City Manager Steve Pinkerton has slightly upwardly adjusted city finances since December. He wrote, “On the whole, this updated report shows revenues increasing 8.95 percent while expenditures are increasing at a higher rate (11.29 percent) from FY 2014-15 to FY 2018-19 (Attachments A and B). The City is addressing its shortfall through a combination of increasing fee revenue, reductions/cost controls and a focused economic development strategy compatible with Davis values.”
The city manager, who exits at the end of next week, is asking council to “Direct staff to continue with community outreach to explain the City’s financial condition, options moving ahead and the financial strategy in the context of targeted economic development activities and to place any additional fund balance in the General Fund Reserve.”
The numbers do not change a whole lot, going from a $5.1 million imbalance to a $4.99 million imbalance. Without the new sales tax revenue, “Addressing the $4.99 million structural imbalance would mean a 10.4 percent reduction for General Fund and Internal Service Fund operations (like Police, Fire, Parks and Recreation) or up to 22.6 percent if Safety Services are held harmless.”
Even if the June sales tax measure is approved, there will need to be some adjustments, “The proposed half-percent Sales tax increase is projected to raise $2.7 million in the first year and approximately $3.6 million annually thereafter.”
The city can probably cover that in the short term by cutting out the last $1 million dedicated to roads in hopes that the voters will pass a parcel tax this November to address roads and other infrastructure needs.
City Manager Pinkerton writes, “The recommended reductions contained in this package are NOT reflected in the FY 2014-15 $49.65 million Preliminary General Fund budget.”
He continues, “If the Council directs staff to make the reductions, it will decrease the General Fund and projected structural imbalance by $1,164,027. The new General Fund will be approximately $48,486,588 and the structural imbalance will be approximately $3,826,242.”
He writes, “Staff is not recommending removing additional funds from the FY 2014-15 budget to account for vacancies and operational savings in the upcoming year, because this staff report proposes to reduce expenses by $1,164,027, which is roughly equal to the $1.2 M salary and operational savings that were taken out at the beginning of FY 2013-14. In other words, the savings have been captured through the proposed reductions. Second, since 55 percent of the proposed reductions are vacant positions, there are very few vacant positions in the General Fund and most are in Police and Fire which backfill unfilled positions with overtime.”
Steve Pinkerton further notes, “Attention has been focused on the structural imbalance because it signals that the City is relying on one-time money to balance its budget and that revenues are not keeping pace with expenditures.”
The following points address major changes since the December 2013 estimates:
- Update Revenue and Expenditure Projections: The December projections were based on very preliminary estimates. Two of the largest sources of revenue for the City are Property Tax and Sales Tax. In making projections, staff aims for reasonable estimates. Revenue and expenditure estimates have been adjusted upwards since December, partially as a result of having more information available. At this time, Staff is not comfortable further increasing FY 2014-15 revenues.
- Property Tax. As discussed in December, the City receives the bulk of its property tax in two installments; one in late January and one in May. At the time of the estimate, the first payment had not been received and the increases in Davis tend to be inconsistent as properties do not turn over frequently and there is very little new development. Regardless, in December the projection was increased by $300,000. The April estimate shows Property Taxes increasing by another $534,481 from December. The forecast has been adjusted to increase growth from 2.5 percent to 3.5 percent in out years.
- Sales Tax. Despite a 1.3 percent drop from the same quarter last year in December, Sales Tax revenue was up in the latest quarter. As a result, the April estimate was increased to $10.2 million. In the December estimate, staff acknowledged that it would come in higher but did not increase the estimate because we wanted to see how the other general fund revenues came in over the next several months. Adjusting for one-time bumps in Sales Tax revenue, it has increased 2.8 percent over the past nine years.
- Settlement for Property-Tax Administration Charges to ERAF. In late January, $256,429 was received as a one-time settlement with Yolo County over the calculation of property tax administration dollars. Counties had been applying the property tax administration fee to Educational Research Augmentation Fund (ERAF) and, in 2012, a decision by the California Supreme Court invalidated the practice.
- Expenditures. The difference between the December and April estimates are minimal. For the April estimate, staff used a combination of current payroll costs and an analysis of anticipated vacancies through the end of the fiscal year to project the salary and benefits. Water costs are based on estimates and reflective of the unusually dry winter which increased water usage in city parks
- Structural Imbalance. The December $5.1 million structural deficit was calculated by subtracting the revenue growth (projected to be $920,000) from the projected increase in expenditures. The April projection is $85,757 less, or $4.99 million, which is a minimal difference from December.
The preliminary General Fund budget still includes the following:
- An additional $2.5 million for infrastructure. Counting all funds, there is a total of $4.7 million budgeted, including $770,000 in appropriations from the prior year. Of this amount, $3,779,000 is General Fund.
- Utility cost increases of $94,000 and other insurance-fund increases $67,500.
- Maintaining funding of $500,000 for water conservation measures.
- First year of Fleet Replacement and Leave Fund paybacks ($415,000).
- FY 2014-15 labor rates calculated at agreed-upon terms. For example, current Memoranda of Understanding costs increased $360,000; medical insurance/cafeteria went up $321,000; PERS retirement $437,000; and, retiree medical is increasing $180,000. This is offset by employees picking up more costs and changes to retiree health. These changes will save approximately $5.2 million over the term of the labor contract.
- Removal of salary savings ($447,000) and operational savings adjustment ($770,000). Adding back $350,000 of budget savings for unfilled Police Department positions. In FY 2013-14, the department identified salary savings for vacant positions which was used as a reduction.
While the Vanguard believes that the sales tax measure will pass, there is no guarantee. Thus, “the Council will be considering the reduction package which has been updated by departments and include the worst-case scenario of 22.6 percent with public safety held harmless.”
The city manager continues, “In addition, cuts which total $1,164,027 are being recommended for implementation irrespective of the sales tax measure. About 55 percent of the reduction results from eliminating vacant positions or temporary-part time hours. The rest of the savings are from operational cuts and fund shifts. No filled positions have been recommended for elimination.
Summary of cuts:
—David M. Greenwald reporting