As the city continues its fourth year of using reserve dollars
to balance the budget, recently constructed Redevelopment Agency
projects continue to drain the city
’s general fund by hundreds of thousands of dollars annually.
But city council members say the expense of the new facilities
isn’t a cause for alarm, rather part of their plan to add more
activities and facilities for the community while building
structures that will ultimately increase city rev
enues.
As the city continues its fourth year of using reserve dollars to balance the budget, recently constructed Redevelopment Agency projects continue to drain the city’s general fund by hundreds of thousands of dollars annually.
But city council members say the expense of the new facilities isn’t a cause for alarm, rather part of their plan to add more activities and facilities for the community while building structures that will ultimately increase city revenues.
Finance Director Jack Dilles said if the city didn’t subsidize these programs, the city’s deficit would be less, but he also points out, “we would not have these wonderful facilities for everyone in the community to enjoy.”
The city will spend approximately $734,000 this budget year to subsidize the Community and Cultural Center, Morgan Hill Playhouse, Aquatic Center, and the new Indoor Recreation Center, which will open next summer.
At the May 20 budget workshop, the city reported the Community and Cultural Center (CCC), which opened in December of 2002, and Morgan Hill Playhouse, which opened in January of 2003, were running a current combined operating deficit of $579,410. City staff said actual expenses have not been tallied through the close of the budget year, which ended on June 30, 2005, but the city projected a deficit of only $326,161. CCC expenditures were already at $1.3 million by May of 2005. The new Aquatic Center, which opened in June of 2004, had a projected operating deficit of $274,213 for the last budget year.
“The council, when it voted for these projects, anticipated they would get a hundred percent return in user fees to offset costs and that hasn’t happened,” City Councilman Mark Grzan said.
Morgan Hill Mayor Dennis Kennedy said the council anticipated expenses would outpace revenues in those facilities for the first couple of years. He said the council believed the benefit of the new facilities was worth the added drain on the general fund.
“We felt the (Community Cultural) Center would provide a much needed service to the community and wouldn’t likely receive much revenue, but our goal is to keep the subsidy to a minimum, to continue to keep it running, since we feel the benefit to the community is sufficient to justify its cost,” he said.
This year, the city estimates the recent RDA projects will continue to draw on the general fund to pay operating expenses while staff works to increase revenues. This budget year the CCC and Morgan Hill Playhouse are estimated to run a $513,000 deficit. The Aquatic Center is estimated to operate $135,000 in the red this year.
Likewise, the city’s new Indoor Recreation Center is budgeted to lose $85,665 after it opens next summer.
In all, the RDA projects represent about $734,000 of red ink for the city.
However, city officials said they knew the new RDA projects would operate with a deficit when city council members, who also comprise the RDA Board, passed the projects and using reserves was part of the plan.
“Start-up costs (of the new facilities) were anticipated, (but) the operating costs as a percent of the budget are not significant at all,” City Councilman Greg Sellers said.
The newly opened RDA projects aren’t a total loss for the city, council members said. In fact, both the Cultural Center and Aquatics Center earn a significant part of their own operating budgets. The Community and Cultural Center, playhouse and Gavilan College, which cost the city roughly $20 million in RDA money to construct, was projected to reap $729,553 in revenues for the past budget year and some $767,000 this year. The Aquatic Center, which cost the city a total of $13.7 million in RDA funds to construct, is expected to make $1.1 million once receipts through June 30, 2005 are tallied; this year, projected revenues are at about $1.3 million. The city projects the Indoor Recreation Center, which is estimated to cost the city $26.5 million in RDA funds, will break-even in two years.
Likewise the new RDA projects aren’t the only significant increases in city expenditures this year. The budget deficit was also created by an increase in the city’s share of pension payments and health care costs for its employees. The city’s PERS (Public Employee Retirement System) contribution has increased 24 percent, or $288,000 this year, to a total of $1.5 million; health care costs have jumped 10 percent to $700,000, according to Dilles.
Though the city has been using its reserve fund to supplement the budget for the last three years, council members said that is exactly why they pinched pennies when creating the account that had an $11.3 million balance in 2003. Before the city learned it would receive $634,000 of Vehicle License Fees back from the state this year, the city faced a deficit of $1.2 million this year and as a result, projected reserves to drop to $8.5 million. The city expects reserves to dip to $4.3 million by 2010, if the city fails to develop other sources of revenue.
“The city is in a healthy surplus we can live on for a while,” City Councilman Steve Tate said.
Kennedy added, “Because our long-range plan shows we will ultimately correct the structural deficit of these programs, we have sufficient reserves to carry us through.”
“We could shut down the operation of these facilities so we break even, but we’re sitting on a very healthy reserve that was established for these purposes and believe it will carry us through,” he said. “We have to look at the long-term goal, the bigger picture,” and he believes the projects will ultimately benefit the city.
Kennedy noted, these projects were on the list when the city held a community-wide visioning process in the late 1990s.
“The community registered their opinions, with a community center on the top of the list,” he said. “The Aquatic Center was near top of the list, along with a new library, a new senior center, a new youth center. There was a call for more recreation facilities.”
He said when the community voted to extend the RDA, twice voters had registered their approval to build these facilities.
“These projects are the vision of the community,” said Kennedy.
The city has a plan, called a “soft landing plan,” to solve the structural budget deficit, council members said. It is a five-year strategy which involves “deferred maintenance, a combination of increasing revenue and cuts to services, and utilizing some of the city’s reserves,” Sellers said.
Increasing revenue by focusing on economic development, is also part of the plan, according to Kennedy. He pointed to the new Ford auto dealership, the new Home Depot and other new businesses as having benefited Morgan Hill; the new retail center to be built on 60-acres of land by Cochrane Road will benefit the city also.
The council does admit, however, there have been some mistakes made with the new projects, such as operating the Aquatic Center all year long last fiscal year.
“The facility was projected to break even in its first year of operation, however, it did not,” Kennedy said. The city made a mistake in keeping the facility open year-round, he said. This cost the city about $150,000.
“That was a mistake, which we will correct this year,” Kennedy said.
The city knows it needs to increase revenue to address the structural budget imbalance, if residents want to continue to maintain and improve services. This is why city officials plan to hold “conversations with the community,” to engage residents in discussions and gather their input on how to generate more revenue.
“We are operating on a deficit now, and if residents want to continue to maintain the level of services we have now, we will need to come up with some kind of revenue to sustain what we have now. If they want services to increase, we will need even more revenue,” City Manager Ed Tewes said.
Though the city will continue to dip into reserves for the next few years, Sellers said it isn’t an indication of a problem, but a chance for the council to find out what services residents want and what they’re willing to pay for.
“We need to be cautious, we are in good shape relative to other cities, but there needs to be a two-way conversation between the council and the community regarding the level of services residents would like,” he said. “The challenge will be to feel out what residents believe is the appropriate level of services needed in the community. We will reach out to them and include them in discussions.”
