Eureka Eyes Hotel Tax Increase After Budget Deficit Swells to Nearly $4 Million

Eureka Finance Director Lane Millar

Eureka is entering a new budget year with a bigger deficit than expected and may pursue a hotel bed tax increase to help close the financial delta.

The Eureka City Council approved the coming fiscal year’s budget at its June 16 meeting as the current year’s budget comes to a disappointing end. City Finance Director Lane Millar recounted the budget’s downbeat recent history: the city expected to finish this year with an $800,000 deficit but the forecast didn’t pan out.  If it had, the city would have come within a single percentage point of its savings reserve policy level.

Instead, “At mid-year our deficit grew substantially to just under $4 million in the red,” said Millar.

He added, “With that update, we expect to start next fiscal year with a beginning fund balance of about $8.7 million, which as a percentage of our total budgeted expenditures is roughly 17.8 percent, which means that we’re over 7 percent below our policy threshold.”

To reach the targeted reserve level of 25 percent, Millar proposed a plan based on 3 percent revenue growth through fiscal year 2029-2030. He said if spending growth is limited to just 1 percent during those three years, “We would be able to produce a healthy surplus” and the 25 percent policy level would be mostly reached.

But he acknowledged that a 3 percent income growth rate “seems high” and said he’s looking for direction from the council.

On the way to talking about raising the TOT, some spending reduction strategies were floated.

“These are not fun to talk about,” said Millar.

The new budget will include a 3 percent cost of living salary increase for city workers but that rate of increase is in doubt beyond this year.

“One way is to restrict (spending) is to to limit the amount of salary growth – that’s a big one,” Millar said. “That really is a hard thing to do but if we don’t kind of turn the ship around, it’s unlikely that we’re going to have a lot the money to provide for salary increases anyway.”

In combination with hiring freezes, retirement incentives and “reorganizing departments,” limiting salary increases over the next three years would ease the budget pressure. “It’s a lot less painful than waking up one day and realizing that you need to cut 10 percent from your budget right away,” Millar said.

Hearing that, Councilmember Scott Bauer suggested a way to boost revenue — through a TOT increase. “I think these are the kind of times we need to we need to talk about that,” he said. “It’s obvious we don’t want to cut services and we don’t want to lose staff. Therefore, we need revenue, so I think we should explore that,” he said.

Bauer described the the city’s 10 percent TOT rate as being comparatively low (for comparison, Arcata and the county have 12 percent rates but Fortuna’s rate is the same as Eureka’s).

Eureka Councilmember Mario Fernandez

But Councilmember Mario Fernandez suggested a TOT hike could backfire. “I would be cautious going that route just with where expenses are right now,” he said. “We’re already looking at an increase in cost of living but just being a tourist destination during the summer months, in addition to the increased cost of gas right now, I would be worried that we wouldn’t be seeing what we would expect when it comes to our Transient Occupancy Tax.”

The council unanimously voted to adopt the fiscal year 2026 to 2027 budget without any further discussion on increasing TOT. But they’ll be talking about it at their next meeting.

During a future agenda items discussion, Councilmember Leslie Castellano asked that a TOT increase be considered as soon as possible, as it would have to go before voters in the November election.

The council took an informal vote showing thumbs up or down on whether to discuss it at the next meeting. Doing so got three councilmember thumbs up, with Fernandez and Councilmember Renee Contreras-DeLoach signaling thumbs down.

With majority support, the TOT discussion will happen at the next meeting.