Morgan Hill city officials and council members are staring down a three-year, $12 million hole in revenue for public services due to the coronavirus pandemic and related stay-at-home orders.
Almost every category of the city’s budget is already suffering significant losses as the council prepares to approve a two-year budget for all city services in June. City staff released their recommended 2020-2022 city budget on April 17, but cautioned that the impact from COVID-19 will likely be so expansive that no service enhancements or “decision packages” are proposed.
“The pandemic’s impact on the global and local economy, coupled with existing unfunded needs and the loss of revenues from the city’s Residential Development Control System (RDCS), has negatively impacted the city’s budgetary outlook in a substantial way, and a lot sooner than originally projected,” City Manager Christina Turner wrote in her Budget Message to the council.
City staff’s most recent projections show that, over the three years starting with fiscal year 2019-20, sales tax receipts could fall by about $4.8 million. The city expects to receive about $8.9 million in sales tax revenues for the current fiscal year, which is about $1.5 million less than was budgeted more than a year ago.
City staff also expect to lose about $1.7 million in projected hotel taxes over the coming three-year period. These revenues would have generated about $3.1 million in 2019-20 without a pandemic. Now, city staff expect to collect about $2.2 million in hotel taxes for 2019-20.
While property tax revenues are not expected to immediately plummet, city staff expect this source of funds will decline by about $800,000 from previous projections over the next three years. “However, the impact to the property tax for the next few years will be dependent on the duration of the pandemic,” Turner wrote in an April 15 memo to the city council.
These three sources of revenue—sales, hotel and property taxes—make up most of the city’s general fund, which pays for basic city services such as public safety, parks and street maintenance.
Turner summarized in her memo to the council: “Businesses, large and small, have had to close or significantly reduce service,” since the March 17 stay-at-home order was initially enacted. “Many of these businesses provide sales tax or transient occupancy (hotel) tax that support the city’s General Fund, which supports city services. Additionally, the city too had to discontinue recreational programs, which will also impact the city’s revenues. Recreation services revenue, the city’s third largest revenue source of the General Fund, is expected to be one of the hardest hit categories due to facilities’ closure.”
The recommended budget projects a three-year, $2.1 million decline in revenue for recreation services. Most of this revenue is paid by membership and user fees. The city expects to receive about $7 million in recreation revenue in 2020-21.
The proposed budget’s development services fund—financed by construction activity—could lose about $2.8 million over the next three years from previous projections, according to city staff. By the end of the current fiscal year (June 30), the development services fund will have collected about $4.1 million—about 23 percent less than expected.
City Hall has already enacted a hiring freeze, with the exception of certain critical public safety positions, Turner’s budget message says. The proposed budget recommends that the council defer some building maintenance projects and reduce contracted services.
In March—shortly after the shelter-at-home order began—City Hall furloughed 76 part-time temporary employees and 22 regular staff members, Turner said. The city has also reduced some contractual services—such as janitorial and maintenance.
“All these steps will not be enough as the bleak outlook requires further reduction,” Turner wrote in the budget message.
More “service level reduction” possibilities—which could include layoffs—will be presented to the council as they deliberate over the recommended budget in the coming weeks, Turner’s budget message said.
The total recommended budget for 2020-21 is $162.3 million, and for 2021-22 it is $144.3 million. This includes general fund expenditures of $46.2 million in 2020-21, and $47.7 million in 2021-22.
The city’s general fund budget for the current fiscal year, which ends June 30, is about $41.1 million.
City Hall currently has a general fund reserve of about $15 million. Often described as a “rainy day fund,” the reserve will likely be put to use to fill in some of the pandemic-related revenue holes over the coming years.
