.

“The key is we’ve got to come out of the recession at some point,” Reem said.

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