by Laura Garber
Hermosa Beach is burning through one-time reserve funds to balance its budget, and city staff warned Tuesday night that the practice is not sustainable as the city heads into an increasingly difficult fiscal environment.
The City Council approved the fiscal year 2025-26 mid-year budget review 5-0 at its March 24 meeting, following a presentation by Finance Manager Henry Chao that laid bare a widening gap between what the city spends and what it takes in.
At the halfway point of the fiscal year, revenues are up $552,347 from original projections, driven largely by a $635,000 increase in parking meter revenue following an October 2025 rate increase and a $240,000 bump in plan check fees. But expenditures have climbed $1,835,257, pushed primarily by $1,278,063 in increased personnel costs from newly negotiated labor agreements with city employee bargaining units.
The result is a projected year-end shortfall of $548,007. Combined with $361,355 in one-time funds used to balance the budget at adoption in June, the city will rely on a total of $909,362 in one-time funds to close the books this fiscal year.
“This is indicating a structural imbalance,” Chao told the council. “Expenditures are really outpacing the revenues.”
Staff used one-time sources to cover the gap, including $235,594 from the elimination of the deputy city manager position and $312,413 from exchanging Prop A funds with the City of West Hollywood for funds to apply to Hermosa’s general fund. But those reserves are finite, and Chao made clear the well is running low.
Looking ahead, the picture grows more difficult. Chao projected structural deficits continuing through fiscal year 2031, driven by a constellation of rising costs the city has limited ability to control. CalPERS pension obligations are expected to increase approximately $600,000. The city’s fire service agreement with Los Angeles County is nearing expiration, and county representatives have indicated they will seek full cost recovery, a potential jump from roughly $300,000 annually to as much as $3.5 million. Labor costs under recently negotiated MOUs will continue rising.
The city’s light and landscaping district also requires an annual general fund subsidy of nearly $410,000, and the city’s insurance fund remains underfunded at $3 million.
Hermosa Beach has twice gone to voters with a sales tax measure and been turned down both times. The city has raised parking meter rates and parking violation fines to generate additional revenue.
“We’re at the point of no return, we have had the conversation about a transit or a sales tax and we went out to ballot twice and the voters struck it down,” Mayor Michael Detoy said. “The county fire and the beaches contract and the lifeguard contract will bankrupt us. So we’ve been telling the residents, unsuccessfully, that there’s an issue. So what have we done? We raised parking revenue and made some people mad there.”
At the next council meeting, staff is expected to bring forward a cost recovery fee update for permits and services.
Among the revenue decreases flagged at midyear; property tax estimates fell 0.6 percent, sales tax projections dropped $46,000, and licenses and permits revenue declined 7.6 percent due to lower electrical and plumbing permit activity. Community center rentals fell $45,500, partly because the closure of Kelly Courts reduced pickleball reservation revenue.
On the expenditure side, the police department accounted for the largest increase at $925,663, almost entirely driven by the newly negotiated MOU. The city attorney budget climbed $200,000, from $480,000 to $680,000, due to litigation activity in the first half of the year. Community development contract services increased $157,000 to support ongoing state-mandated reporting requirements and permit processing.
Public speakers pressed the council for greater transparency about the city’s fiscal trajectory. Resident David Grethen, a Public Works commissioner speaking as an individual, urged the council to take the structural deficit projections seriously.
“We did see that we had a deficiency at mid-year based on the data, so that tells me we need to continue to take heart when we look at those projections,” Grethen said. “There’s nothing telling us we shouldn’t believe that and I think we need to assume that’s the trend until we know better.”
Resident Eric Horne noted that last year’s budget study session lasted only 53 minutes and produced one position cut.
“The fact that this city is not financially prepared to deal with this, that is on your watch,” he said.
The council did make one small trim Tuesday night, voting to defer a $106,600 purchase of two Ford Explorer police vehicles to the upcoming budget cycle for a broader fleet review. Councilmember Ray Jackson questioned whether the existing 2014 Ford Fusion hybrids could remain in service longer and whether a less expensive replacement existed.
With capital improvement study sessions scheduled for May and a full budget study session in June, the council faces difficult choices about prioritizing core services as it prepares the fiscal year 2026-27 budget.
“We are going to have to start making cuts to maintain core priority city services,” Chao said. ER
