At the current rate of spending, the city of Morgan Hill will
have about 30 percent less money in five years than councilmembers
thought they would have just four months ago, and that’s why they
will have to fill in about $3 million in next year’s budget with
both reserve fund spending and ongoing service cuts.
At the current rate of spending, the city of Morgan Hill will have about 30 percent less money in five years than councilmembers thought they would have just four months ago, and that’s why they will have to fill in about $3 million in next year’s budget with both reserve fund spending and ongoing service cuts.
City staff’s forecasts of expected revenues continue to worsen as private sector sales activity that determines the level of funding available for public safety, parks and recreation, and street repairs remains flat. That was some of the bad news presented to the council Wednesday by members of the city’s budget team, in a report that Councilman Greg Sellers later called “sobering.”
“It’s obvious we’re not out of the woods yet, and the woods keep getting darker,” Sellers said.
In December, officials projected the general fund reserve to dip to 9 percent of revenues by 2014, if no savings were enacted. Following that report, the council changed its policy to keep reserves at a minimum level of 15 percent, rather than the 25 percent cutoff it has used in the past. The city projected about $26.4 million in general fund revenues for the 2009-2010 fiscal year, which ends June 30. However, as of Wednesday the reserve is expected to be in the red by 20 percent of total revenues by 2014.
“We haven’t hit bottom yet,” city Budget Manager Jimmy Forbis said. “We don’t know when that bottom is.” He added that cities, counties and school districts throughout California, as well as the state itself, are at the mercy of the same dismal economic factors.
City staff is in the process of devising options and recommendations to find at least $1.8 million in cuts, which would be ongoing throughout the five-year projection, according to Forbis. Another $1.2 million from the reserve fund will be needed to backfill other expenses.
In normal years, this $3 million impact would be funded mostly by sales, property and hotel tax revenues, but those sources have diminished as the economic downturn continues.
Last week, City Manager Ed Tewes presented “budget targets” to all the departments supplied by the general fund. Those targets would cut a total of $2.3 million from the general fund, he said, though he declined to release the details in each department.
Department managers are expected to present their recommendations in the coming weeks to Tewes, who will present a recommended fiscal year 2010-2011 budget to the council May 15.
In other bad economic news, Morgan Hill’s unemployment rate stands at about 14 percent, meaning about 2,500 previously employed residents are unemployed. That’s about 1,000 more than a year ago.
Local housing activity is also drastically down from a peak in 2005, when 272 new residential construction permits were issued. In 2009, only 25 permits were issued. Perhaps the good sign is already in 2010, the city has granted more home building permits than in all of last year.
As of January, sales tax revenues were already down by about 45 percent from their peak of about $6.6 million in 2007. Wednesday’s updated presentation expects another $700,000 loss in sales tax revenues by June 30.
Property tax revenues are also down by another $250,000, due to a decline in assessed property values. The 2009-2010 city budget projected property tax revenues of about $3.9 million for the year.
Councilmember Marby Lee said the latest numbers are “disheartening.”
“Back in 2008, they said by 2010 we could be hoping to get out of this, and now here we are in 2010 and it doesn’t seem to be picking back up.”
Meanwhile, most councilmembers are hard-pressed to come up with new ideas on how or where to save money. The city can’t control the deteriorating economy, but it can control some costs – particularly those of employees’ salaries and benefits, which make up about 56 percent of the $27.9 million general fund.
Lowering the city’s employee costs could mean either letting go of some employees or cutting salaries. “That’s a little more difficult to do but it’s something we have to look at. This affects a lot of people we work with and a lot of people we serve,” Forbis said.
City staff are in the process of attempting to negotiate delays or concessions of scheduled raises from the three local unions. Those raises, determined by contracts that extend to 2014, will add up to about $1.23 million in the next four years.
Lee thinks the city should look at the possibility of privatizing some of its facilities as a way to achieve some savings. Notably, the Community and Cultural Center and the Aquatics Center have traditionally run recurring deficits and their operation by a contracted third party should be considered.
“I think we should at least look at that,” Lee said. She noted that the city hired a company to run the concessions booth at the Aquatics Center a couple years ago, and the result has been positive. “People are happy with the facility and the bottom line is better.”
She said she has mentioned privatization of these two facilities in the past, but the majority of the council doesn’t seem to want to consider it.
Overall, the city’s parks and recreation department, which manages both facilities, has improved its cost-recovery ability since 2007 due to administrative savings and growing membership. Last year, the department recovered about 84 percent of its $5.3 million in costs.
But there’s no escaping the fact that costs for city employees make up more than half the general fund.
Sellers said working out the suggested details of the budget and savings is better left to city staff until a recommended budget is presented to the council May 15. But he said after cutting about $2 million last year, when they even considered turning off street lights to save money, “We’re way past originality at this point.”
“The reality is there is precious little (waste and excess), and there hasn’t been (any) for a long time. It’s real basic meat-and-bones cuts that we’re unfortunately going to be looking at making.”
Councilwoman Marilyn Librers emphasized that all city departments will be affected by the upcoming cuts, but she agreed the city is already run efficiently.
“Everyone is working hard to have the least amount of negative effect on our workforce,” Librers said. “Having been on the council a little over a year, I am impressed with what a lean machine the city is. I don’t think people realize that (city employees) are working hard and fast.”
An economic recovery is still expected, but even that will take place later than the city thought back in December. The recovery could start in 2011, when property and sales tax growth is expected to resume at about 5 percent per year.
“It will be a slow and gradual recovery,” Forbis said.
