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SR-9-A (25) 9-'A JAt~ 1 CM:JJ:LCB:dm:br:srcpfc Councll Meeting: January 19, 1993 Santa Monica, California TO: Mayor and Clty Councll FROM: Clty Staff SUBJECT: BACKGROUND INFORMATION FOR PUBLIC HEARING ON COMMUNITY INPUT AND CITY COUNCIL PRIORITIES FOR THE FISCAL YEAR 1993-94 CITY BUDGET Introduction Each year to inl tlate the annual budget process, the Council conducts a public hearing concerning the City's current and proJected financial status and on communlty budget priorities. Such a hearing is held prior to submittal of departmental budget requests to the ci ty Manager and therefore provldes an opportunlty for publlC lnput earller in the budget preparation process. The hearlng also allows time for more thorough staff and Council conslderatlon and evaluation of suggestions, and allows more time for public education on budget parameters and constraints. It 15 lmportant to notel however, that th1S early hearlng does not preclude or supplant the publ1C review opportunity and hearlng process normally scheduled for May and June. Executive summary Durlng the last elghteen months, the Clty has taken aggressive actlon to reduce City expenditures as a result of declining revenues due to the receSSlon and on-going economic slowdown. - 1 - q-A- '" . JJ1i;. ~ ~ 1 l~r:. ~ ..... -c. ~ Overall, budgeted expenditures for FY1992-93 were reduced approxlmately 11% from the FY1991-92 budget and about 60 positions were eliminated without layoffs and without significantly impactlng essential city services. The budget also provided an enhanced reserve fund to offset anticipated state revenue cuts to the Clty. In September, the State reduced Clty revenues by approximately $1.8 million. Last week, the Governor released his proposed state budget for FY1993-94. The proposed state budget not only contlnues the current year $1.8 million revenue cut to the city, but pre- liminarily increases It to approximately $5.5 milllon. These property tax funds are belng shifted to the schools. Replacing thlS state cut will be extraordinarily difficult for the City as recent economlC prO]ectlons indicate local economic recovery is not expected to begln untll FY1994-95. ThlS means there wlll be essentially no City economy-linked revenue growth next fiscal year. In addltlon, the city will also have to absorb various consumer price index-driven cost increases such as for fuel and utllities. In order to hopefully minlIDlze potentlally severe service reductions, staff has been reviewlng options for generating replacement revenues as well as comprehensively reviewing all Clty serVlces to reduce costs through further operating effl.ClenCles and restructurlngs. Prelimlnary results of these reVlews lndlcate that it will not be possible to close the Clty'S $5.5 million-plus budget gap wlthout either revenue increases or significant service reductlons. The results of these reVlews - 2 - will be provided to the council later in the City's budget process. Economic status The d1ff1cult budget 1ssues fac1ng the city for FY 1993-94 are directly Ilnked to the status of the economy. Wh1le the recent recession began in the third quarter of calendar year 1990 and techn1cally ended by the second quarter of 1991, the subsequent economic slowdown has continued nationally until the last two to three months. Many economic indices now appear to be indicating that a national economic recovery has begun and will be well underway later th1S Spr1ng, however, it appears that growth 1n the Gross Domestic Product (GDP) will st1ll only average a modest 3%/year over the next few yearsl w1th annual Consumer Price Index changes of 3% to 4%. While this 1S good news for the nation, 1t 1S not expected that this rate of GDP growth w1ll be suffic1ent to spur a quick turnaround in Cal1forn1a's economy. The State of California is still 1n the midst of its worst econom1C downturn Slnce the Great Depress10n of the 1930's. Since 1990, almost 900,000 Jobs have disappeared, and most forecasters proj ect the further loss of 60,000 to 801000 jobs before employment beg1ns to increase. ApproX1mately 20% to 25% of this Job loss 1S due to defense cutbacks and related contractions in the aerospace 1ndustry, while the remaining losses are due to the on-go1ng effects of the recession and to bus1ness downs1z1ng. At th1s t1me, there appears to be an - 3 - emerging consensus among economists that an economic turnaround will not begln in the state for at least another twelve months. When the state economy does turn the corner, the positive economlC effects will first be experlenced in Northern and Central California; Southern California will lag the state by about another twelve months lnto Fiscal Year 1994-95. ThlS is because more aerospace and related Job losses have occurred in the southland. As a result, for at least the next twelve months I Southern California home sales are expected to remain at their current low levels, office vacancy rates wlll be in the 20%+ range and hotel occupancy rates wlll be ln the 60% to 70% range. In contrast to the State's and region's troubled economles, the City's $4.8 billion economy fared relatlvely well this past year. Hotel occupancy rates, WhlCh exceeded 90% thlS summer, continue to be the hlghest ln thlS area, the office vacancy rate dropped to 13% and is expected to drop below 10% later thlS Spring, the number of businesses ln the Clty remained constant, City unemployment rates were lower than those for the City and County of Los Angeles and the State, and median household effective buying income grew to its highest level everl surpasslng that for the County, State and natlon for the first time. However, desplte thlS relatlvely strong econornlC performance, the rate of growth of economy-llnked General Fund revenues dropped to the lowest level in over five yearsl primarily due to a real dollar decllne In Sales Tax receipts. As a result, the City's expendlture budget was slgnlflcantly reduced as previously - 4 - dlscussed. The status of the City's economy and therefore city revenues are not expected to lmprove unt~l the regional economy begins a recovery ln FY1994-95. Th~s econom~c p~cture is status of the Federal further complicated by the unclear budget. President-elect CI~nton' s announced economic plan was to ~nsti tute a short-term economic st~mulus package and a long-term deflcit reduction program. The stimulus package was to focus on publlC works programs for infrastructure repair, worker trainingl and efforts to redirect financial institution resources into local econom~c development, with approximately one-half of the package dlrected specifically to cltles. However, ~t has recently come to light that the Federal def~c~t is projected to be much larger than anticipated, resulting ~n a growing hesitancy to institute any sizable economlC stimulus package for fear of further adding to the Federal deficit. A rapidly increasing Federal deficit could result in the slow~ng, or even reversal, of the emerging national economic recovery. Budget structure Due to the magnitude of state budget cuts and the likelihood of essentlally no local econom~c and related revenue growth until FY1994-95, preparing the city's FY1993-94 budget will be very diff icul t. To ass~st the Councll and publ~c ~n beginning to conslder posslble serVlce level reductlons and/or the implementatlon of replacement revenues, the following is a brief discussion of the City's budget structure. More detailed - 5 - information can be found in the City's Adopted Budget for FY1992-93. For budget purposes, the financial operations of the City are organized into twenty-three separate funds. The largest fund is the General Fund WhlCh constitutes about 54% of total city revenues. For ease of discussionl these funds can be grouped into three major categorles: Enterprise and Internal Service Funds which operate much like private businesses where the services provided are flnanced primarily from fees. Examples are the Water Fund, SOlld Waste Management Fund, and the City self-insurance funds. Special Revenue Funds which are used to keep track of expenditures that can legally only be made for specific uses and where the revenues come from speclalized sources. Examples are the Community Development Block Grant Fund and the Beach Fund. The General Fund ln which revenues and expenditures associated wlth providing basic Clty services such as Police, Fire, and Llbrary are tracked. About 65% of the General Fund is flnanced from tax revenues such as the utll1ty Users Tax, the Sales Tax, Property Taxes, the Business Llcense Tax, the Transient occupancy (or bed) Tax from hotels and motels and the Real Property Transfer Tax. Remalnlng revenues primarily come from other - 6 - governmental agencies, various fines and cost offsett1ng fees and charges. Attached are a ser1es of p1e charts show1ng the largest funds as well as the major revenue and expend1 ture components of the General Fund. Recommendation It 1S recommended that the Counc11 conduct the hearing to receive public input, and direct staff concerning priorities for preparation of the FY 1993-94 city budget. Prepared by: John Jalili, city Manager Lynne C. Barrette, Assistant city Manager M1ke Denn1s, F1nance Director Attachments - 7 - UJ Q) e 1:J !o 'CI) mCtl I :] 0) h c: "- II U Q) C\I (! Ii> : I ,..... I! '-I' i! Q) (j) 11 (I: ,... !I"O >- 1 Q) U. I....., Ia.UJ 10-0 1-05 i <( u. I ! ...... i o~ i~ ..... ctS IE !E I::J ; :cn #. t') #. '''It' ~ a, ("I '0 t: ~ LL 4IJ o t: III ... ~ . J;;: ... 4IJ - III $: -# o 10 '0 LL J;;: .,.~ 0- . III ('001- -~ J;;: 4>> a. Em 0...... 0- - ... C>>O - > a. 4IJ CD... _ '0- V~ CD<C a:: . - e 01 ~ .,. o 10 '0 t: ~ LL .,. (0 to '0 c: ~ u. 4J - . as ~ ... "# ~ C! III Qlo !I CD - 10 .. - :c: .:! ... \\ ~ \ III \. j:. W J ! \ . j J \ ~ i/:. i ~'" / ; ~ ~ ~,2// (I) ~ co '0 t: ~ LL. '0 o f1) .. ... CD c: G) (:) t: o "" ,..... to-- ~ """ I"- ,..... .. "" 0> ,.... Y7 II 10 ... 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