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HomeMy WebLinkAbout17 - Financial Impact of the State Budget ProposalCITY OF NEWPORT BEACH CITY COUNCIL STAFF REPORT Agenda Item No. 17 March 23, 2004 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Administrative Services Department Dennis Danner, Administrative Services Director, 949 - 644 -3123, ddanner@city.newport-beach.ca.us SUBJECT: Financial Impact of the State Budget Proposal and Related Issues ISSUE: Will the State Budget proposal or related financial issues have any monetary impact on the City's proposed budget for Fiscal Year 2004 -05? RECOMMENDATION: • Receive and file the report. DISCUSSION: Background: At a City Council Meeting earlier this year, Council Member John Heffernan requested a report on the impact of various State Budget actions, other financial issues, and the recent voter approved Propositions 57 and 58. This report will address these issues. Analysis: Since the passage of Proposition 13 in 1978, local agencies' budgets have become more and more intertwined with (and dependent upon) the State Budget process. Since the early 1980's the following local government revenue sources (or in some cases increased charges) have been either reduced or eliminated by State actions: • Highway Carriers Subventions • Liquor License Subventions • Bank In -Lieu Subventions • Business Inventory Exemption Reimbursement • Cigarette Tax Subventions • Jail Booking Fees • Property Tax Administration Fees Financial Impact of the State Budget Proposal and Related Issues March 23, 2004 Page 2 • Education Revenue Augmentation Fund (ERAF) • SB 90 Mandated Cost Reimbursements • Vehicle License Fees Backfill • State Library Subventions This list is just a sample and not all inclusive. To give the reader a sense of magnitude of these revenue losses (or fee increases), the cumulative loss to the City of secured property taxes alone since the implementation of ERAF in 1992 -93 through the projected budget year of 2004 -05 will be in excess of $56 million. The ERAF shift of secured property taxes from local agencies to school districts is designed to relieve the funding burden on the State's General Fund for school districts mandated by Proposition 98, approved by the voters in 1988. The Governor's budget proposal increases the ERAF amount an additional $1.35 million from the City in FY 2004 -05. In addition to the uncertain revenue outlook mentioned above, the City also faces many rising costs. Our pension costs for our employees are increasing dramatically, primarily because of market losses experienced by CalPERS, our pension provider. In addition, the City is currently facing rising costs in areas affecting all business enterprises, including property and liability insurance premiums, workers' compensation costs, utility costs, employee salary costs, etc. Response: In preparing the City's proposed budget for FY 2004 -05, staff took all of these revenue and expenditure factors into consideration. We included: • The further increase of property tax losses to the State (ERAF) • Full funding of the VLF Backfill in the amount of $4.2 million • Increased insurance and utility costs • All known (and assumed) salary and benefit costs, including the increase in pension costs • Increases due to private contract adjustments • General Fund Capital Project funding in the amount of $2.0 million (as compared to a "normal" amount of $4.0 to $5.0 million) • Assumed very little (or no) adjustments in employee contracts through negotiations • No use of reserves to offset any revenue losses or expenditure increases In addition to the above, we have instructed all departments that there is a modified hiring freeze whereby all departments will have to obtain the City Manager's approval before recruiting for a vacant position. Further, all supplemental budget requests for FY 2004 -05, above the baseline budget approved by the City Council for FY 2003 -04 will be subject to increased scrutiny over past years and very few will be recommended to the City Council, including any new staff positions. 1_J Financial Impact of the State Budget Proposal and Related Issues March 23, 2004 Page 3 Outlook: Based upon the above assumptions and instructions, we will be submitting a balanced budget for FY 2004 -05 to the City Council with no use of reserves. This by no means indicates the task was easy. Our initial budget estimates indicated an operating deficit of approximately $1.7 million for FY 2004 -05. After all department requests were input, that operating deficit had shrunk to approximately $100,000. This was only accomplished with the full cooperation of all departments and with an adherence to a strict fiscal discipline. It is anticipated that this small operating deficit can be eliminated by re- estimating key revenue sources. The proposed budget will be a status -quo budget, with no reduction in service to the public and no new service programs. While this budget will be a tight one, with little new in terms of programs and services, we anticipate the FY 2005 -06 and 2006 -07 budgets will require us to draw from our PERS reserve fund we have set aside over the past several years to help us meet the peak of the PERS rates, when they occur over the next several years. Concerns: There are still many concerns facing the City, including the ongoing State budget crisis, spiraling pension and insurance costs, property tax litigation, and the uncertain economy. In addition, the City continues to defer much needed infrastructure maintenance, and it is not funding depreciation of buildings and other assets. By delaying these capital improvements they only become more costly in the long run. All in all, however, it could be much worse. Both residents and visitors are fortunate that Newport Beach has a strong, diverse revenue base with which to fund the City's operations. Newport Beach has faced fiscal crises before, and the State was, in large part, the culprit then as well. However, over the past several years, the City Council and staff have worked together to create a more solid foundation of local fiscal reserves. They were clearly needed. Those reserves now enable us to adjust to the current round of problems in a more orderly manner. To the best of our ability, the budget we are developing properly reflects all these considerations. The City Council should remain diligent to the uncertainties cited above and continue their conservative approach to funding municipal services. Prepared and submitted by: Dennis C. Danner Administrative Services Director