As the Arcadia City Council prepares to reconvene Tuesday following a first-ever censure action against Mayor Sharon Kwan, city officials responded to budget concerns voiced by the mayor and a recently termed-out councilwoman.
Kwan and former Councilwoman April Verlato have said they’re concerned about pay increases for city employees possibly leading to depleted reserve funds and budget deficits.
In an email to HeySoCal.com, Deputy City Manager Justine Bruno referred to a May 20 meeting when City Manager Dominic Lazzaretto “presented a conservative budget for Fiscal Year 2025-26, highlighting potential imbalances in future years if no corrective action is taken. It’s important to keep in mind that city budgets are planning tools — they provide a high-level overview of the services offered to the community and the resources needed to support them.
“The materials shared in May follow the same approach as previous City of Arcadia budgets: a snapshot in time with projections for the years ahead. Each year, the cost of delivering services increases. Without adjustments to spending or new revenue sources, deficits can occur,” Bruno wrote. “Fortunately, Arcadia has benefited from several years of strong revenue growth. This, along with reserves exceeding $73.5 million, has allowed us to avoid budget cuts or reductions in service levels. …
“The City turned a projected $3 million shortfall last year into a $34,000 surplus. It’s common for cities to face years where expenses outpace revenues, but Arcadia has consistently managed to make necessary adjustments, and we expect to continue doing so moving forward,” Bruno wrote.
According to Verlato, $73.5 million in reserve funds “was the amount in reserves as of June 2024. (Bruno is) not presenting current information,” the former councilwoman and mayor wrote in an email to HeySoCal.com. “In the Equipment Fund report, it shows a $3M decline in funds just in that category alone:
“And, substantially less is expected to be spent from the equipment fund than the prior year. $5.2M less. That’s a cut,” Verlato wrote.
Verlato also contended that the page above from the City Council-approved Operating Budget contradicts the following data from the June 3 budget presentation that says the city spend around $3.1 million on equipment.
“On top of that, Arcadia has not had strong revenue growth,” Verlato added.
“Sales tax, which spiked from $15.8M to $24.8M unexpectedly after COVID, but due in part to a new sales tax that was voted on in 2019, is flat and if anything, declining,” she wrote. “It’s expected to be even lower this year because of tariffs. Sales tax is the City’s largest revenue source.”
Revenue from the utility users tax, or UUT is also declining.
The “strong revenue growth” that Bruno mentioned “is only attributable to property tax and hotel tax and we are talking maybe $1M more for each,” according to Verlato. “For property tax, that growth is just 5%. It basically makes up for the decline in sales tax and UUT.”
The transient occupancy tax increased in 2022 because of another voter initiative that increased taxes, Verlato said. Similarly, property revenues are increasing because of Proposition 19, a voter-approved tax hike.
“Yes, revenues will increase, but only if we vote in more taxes,” according to Verlato. “They aren’t happening naturally.
“The ‘corrective action’ that will be needed is another voter increase in taxes,” Verlato wrote. “I’m trying to sound the alarm to warn voters, the ‘need’ for an increase in taxes is not because of something unexpected or unavoidable. It’s because of council increasing compensation of employees in excess of current revenue streams. The council had a choice. It could have stayed within the constraints of current revenues, but they chose to increase employee compensation beyond what the revenues could support, believing they could rely on reserves. But once reserves run out, council will need to make hard decisions and it will most likely result in council putting forth a ballot initiative to increase either UUT or add a property tax to cover pension costs.”
Verlato added that “none of these budgets incorporate the real amount of (city employee pension) payments once recalculated based on new compensation from last year. I expect that number to increase by several million (dollars).”
On employee compensation, Verlato warned that “while current projected revenues incorporate a 3% increase each year, it is possible that in (fiscal year) 2027-28 and FY 2028-29 the City may experience an uptick due to tourism generated by the Olympics.
These estimates do not include an increase in employee costs after the third year of current contracts. Contracts between the city and employee unions will expire June 30, 2027, “and it should be expected that the unions will ask for a cost of living increase in excess of 3% per year,” Verlato wrote in a mass email Monday.
“The current contract had increases of 7% the first year, 6% the second year and 5% the third year. The current contract also included an increase in benefits, such as medical, vacation pay, etc.,” Verlato wrote. “When everything was combined, employee costs increased 20% in year one of the contract.”
A slide from Lazzaretto’s presentation in May illustrated that:
On Sept. 2, the council voted 4-1 to censure Kwan for alleged misconduct but suspended penalties against her if she adheres to rules for decorum that the panel also established at its last regular meeting.
Kwan claims the council is trying to silence her for raising concerns about the budget.
“I am delighted that the public saw my Council colleagues and the city attorney trying to silence me because of my insistence on transparency, financial responsibility, and professionalism, and that’s why so many people showed up to defend me against this obvious retaliation,” Kwan said following the censure vote. “I know my colleagues and the city attorney are going to continue trying to intimidate me, and I will continue fighting against it because the residents of Arcadia deserve to know the truth about what’s happening at City Hall and how their money is being spent.”
One point of contention during the censure proceedings centered around a financial document Kwan requested from the city manager. Lazzaretto said he repeatedly emailed the information to Kwan, and the mayor said she was unable to open the attachment.
According to Verlato, while the city has focused on the censure, “What was forgotten in all of this, a request by Mayor Kwan for a break-down of the cost saving measures that balanced the 2024-25 budget. She first inquired how the City Manager was able to balance the $3M deficit at the May Budget Study Session.
“On August 18, the Mayor had asked, for the 6th time, for the list of ‘cost saving measures.’
“Here is what Mayor Kwan received from the City Manager, handed to her just as she walked into the meeting on August 19, the same night Councilman (David) Fu moved to censure and remove Mayor Kwan:
Video of the censure meeting is on the city’s website, along with access to the meeting Tuesday evening and documents that include the list of a Kwan’s alleged misconduct.
The 2025-26 budget the council approved in June totals about $91 million with $92.5 million in expected revenues.
