Council Votes to Close Budget Hole

This week, council unanimously supported a motion that would close that gap considerably.

The Mayor Pro Tem said on Tuesday, “A shortfall to me is short term, and all of the indicators across the board seems to be that this is an actual change in our economy and that it’s long term.”

That is why she is leaning toward a policy where the 15 percent reserve remains at 15 percent. 

She added, “We need to kind of toe the line on that so we know that now, going forward, that we’re looking at where we are in the economy and where our reserve balance is, it’s not short term, so it can’t just be made up in the following fiscal year, but that we really need to understand that we have a changing reality.”

At the same time, she acknowledged problems with moving money across categories through a cost recovery effort.

According to Interim City Manager Paul Navazio, the projected shortfall in the current year General Fund fund balance is primarily the result of lower revenues relative to budgeted amounts for selected revenue items.

He argued that General Fund expenditures are projected to be well within budget across most, if not all, departments and expenditure categories.

According to the city staff report, “The City’s Indirect Cost Allocation Plan (lCAP) was first established in FY2008/09 in order to recover indirect overhead costs borne by the General Fund in support of non-General Fund supported activities. The ICAP meets the requirements of generally accepted accounting principles (GAAP), and is also an approved method of assessing overhead charges to federal grants, pursuant to Office of Management and Budget circular #87 (OMB-87).”

As explained, the ICAP establishes “overhead rates that the City may appropriately assess across departments, divisions and programs that do not directly pay for costs associated with general government activities.”

Staff proposed that the city remedy the current shortfall “by updating the ICAP allocation based on the most recent adjusted budget for all funds identified as subject to indirect cost recovery in the FY201011 1 budget.”

The amount of the adjustment took the reserve gap down by $292,335.

Councilmember Sue Greenwald was leery of these practices. 

She said on Tuesday, “When we started getting in trouble, we started shifting enterprise money, RDA money, indirect costs over to the general fund.  This is kind of a sleight of hand, but we can’t continue with this [even though] it might have worked this year.”

She argued that we would be in real big trouble if the RDA goes away because we have shifted funds from there to cover general fund gaps, including for eight positions.

“I just want to point out that things are not okay and the tricks we’re using this year, we’re going to hit the wall soon,” the councilmember said.

Paul Navazio explained, “The explanation is more in line with an understanding, it can be interpreted as a cost shift, but basically there’s $5 million of city overhead that is entirely covered by the general fund.”

He continued, “We have historically – and it goes back much beyond 2009-10 – made an effort to recover appropriately through good accounting practices… appropriate recovery of citywide overhead that’s borne by general fund across other funds.  That’s what this attempts to do.”

Along with this proposal were other cost-cutting measures.  According to the staff report, “The City Manager’s Office is also implementing a series of administrative cost-control measures aimed at reducing departmental expenditure through the remainder of the current fiscal year, and potentially mitigate impacts of selected budget reductions likely to be proposed for FY2011/12.”

They include a hiring freeze which would freeze all new hires regardless of funding source.  It would also “discontinue the use of position savings to backfill with temporary personnel, contract services or special assignment pay.”

It would suspend all non-essential and non-emergency overtime activities – however the language would clearly allow emergency services to continue to utilize overtime. 

Moreover, it would suspend all city paid travel, training and educational incentives, though there could be exemptions for mandatory State or Federal regulated training.

Furthermore, all services not currently under contract must be approved by the Interim City Manager in advance of commitment.

Finally, all discretionary spending by departments would be limited.

Ms. Swanson said of these changes, “I appreciate that you put in the hiring freeze, and everything coming before you for approval, and just in general really tighten down any discretionary expenses. I kind of think that just needs to be how we operate until further notice, it goes to our long term stability.”

The most curious portion of the meeting was listening to Stephen Souza.  While he remains resolute that things will get better, he seems to have been fully converted on a number of issues that have arisen over the past year.

He argued that the 15 percent reserve and the need to close it amount to a “magic number” and a “magic date.”

“We can see very clearly that $288,000 comes from four particular areas for which we need to scrutinize further because those are areas in which we’re not going to see more likely those funds coming back – motor vehicle in-lieu fee, state mandated reimbursements, planning fees and recreation fees,” Councilmember Souza added.

Councilmember Souza argued that we would see increases in both sales tax and property tax next year.  “I think we have bottomed on the real estate market – at least in this town – and we bottomed on the sales tax because we’ve added more sales tax generators.  Which will not to a large degree generate a lot, but they will generate more than they did last year.”

He sees two problems. First is the rising cost to retirement, which he argued should be borne by employees.  Second, he sees decreasing revenues to support services  that the city provides.  He says we need to determine what the core services that we need to deliver and the need to do things that we’ve never done.  He is talking about funding roadways, streets, and bike paths.

Councilmember Greenwald would later respond, “I don’t necessarily share Steve’s optimism about our housing prices bottom.”  She pointed out the biggest local impacts such as layoffs and furloughs by the state and UC have only recently been implemented and we have not felt the full effect yet.

Councilmember Dan Wolk added, “We’re all pretty uniform in the need to really cut and to think really long term about sort of what we need to cut.”

Mayor Joe Krovoza pointed out, “In the last two weeks, by doing what we’ve done in this exercise here, we’ve taken a hard look at the overall budget and we realize that there is more we can do in the cost recovery area to preserve our general fund.”

He added, “A couple of weeks ago we were $344,000 short of making the fifteen percent, now we’re within $40 or $50,000 or something like that.”

—David M. Greenwald reporting