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SR-202-001 (64) CMO:\F:\CMANAGER\Staff Reports\Budgetpriorities-2002.doc Council Meeting: January 8, 2002 Santa Monica, CA TO: Mayor and City Council FROM: City Staff SUBJECT: Recommendation to consider the fiscal, economic and community satisfaction context in which the budget will be formulated and receive public comment, hold discussion and identify budget priorities for Fiscal Year 2002- 03, including Community Development Block Grant (CDBG) and Home Investment Partnership Act (HOME) Programs Introduction This report presents the significantly altered context in which the FY 2002-03 operating and capital budgets will be prepared. It recommends that the City Council consider those conditions, acknowledge the results of a recent community satisfaction survey, take input from the public and provide direction to staff regarding budget priorities, including CDBG and HOME programs. For readers who are unfamiliar with the structure of the City’s financial operations, background information on the current budget is included as Attachment A to this report. Background Each fall, City staff assesses national, state and regional economic forecasts to project likely effects on the local economy and on the revenues that support municipal activity. The projections are refined over the course of the budget process as the revenue and expenditure experience of the current fiscal year unfolds. This year, following a period of unprecedented economic growth, the economy is in recession and the events of 1 September 11 create a climate of considerable uncertainty in which the budget process must take place. While the City Council and staff receive informal input throughout the year, a telephone survey is conducted in the fall to assess residents’ satisfaction with municipal services and identify issues that may require attention. An opportunity is provided in December and January for community comment on budget priorities on the City’s website. Input is also requested at the publicly noticed hearing to be conducted this evening. The process of projection and input is of particular importance, given the current context, to ensure that the budget crafted over the next several months, and proposed for Council adoption in June, reflects community interests and is a sustainable plan of revenue and expenditure. To more effectively focus financial resources and staff effort on key issues of concern to the community, the City Council is asked to identify priorities for what will likely be a no- growth budget year. Discussion Budget Context – Economic and Fiscal Forecast The economic and fiscal contexts have substantially changed since last year’s budget priority session. While the City ended FY 2000/01 in a strong financial position, during the last quarter of FY 2000/01, the economy began a downturn that became more rapid and 2 deeper than expected by almost all economists. Data signaling this more aggressive slowdown was not available until after the FY 2001/02 City budget was adopted on June th 19, 2001. The effects of September 11 further aggravated the economic slowdown that is now officially a recession. As part of the FY 2000/01 Year End budget report, Council received preliminary staff estimates of revenue losses, primarily from Transient Occupancy and Sales Taxes, that could be expected this fiscal year and in FY 2002/03. Based on recent economic projections of the City’s economy provided by California State University at Long Beach, forecasts from other authoritative economic sources and some additional current year fiscal data for the City, projected revenue losses will probably be somewhat less than the early estimates. However, difficult budgetary decisions must nevertheless be made over the next 6 months to bring General Fund on-going revenues and expenditures back into a sustainable balance. These decisions will be guided by the availability of updated economic and fiscal data that may signal how rapidly and how strongly the economy will recover, and whether the recent combination of unique events has a long-term effect on the ability of the local economy to generate on-going revenue to pay for City services and service levels. The current year General Fund revenue loss is estimated at $ 7.7 million. To mitigate this revenue shortfall, a cost savings program is underway in every department that may reduce this loss up to 50%. We have also reviewed the City’s capital expenditure program and should be able to close out and/or defer various projects to cover the remaining 3 revenue losses. Details will be presented to the City Council as part of the FY 2001/02 Mid-Year budget report. For next fiscal year and over the following four fiscal years, the projected average gap between revenues and expenditures ranges from about $ 4.6 million (2.5%) to $ 11.0 million (6.2%) per year. Due to the City’s overall financial strength created by years of fiscal discipline and prudent budget decisions by the City Council, staff has identified a range of strategies to re-balance the General Fund. An analysis of available strategies and a recommended course of action will be presented as part of the Proposed FY 2002/03 City Budget in mid-May, 2002. A no-growth budget is currently contemplated, and staff will be prepared to present budget reductions should that prove necessary. As usual, there are several uncertainties that could exacerbate the estimated revenue shortfall: 1) If there are further terrorist attacks or some other major “shock” to consumer and/or business confidence, the recession could be prolonged and/or deepened. 2) The State is facing a $ 12.4 billion budgetary deficit as it prepares its FY 2002/03 budget. Privately, State officials have indicated that this deficit could reach $ 14.0 to $ 18.0 billion. To close a budget gap of this magnitude, local officials around the state are very concerned that the State may, once again, take local revenues to help balance the State budget, despite assurances from the Governor that such a budget-balancing strategy will not be used. The local revenue source most 4 vulnerable is the Motor Vehicle In Lieu Tax. For the City, about $ 3.2 million is at stake. 3) Our five year expenditure projections have not included the full impacts of implementation of a living wage ordinance, or the impacts of possible cost increases/revenue losses associated with three pending state-wide legal issues: PERS enrollment of non-permanent employees, binding arbitration, and property tax assessment practices. Staff will continue to monitor these uncertainties and refine projections over the course of the budget preparation process. Budget Context – Resident Satisfaction For the fourth consecutive year as part of the budget preparation cycle, the City conducted a scientifically valid telephone survey, asking, "How are we doing?" in delivering City services. The report of survey findings from the 411 randomly selected households is Attachment B to this report and is available on the City web site. The following summarizes key findings of the survey: ? Fully 84 percent of Santa Monicans say they are "very" or "somewhat" satisfied with the job the City of Santa Monica is doing to provide City services. This figure reflects an increase over the satisfaction levels found a year ago, and nearly regains the very high levels of satisfaction found in the 1999 resident survey. 5 ? Issues related to the homeless, growth, housing and traffic top the list of concerns voiced by residents in the 2001 survey; however, concern about housing and growth fell substantially from the prior year (each by more than 50%), while concern about traffic increased (from 9 to 21%). ? While improving communication was a top suggestion made by residents for ways to improve City services, respondents expressed high levels of satisfaction with the way the City communicates with residents (73% saying they were "very" or "somewhat" satisfied), with the Seascape newsletter once again ranked highest (35%) as a source of City information and CityTV and the Los Angeles Times ranked second (18%). ? For the first time, residents in the citywide survey were asked to rate customer service at City Hall for courtesy and responsiveness. Of those who had contacted a City department in the past year (52% of those surveyed), 90 percent said the staff they dealt with was "very" or "somewhat" courteous and 75 percent said staff was "very" or "somewhat" responsive to their needs. Seventy- two percent said they were satisfied with the service received after contacting a City department. Results of the survey are being communicated to employees and City departments will use the survey data to inform budget preparation, including performance measures. 6 Budget Context – CDBG/HOME As part of the FY 2000-01 budget process, funding for social service grants was recommended for a period of three years dependent on appropriations in each of the two subsequent fiscal years. Third year funding for grantees will be recommended in the FY 2002-03 Budget for agencies that continue to meet the performance targets and work plans set out in their grantee agreements. Public input on year three of the grant program including use of the City’s CDBG and HOME funds, will assist in preparation of an action plan for this year as required by the U.S. Department of Housing and Urban Development. Budget Context – Known Requirements for Capital Projects and New Ongoing Services The funding needs for existing and planned capital projects continue to exceed the availability of capital funds. Several significant capital projects remain unfunded or underfunded in the current three-year capital plan. These projects (and their respective budget needs) include the reconstruction of the Main Library ($5 million), Virginia Avenue Park ($4.3 million), 415 PCH ($8.3 million); downtown urban design elements not related to the transit mall ($1.4 million); Airport Park ($800,000); Exposition Bike Path ($660,000); renovation of the Senior Recreation Center ($2.2 million); th construction of a breakwater ($1.9 million); Pier Ramp ($2.5 million) and 20 and Cloverfield Improvements ($2 million). Other projects that will require substantial financial resources within the next ten years, with some portion likely from the General Fund as well as other revenue sources, include the Civic Center Specific Plan Working Group proposal (over $70 million); 7 seismic renovation and rebuild of the downtown parking structures (over $90 million); renovation and seismic upgrade of City Hall and a new public facilities building ($60 - $70 million); the Corporation Yards Master Plan ($50 million) and requests from Santa Monica College for seismic retrofit resources. In addition, current projections include approximately $5.7 million in on-going expenditures within the next five years to support expanded maintenance and operations at Virginia Avenue Park, Airport Park, the new Public Safety Facility and Main Library. As staff identifies strategies to rebalance the General Fund for FY 2002-03, some capital projects that were previously adopted or included in the current three-year capital plan may have to be deferred or phased over time. These strategies will be presented to Council as part of the FY 2002-03 budget presentation in May. A Focused Agenda with Outcome Measures Development of the FY 2001-02 budget and work plan benefited from Council’s early identification of key priorities. The FY 2001/02 mid-year budget report will detail progress achieved by focusing staff and material resources to address them. It would be timely now for the City Council to consider public input, reaffirm or change, and in light of current economic conditions, more finely hone priorities for FY 2002-03. 8 Budget/Financial Impact There is no direct impact of establishing priorities for the FY 2002-03 operating and capital budgets. Staff will return with a plan of work and a corresponding budget in support of selected priorities for Council consideration in June 2002. Recommendation It is recommended that the Council consider the context in which the FY 2002-03 operating and capital budgets will be prepared, hear input from the public, and provide direction to staff regarding priorities for the coming fiscal year, including the CDBG and HOME programs. Prepared By: Susan McCarthy, City Manager Gordon Anderson, Assistant City Manager C.M. Dennis, Director of Finance Mona Miyasato, Assistant to the City Manager for Management Services Judy Rambeau, Assistant to the City Manager for Community Relations Barbara Stinchfield, Director of Community and Cultural Services Attachment A: Structure of City’s Financial Operations Attachment B: Resident Satisfaction Survey 2001 9 Attachment A STRUCTURE OF THE CITY’S FINANCIAL OPERATIONS The financial operations of the City are organized into funds for which budgets are prepared. These funds are grouped into three major categories: , which is the largest fund which constitutes about one- The General Fund half of all City revenue, provides basic City services such as Police, Fire, and Library. About 73% of the General Fund is financed from tax revenues such as the Utility User’s Tax, Sales Tax, Property Taxes, Business License Tax, Transient Occupancy Tax (also known as the bed tax) from hotels and motels and the Parking Facilities Tax on all paid parking in the City. Remaining revenues primarily come from other governmental agencies, various fines and cost offsetting fees and charges. operate much like Enterprise and Internal Service Funds private businesses where the services provided are financed primarily from fees. Examples are the Water Fund, Solid Waste Management Fund, and the City self-insurance funds. keep track Special Revenue Funds of specialized revenues and expenditures that can legally only be made for specific uses. Examples are the Community Development Block Grant Fund and Beach Fund. The following pie charts show where the City’s money comes from and where it goes. PIE CHARTS: Analysis of Adopted City of Santa Monica FY 2001/02 General Fund Revenue – Local Taxes Analysis of the adopted FY 2001/02 Budget: All funds Analysis of the ado 10 11