Revised local financial forecasts that predict more sales tax revenues and lower city employees’ retirement costs might prevent the need for drastic budget cuts in response to the loss of about $23 million in annual redevelopment revenue.
The city council will discuss the latest projections and consider about $615,000 in mid-year budget amendments Wednesday. Those more pressing mid-year adjustments include higher-than-anticipated payouts for workers compensation, employee benefits (including sick and vacation leave payouts), liability insurance claims and other costs.
Most of those adjustments – about $545,000 – will be paid for with reserve balances within the separate funds, according to city finance director Kevin Riper.
The remainder of the cost increases – about $70,000 – are in the general fund. And since most of those costs are related to membership recreation services – such as increased services contracted by the YMCA and the replacement of gym equipment – they will be “more than offset” with membership fees which have produced about $134,000 more revenue than anticipated so far this year, Riper said.
But in the longer term, the city will need to figure out how to find a new funding source for or eliminate more than $1.1 million in general fund and development-related services that until now were funded by the RDA.
City staff will lay out a proposal to the council Wednesday to reallocate those costs to other funds and avoid laying off any employees or eliminating any major services, at least for now.
The state abolished RDAs as of Feb. 1, redirecting their revenues and assets to education and other basic services. In Morgan Hill, aside from bond payments and capital expenses those revenues funded all or part of the salaries of 17 city employees, at a cost of $250,000. The revenues also paid for about $900,000 in central services overhead and administrative costs, according to city staff.
Now city staff recommends that those costs be shifted to other funds – mostly the general fund and community development fund.
That means mid-year layoffs and other cuts can be avoided, City Manager Ed Tewes said. Even without the RDA, there is still plenty of work available for the formerly RDA-funded employees to stay busy.
Most of those employees will still be able to work on “winding down” the RDA as the newly formed successor agency. Those jobs include administering the payment of the agency’s existing debts, contracts and other obligations such as more than $157 million in bond repayments.
They will also be occupied with existing bond-funded projects such as the Butterfield Boulevard southern extension, and activities of the successor housing agency, which is charged with carrying out affordable housing programs and obligations already set up by the RDA’s former “20-percent set-aside” funds. Those include a number of outstanding loans to home owners, developers and businesses that the new agency has to collect.
“Some of the employees formerly paid by the redevelopment will have all or a portion of their salary paid by the successor agency and the successor housing agency,” Tewes said.
That includes Tewes himself, as 40 percent of his salary formerly paid by the RDA will instead be covered by the successor agency (25 percent) and successor housing agency (15 percent).
Other employees formerly paid by the RDA are a part-time police records specialist and a full-time police officer. Their salaries will likely be financed by the general fund, according to the city staff report.
The new five-year budget forecast to be presented Wednesday projects the need for more spending from the reserve funds, but a more optimistic fund balance by 2016 than expected before the RDA was eliminated. Even if the general fund continues to subsidize a $400,000 annual “structural deficit” in the community development fund (also opened up by the elimination of the RDA), reserves are projected to drop to 17 percent of general fund revenues in 2013, but rise up to 24 percent by 2016, according to the city staff report.
But the council has previously indicated it does not want the general fund to subsidize community development services, which are mostly used and funded by developers who pay fees for permits, site reviews, application processing and other services. A new fee schedule adopted earlier this year was updated to ensure the city recovers all of its community development costs, but it did not take into account the possible and now actual loss of the RDA, Tewes said.
As a result, city staff will revise those fees for the 2012-2013 budget, in hopes of dropping the fund’s newly projected deficit down to zero, Tewes said.
And while the general fund is now expected to begin running a surplus by 2015, city staff expect to draw about $1.1 million from the reserves over the next three years, if no service cuts are made during that time. The city’s reserve fund currently contains about $6.8 million.
Allowing the general fund to reach its eventual surplus is an expected rise in sales tax revenues, and a recently revised projection by CalPERS of the city’s retirement costs.
In 2010, the city collected about $5.4 million in sales tax revenues – an 11-percent increase from the $4.8 million collected in 2009. And sales tax revenues collected in the second quarter of the current fiscal year ($1.6 million) are about 18 percent higher than they were the same three-month period a year ago ($1.4 million).
The rate is faster than city staff expected. This is due to the high price of gasoline and Morgan Hill’s “fortuitously disproportionate share of gasoline sales tax revenue,” and the opening of new businesses that already generate or will soon be generating new sales, according to the staff report.
As a result, city staff increased the projection of sales tax revenues for this year by $850,000, and for each of the next five years by $1 million annually.
And while city staff do not yet know exactly how much the taxpayers’ share of retirement costs will be, an “actuarial study” done by the state pension fund, CalPERS, late last year suggests that city will not have to spend as much on that cost as previously expected, Riper said.
About a year ago, CalPERS indicated the city’s retirement cost for its employees could rise by more than $400,000 annually by this year. Riper said the updated study suggests the cost will not go up nearly that much.
The city currently spends about $2.3 million annually on CalPERS.
The state pension fund’s most recent projection shows that the city’s contribution for police employees’ retirement, for example, will drop five points from its previous prediction to 32.7 percent, according to city staff.
The decrease is the result of a “strong performance” of the CalPERS investment fund, which grew by more than 20 percent in 2011, city staff said.
City costs formerly funded by redevelopment, and how to coverthem:
– $250,000: Employee salary costs to be reallocated to thegeneral fund and community development fund
– $115,000: Street paving, to be shifted to the capitalimprovement program
– $900,000: Administrative overhead, to be distributed across avariety of funds – mostly the general and community developmentfunds
– $400,000: Annual community development fund deficit startingin July, to be covered by the general fund or revised developmentuser fees
Downtown projects scheduled to be funded by remaining RDA bondproceeds:
– $7.6 million: 300-space parking garage on Depot Street
– $1.1 million: Relocate passenger train platform to the westside of tracks
– $3 million: Financial assistance to private developers fordowntown projects
– $2.9 million: Monterey Road streetscape improvements
– $1.8 million: Renovate downtown parking lots
– $900,000: Linear park
– $2.1 million: Renovate downtown side streets
– $900,000: Fourth Street reconstruction
– 8.8 million: Hale Avenue extension
