EXECUTIVE SUMMARY

This is the third is a series of planned special reports that are being prepared on the budget strategies described in the City Manager's 6-Point Plan of Action to the City's budget crisis.  This report addresses the recommended reductions to City services and levels of service.

The City's budget crisis was triggered by higher than projected costs for employee base wages and retirement programs, combined with uncertainty about future state provided revenues.  These factors opened an estimated $11-$17 million gap between expenses and revenues in the General Fund.  Current year revenues are not stabilizing as expected.  Rather, key revenues are continuing to decline.  The General Fund gap is now projected to be $14-$15 million annually for the next 20 years.  This does not include any projected reductions in state-provided funding.

Savings generated by the budget strategies could total $13.4 million.  This includes $8,455,059 million in savings and increased revenues created through the recommended reductions to City services and levels of service as outlined in this report.   It is important to state that the City Council will need to consider, revise as needed, and ultimately adopt any reductions to services and levels of services.  Those decisions represent the policy direction and guidance that only the City Council can make.

This recommendation includes three key components.  They are:

Proposed reductions to service levels in 39 programs included in the General Fund.  For each program, changes to program outcome measures, budgeted funding, work hours, full-time equivalent positions, and products are identified.

Proposed increases to fees or charges, or the establishment of new fees or charges.  Specific fees and charges proposed for programs managed by the Community Development, Finance, Library, and Public Works Departments are presented.

Proposed reductions to programs in other City funds.  The reductions are recommended to make these funds as cost efficient as possible, and to provide opportunities for some employees affected by service reductions to be transferred to vacancies in utility, enterprise, or other funds.

There are hard "costs" that will result if the recommended reduction is adopted.  Services will be reduced to our residents, businesses, and visitors.  For some services, fees will have to be increased or imposed for the first time.  A total of 64.9 full time and 14.9 part time positions (144,446 work hours) will be eliminated from the workforce during the next three fiscal years.  The number of employee layoffs could be as high as 24 (not including Public Safety) if all the positions recommended to be eliminated were to occur immediately.  However, the phasing of the reductions during the next three fiscal years is expected to dramatically reduce the actual number of employee layoffs. Rather, these position reductions will be able to be accomplished through employee attrition.  Final Council policy direction and an implementation schedule will be required before more exact numbers can be determined. 

As difficult as these recommended reductions are to make, the budget crisis requires that we take steps to reduce the size of City government in Sunnyvale.  The General Fund gap represents a structural imbalance between available revenues and projected expenses.  Making one-time spending reductions such as one or two year wage concessions can not solve this structural imbalance.  As we continue to work to resolve this unprecedented problem, we will make every effort to reduce the negative effects the final service reductions will have on the community and the workforce.  The $8.4 million in savings represents a critical part in addressing the budget crisis.  It is equally important that our future workforce is as skilled and committed to public service as it has been in the past in order to deliver tomorrow's City services.

BACKGROUND

1. 6-Point Action Plan

The City Manager introduced a 6-Point Action Plan to City Council in late January 2003 to address a rapidly escalating financial and budget crisis facing the City.  The plan identified three principal causes for the budget crisis:

• Personnel costs: Base wage expenses for City employees are increasing at higher rates than projected in the City's budget.  This fiscal year, base wage increases for all employee groups is about $3.0 million more than budgeted.  The City Council approved an approach to pay for these increased wage costs on a continuing basis for employees represented by the Sunnyvale Employees Association (SEA), management, and confidential employees.  Increased wage costs for employees represented by the Public Safety Officers' Association (PSOA), the Communication Officers' Association (COA), and the Service Employees International Union (SEIU) were only covered for FY 2002/2003.   Additional funding will be required to cover these increases on a continuing basis.  Equally important, personnel costs are expected to exceed budgeted amounts in FY 2003/2004, and the foreseeable future.  In January, staff estimated wage increases for SEA employees for FY 2003/2004 would be 7.06% and an average of 6% for PSOA employees in FY 2003/2004. These projections have changed slightly and are described in more detail later in the report. These are about 3.5% more than we have included in the long range financial plan for SEA and 3% more for PSOA. If base wages for benchmark positions continue to grow, the $11 million gap will increase.
  

• Retirement costs: Late last year, the California Public Employees Retirement System (PERS) announced significant increases in formulas used to determine the City's costs for employee retirement programs because of continuing asset losses.   All regular full time and part time employees are included in retirement programs managed by PERS, as required by City Charter.  Beginning in FY 2004/2005, funding included in the budget for miscellaneous employees' retirement costs is projected to be 3.5% less than the revised PERS contribution rates. For public safety employees, the funding shortfall in FY 2004/2005 is 13.0%. The gap between budgeted retirement expenses and projected contribution rates is about $9.7 million annually over the 20-year planning period.  Continued market losses in PERS' asset portfolio combined with higher base wage rates for Sunnyvale employees have resulted in these revised PERS contribution rates.
  

• Revenue reductions: The on-going national recession resulted in steep declines in City revenues, especially Sales Tax and Transient Occupancy Tax (TOT) revenues.  Although staff programmed these declines into the City's long-term financial plan, the reduced revenues from many of the City's most important revenue sources "thinned out" our ability to absorb future revenue losses or increased costs.  It now appears that key revenue sources are continuing to decline this fiscal year, rather than stabilizing.   The proposed actions announced by Governor Gray Davis in December 2002 turned a budget problem into a crisis, when he suggested that the state-provided "backfill" of Motor Vehicle License Fees (VLF) revenues be eliminated.  This action was proposed to begin taking effect in the current fiscal year.  In addition, state revenues for public libraries were to be reduced by $50,000, reimbursements for state-mandated programs by $100,000, and redevelopment area property tax increment revenues up to $1.5 million annually.

These three factors created an estimated $11-$17 million gap between revenues and expenses in the City's General Fund.  This represents an on-going structural budget imbalance, as opposed to a one-time problem that could be more easily addressed.  This new fiscal reality required that the City develop a comprehensive budget strategy that reduces the size of City government in Sunnyvale.  Fortunately, our planning and financial systems have created two vital tools in responding to the budget crisis: time and money.  These tools will allow City services to be reduced, levels of service to be reset, and the City's workforce to be reshaped in a phased, measured manner during the next three years.

2. Update on the City's Financial Condition

1. City Revenues

Six key sources generate nearly 90% of the City's General Fund revenues.  They are: Sales Tax, Property Tax, Transient Occupancy Tax, Motor Vehicle License Fees, Utility Users Tax, and construction-related taxes and fees.  The current budget projected that revenues from many of these sources would stop falling this fiscal year.  We believed that revenue patterns that the City experienced in FY 1998/1999 represented our actual revenue base; revenues were projected to stabilize this fiscal year, and slowly increase to actual revenue base levels by FY 2007/2008.

Now, even this revenue picture appears too optimistic.  Currently, construction-related taxes and fees are 20% lower than projected; TOT revenues are 20% lower than anticipated.  Sales tax revenues are trending 12% lower.  These three revenue sources show serious decreases, due to the lack of a sustained economic recovery and the war in Iraq.

The following table reports actual revenues received as of Period 9 for SalesTaxes, TOT, and construction taxes and fees.  Period 9 represents 66.85% of the fiscal year.

General Fund Revenue Source	FY 2002/2003 Adopted Budget	FY 2002/2003 YTD Actuals Period 9	Percentage	FY 2002/2003 Year-End Projected
Sales and Use Tax	$26,000,000	$15,961,553	61.39	$22,900,000
TOT	$ 6,904,275	$ 3,149,463	45.62	$5,300,000
Permits and Licenses	$ 3,482,346	$ 2,064,807	59.29	$2,978,967
Construction Tax	$ 1,136,337	$    430,279	37.87	$   909,070
Plan Check Fees	$    722,551	$    417,081	57.72	$   578,041

Staff has completed revenue projections for the 20-year long-term financial plan.  The negative trends, expected economic conditions, and our forecasting models indicate that future revenues from Sales Tax, TOT, and construction-related fees will be considerably lower than estimated last year.  This will increase the structural gap between revenues and expenses in the General Fund.

Better news is emerging on Vehicle License Fee (VLF) backfill revenues.  The State Legislature rejected the Governor's proposal to eliminate VLF revenues to cities and counties.  It now appears likely that VLF funding will be continued at current levels by raising Vehicle License Fees to the 1998 rate schedule through an administrative action.  This "triggering mechanism" could occur as early as May 2003; it would not require any legislative action.  However, other types of state funding provided to cities and counties remain at risk as the State continues to struggle with a $34+ billion deficit.  Republicans in the legislature issued a plan that calls for local governments to provide $500 million in unallocated funding reductions to help ease the deficit.  Staff is closely watching this proposal, and others as they emerge, to gauge their effects on State provided revenues to our City.  Any implementation of a “local government contribution” to the State budget crisis could result in additional service reductions in Sunnyvale. 

2. City Expenses

Current expenditure patterns demonstrate a more encouraging picture than revenues.  Overall operating costs for the General Fund are slightly under forecast as of Accounting Period 9 (March 1, 2003).  The following table reports actual expenses as of Period 9.

Departmental Operating Expenses	FY 2002/2003 Current Budget	FY 2002/2003 YTD Actuals Period 9	Percentage	FY 2002/2003 Year-End Projected
All Departments	$90,668,234	$58,947,897	65.01	$88,421,845

The year-end projection represents a savings to the General Fund of about $1.6 million. These savings are generated, in large part, by the selective hiring freeze that the City instituted in January 2003.

However, future base wage costs continue to pose serious problems to City expenditure patterns on a long-term basis.  The 6-Point Plan anticipated that wage increases would exceed budget projections for FY 2003/2004.  Annual base wage adjustments for the City's represented employees are driven by wage increases granted by other cities within our labor market. These cities are scheduled through existing labor contracts to give base wage increases according to existing contractual agreements next fiscal year.  Employee associations or unions within these cities have not agreed to concessions that would result in either reduced increases to base wages or reduced base wages.  Base wage formulas are incorporated into the memorandums of understanding or contracts that the City has with its employee associations.  These contracts can only be changed through negotiation i.e. mutual agreement.

The Human Resources Department is projecting future base wage increases for FY 2003/2004 as follows:

In addition, a 3.0% wage increase for management employees is included in the long-term financial plan for FY 2003/2004.  These percentage increases are higher than projected last year.

For future fiscal years, the long-term financial plan contains inflation factors for base wages of 3.0% through FY 2012/2013, and 4.0% thereafter for SEA, confidential, SEIU, and management employees.   Staff reviewed contracts in other cities, and concluded that higher projections are needed for PSOA employees.  A 5.0% increase has been included through FY 2005/2006 (the end of the current contract), and 4.0% for the balance of the long-term financial plan.  These projections are higher than included in the last year, and add to the General Fund gap.  To the extent that any future wage increase assumptions are too low, it will also increase the structural gap.

3. General Fund Subsidy to the Community Recreation Fund

Three programs managed by the Parks and Recreation Department are included in the Community Recreation Fund.  These programs provide a wide variety of parks and recreation services, including golf, tennis, swimming, senior services, arts, community theater, and various classes to individuals of all ages and income levels.  Fees and charges are established for many services offered through these programs.  Fee schedules are set up and reviewed regularly to insure that our fees reflect market rates charged by other local governments and private sector firms.  Although the fund and these programs have been established to recover costs through their fee structures, additional resources have been required to balance the fund.  Some of the services provided through this fund are offered to targeted populations such as youth and seniors at less than full cost recovery.  A fee waiver system protects the economically disadvantaged.  This requires an annual subsidy from the General Fund.  In FY 2002/2003, a $2,373,093 subsidy from the General Fund to the Community Recreation Fund was made through an inter-fund transfer.  Higher subsidies are projected in future fiscal years, beginning with FY 2003/2004.  Three familiar factors are creating this situation.  Personnel costs are higher because of the conversion of contract agency employees to regular City employee status.  Also, higher PERS rates are projected than budgeted for these employees.  Finally, revenues for golf course fees and golf related services are expected to drop next year, given the continuing local economic downturn. 

There are several options available to Council in order to address this issue.  For example, the annual subsidy can be increased to offset the increased personnel costs and decreased revenues.  Or, service levels can be cut to reduce overall fund costs, eliminating the need for an increase in the subsidy from the General Fund.  Staff is developing additional information on these options, which will be presented on May 2^nd.  Council will have the opportunity to provide preliminary policy direction on this issue at that time.

The 6-Point Plan projected that the gap between revenues and expenses in the General Fund would be $11-$17 million annually for the next 20 years.  This examination covered only future personnel related expenses.  This projection was built on three assumptions:

1. Revenues would stabilize this fiscal year, and gradually return to normal levels  by FY 2007/2008;

2. PERS retirement contribution rates would not exceed their revised estimates; and

3. Future base wage rates would not exceed budgeted      amounts.

It now appears that the gap will increase because the long-term revenue projections are less than expected, and base wage increases will likely be higher than budgeted.  In addition, the need for an increased subsidy to the Community Recreation Fund will add an estimated $720,000 to the General Fund gap.  As a result, the structural gap between revenues and expenses in the General Fund has grown to $14-$15 million annually for the next 20 years.

It’s important to state that this estimated $14-$15 million gap includes only contribution rates to the City’s retirement programs that were provided by PERS for FY 2003/2004 and FY 2004/2005.  The 6-Point Plan stated that future PERS contribution rates may be even higher if the PERS investment portfolio generates less than an 8Ľ% return on its assets this year and in the future.  At this point, it appears unlikely that PERS will achieve its targeted performance this fiscal year.  As of February 2003, it seems more likely that PERS will suffer a third straight year of negative asset growth.  This will trigger higher contribution rates than the City anticipated and has budgeted, beginning in FY 2005/2006.

3. Budget Strategies: Actions to Date

The 6-Point Plan identified six specific budget strategies that staff would examine in order to find ways to either reduce expenses or increase revenues to close the gap between revenues and expenses in the General Fund.  The City Manager and City staff have presented key findings from the examinations of three budget strategies.

• 10-Year Capital Projects Plan. The City Manager presented recommended revisions to the 10-Year Capital Projects Plan to City Council at two separate meetings on February 26^th and March 20^th.  In addition, two community meetings were held to provide opportunities for public comment.  Council provided preliminary policy direction on March 20^th.  Based on this preliminary direction, it is projected that the revisions to the capital plan will contribute $1.8 million to closing the General Fund gap.
  

• Rental rates and In-Lieu Fees/Inter-Fund Transfers.  This report covered Points 2 and 4 in the 6-Point Plan.  Recommended changes to rental rates and in-lieu fees/inter-fund transfer schedules and formulas were presented to City Council on March 25^th.  Community meetings on these budget strategies will be conducted on April 28^th and April 30^th, in conjunction with the recommended reductions to services and levels of service.  Council approved a motion to adopt the City Manager's recommendations included in the report.  Based on this preliminary policy guidance, it is projected that the revisions to rental rates and in-lieu fees/inter-fund transfer schedules will contribute $445,000-$535,000 to closing the General Fund gap.

In addition, Point 3 in the 6-Point Plan addressed job vacancies and recruitment.  Other cities and counties in the Bay area implemented hiring freezes.  Rather than implement an across-the-board job freeze, staff is reviewing each job vacancy as it occurs.  In some cases, recruitments are suspended or not started to fill vacancies.  Department directors are given the option of filling vacancies with temporary employees so that current levels of service can be met.  For other vacancies, recruitments were continued or started to fill the positions permanently.  As of April 18th, about 100 regular and part-time positions are vacant.  Some of these vacancies will be able to absorb employees whose positions are being eliminated by the recommended reductions.

Finally, Point 5 in the 6-Point Plan addressed tax and fee increases.  This budget strategy will be addressed in a separate report and distributed to the City Council on April 25, 2003 for consideration at its regular meeting on May 6, 2003.

4. Criteria for Evaluating Recommended Reductions to Services and Levels of  Service

The City Manager asked each department director to prepare proposed reduction packages for the programs managed by their departments.  Four separate reduction packages were prepared for each department: a 10 percent reduction and three separate 5 percent reductions.  This allowed the City Manager to review a broad range of potential reductions to services and levels of service.  Department directors were asked to identify changes that their proposed reductions would make to program outcome measures, and work hours, costs, and products associated with specific activities. 

In reviewing these proposed reductions, the City Manager developed criteria or more correctly a "set of principles".   It is an extremely difficult task to reduce the size of local government for an organization that spends $90 million annually in providing a complex array of services and programs to more than 130,000 customers.  It makes it even more difficult knowing that service reductions often translate into eliminating positions and possible employee layoffs.  This task required a more comprehensive set of principles rather than a simple set of criteria.

Three components made up the set of principles: Grounding Beliefs, Guiding City Policies, and Key Questions that Shape Service Delivery.  This set of principles was presented and discussed at the April 1^st City Council meeting.  A copy of the report to Council describing these components in more detail is attached to this report. (Attachment A)

5. Preferences Regarding Service Reductions

It could be helpful in providing policy direction to consider our customers' preferences regarding reductions to City services and service levels.  Individual residents, business representatives, and community group members are encouraged to provide their specific comments, ideas, and opinions on the budget at both City Council meetings and community meetings on the budget. 

In addition, recent surveys of City residents provide data and information on preferences for the entire community.  The City contracted with The Gelfond Group to conduct a survey of Sunnyvale residents to determine their preferences regarding potential reductions to City services.  Gelfond conducted this telephone survey during early April.  About 370 residents completed the 50-question survey.  Residents were randomly selected to participate in the survey. The sample size allows for survey results to be statistically significant.  Questions were grouped into three categories: preferences regarding service reductions, tax or fee increases vs. service reductions, and demographics.  A copy of the survey is included with this report as Attachment B.

Results and key findings from the survey may be helpful as the Council considers the recommended reductions to services and levels of service.  These will be distributed to Council prior to its May 2^nd meeting.

Previous resident satisfaction surveys have included questions that provide additional insight into residents' preferences regarding service reductions.  The last three annual surveys included a question that asked residents whether they would prefer to see taxes increase or service cut if there was insufficient revenue to support current levels of service.  Overall, residents prefer to increase taxes rather than reduce services, by a slim majority.

Question:        "All local governments are receiving less state and federal funding these days.  To make up for the shortage of funds, what action should the City take?"

	June 2000 Survey	December 2001 Survey	June 2002 Survey
Increase local taxes	58%	51%	53%
Keep taxes at current levels, but reduce the level of service provided	42%	49%	47%

Past surveys also asked residents to rank the importance of selected City services that are provided.  Four services received an importance rating of 90% or higher in the two most recent surveys: fire protection, police protection, response time to medical emergencies, and quality of drinking water.  Four service areas received importance ratings of 30-40% in both surveys:  Baylands Park, information and coordination about Sunnyvale's child care facilities, and the appearance and hours of operation at the Library.  Attachment C lists the importance ratings from the December 2001 and June 2002 surveys for 34 services provided to external customers.

Staff have met with the Board of Directors for the Sunnyvale Chamber of Commerce on several occasions to review the City's overall financial situation and to discuss the six budget strategies that are being used to address the budget crisis.  In addition, staff plans to provide a business briefing to chamber officers and members prior to the Council's May 2^nd meeting to review the recommended service reductions contained in this report, and to discuss ideas, suggestions, and comments.

RECOMMENDED SERVICE AND LEVELS OF SERVICE REDUCTION

1. Overview of Recommended Reductions to Services and Levels of Service

It was a deliberate decision to list reductions to services, levels of service, and staffing as the last point in the 6-Point Plan.  We had hoped to take a significant chunk out of the estimated $11-$17 million gap before we turned our attention to service and levels of service reductions.  It's never easy to recommend reducing services or positions.  It's even harder given our experience of proven performance, the level of confidence our residents and businesses have in City government, and the degree of pride City employees have in their organization.  Our resident satisfaction surveys prove again and again that the City delivers high quality public services.  Ninety three percent of residents rated the overall quality of City services either "very good" or "good" in the June 2002 resident satisfaction survey.  In the same survey, only 9% of residents indicated that they had little confidence that the City was wisely spending their tax dollars.  In the most recent employee satisfaction survey, 90% of City employees indicated that they were proud to work for Sunnyvale, demonstrating their pride in their work.

Yet, the 6-Point Plan envisioned that we would need to recommend service and position reductions.  The size of the gap in the General Fund, and the fact that the gap represents a structural rather than one-time shortfall between revenues and expenses, requires that we reduce and reshape the workforce.  We must reexamine the current mix of services that the City provides, and reset levels of services so that the City can deliver a sustainable set of services and programs with realistic staffing levels for the foreseeable future.  At the same time, it's critical to restate-- service and staffing reductions need to be implemented in a manner that minimizes the negative affects on our employees, and our residents and businesses.  The remaining workforce will need to be well paid, equipped, trained, and supported.  We need to insure that our future workforce is as skilled and committed as in the past in order to deliver a reduced set of services at levels that are financially possible.  If not, it will be difficult, if not impossible, to deliver services at levels that are acceptable to our residents, businesses, and visitors.

The City Manager's recommended reductions to services and levels of service total $8.4 million annually.  These reductions can be implemented in a phased, measured basis during the next three fiscal years. Two key resources created by the City's planning and financial management systems--time and dollars--permit the City to take this phased approach.  This will allow some of the required work hour and position cuts to be accomplished through existing and future vacancies.  We cannot completely eliminate the need for employee layoffs; we can reduce the degree to which layoffs will be required.

The recommended reductions to services and levels of service will affect 10 of 11 City departments.  The Employment Development Department is funded primarily through state and federal grants.  The department provides employment-related services to the City to offset General Fund services that it receives from the City.  As previously reported, an equal, across-the-board percentage cut was not used in developing this set of recommended reductions.  As a result, some programs are recommended to be reduced more than others.  Attachment D contains a table that summarizes the recommended reductions to General Fund programs managed by each department.

2. Recommended Service and Levels of Service Reductions by Department

Attachment E provides detailed information on recommended reductions to services and levels of service for all General Fund programs managed by each City department.  This information describes proposed changes to program outcome measures and activities that will result as the recommended reductions are implemented.  The following summarizes key reductions by department.

Community Development Department
The department manages five programs; four are included in the General Fund. Recommended reductions include:
Service level changes	Examples include: reduce the implementation of the Lakewood Village neighborhood preservation pilot program to 200 vs. 400 additional properties; compress neighborhood dumpster clean up days to Saturdays only; longer response times at one-stop counter and telephone requests on peak days; reduce or limited capacity for Council study issues and special research projects.
Outcome measure changes	4 of 29 measures reduced; 2 increased.
Funding changes	11.56% total; $144,078 cut and $399,000 in increased fee revenues.
Work hour reductions	2,951 hours
Position reductions	1.5 full time positions

Finance Department
The department manages eight programs; all are included in the General Fund.  The Utility Business Management program is paid for entirely through in-lieu fees charged to the City’s three utility enterprise funds.  Recommended reductions include:
Service level changes	Examples include: reduce from seven to four the number of financial/operational audits completed; limit the capacity to complete non-routine and special research projects; update fixed assets annually rather than every accounting period (13 times/year); significantly reduce the number of purchasing cards issued to staff, increasing individual invoices and potentially increasing delays in payment to vendors; reduce central stores business hours by 7.5 hours per week; increase from 30 to 60 days for processing business license tax certificates.
Outcome measure changes	Seven of 41 measures reduced.
Funding changes	13.97% total;  $562,926 cut and $127,000 in increased fee revenues.
Work hour reductions	9,650 hours
Position reductions	5.4 full time positions

Human Resources Department
The department manages five programs; only one is included in the General Fund. Reductions are also recommended for other programs managed by this department.  Recommended reductions include:
Service level changes	Examples include: Reduce expenses for position recruitments; limit the use of management style assessments to executive level recruitments.
Outcome measure changes	One measure will be eliminated.
Funding changes	6.34% total; $97,682 cut.
Work hour reductions	No change.
Position reductions	No change.

Information Technology Department

The department manages two programs; neither is included in the General Fund.  Recommended reductions are described later in the report as part of operational savings generated by changes to rental fund rates.

Libraries Department
The department manages four programs; three are included in the General Fund. Recommended reductions include:
Service level changes	Examples include: eliminate Bookmobile outreach service; drop Urban Libraries Council membership; drop staff assistance provided at the Periodicals desk and use computer software to schedule patron’s use of computer work stations; reduce department expenses for travel, conferences, and meeting expenses.
Outcome measure changes	8 of 24 measures reduced
Funding changes	10.28% total; $300,002 cut and $323,000 in increased revenues.
Work hour reductions	6, 977 hours
Position reductions	2 full time positions and 5 part time positions

Office of the City Attorney

This office manages one program; it is included in the General Fund.  Recommended reductions include: 

Service level changes	Examples include: reductions to department expenses such as books and publications, outside legal services, training, and conferences and meetings.
Performance measure changes	No change.
Funding changes	11.8% total; $154,569 in cuts.
Work hour reductions	No change.
Position reductions	No change.

Office of the City Manager

This office manages eight programs; seven are included in the General Fund.  In addition, two projects will become operating programs in the FY 2003/2004 recommended budget.  Recommended reductions include:

Service level changes	Limited capacity to accept new intergovernmental relations, special studies, and other special assignments; eliminate strategic and business plans, and leadership development events; reduce workplace improvement and process improvement activities, limiting opportunities for productivity enhancements; reduce organizational assessments submitted to the California Council for Excellence to every other year; drop KSUN enhancements; reduce Community Events Grants Program from $30,000 to $5,000 annually; reduce size of legal notices; reduce wording for municipal election candidate statements; retain only the mobile youth “fun on the run” funding in the Youth and Family Services project.
Outcome measure changes	8 of 51 measures will be reduced.
Funding changes	16.42% total; $675,573 in cuts.
Work hour reductions	9,281 hours
Position reductions	5 full time positions and .5 part time positions

Parks and Recreation Department

The department manages seven programs; three are included in the General Fund.  Reductions are also recommended for other programs managed by this department.  Please refer to page 20 for a total savings for these reductions.

General Fund recommended reductions include:

Service level changes	Examples include: reduce maintenance to open field areas and landscaping at Baylands Park, resulting in more weeds, more litter, and less opportunities to speak with staff; close one of three set of restrooms in Baylands Park that serve the Bay Trail; drain all ornamental water features in neighborhood parks; eliminate free materials to co-sponsored sports groups; increased litter and reduced ornamental turf cutting in neighborhood parks; increased response time for addressing customer inquiries and limited capacity to respond to study issues and non-routine research assignments.
Outcome measure changes	9 of 16 measures will be reduced.
Funding changes	14.29% total; $1,007,521 in cuts.
Work hour reductions	12,108 hours
Position reductions	5.5 full time positions and .4 part time positions

Public Safety Department

The department manages five programs; all are included in the General Fund. The department has submitted its recommended reductions in two packages.  The first package contains about $1 million in service level reductions to three programs, and a net reduction of two positions.  The second package contains about $2.4 million in estimated savings from realignment to FY 2001/02 service levels.  The impact on the public of these reductions should be minimal since they are designed to maintain service delivery that the public received last fiscal year and are receiving currently.

Recommended reductions include:

Service level changes	Examples include: reduce firearms training and maintenance to meet minimum requirements; reduce personnel assigned to vice and narcotics investigations by 25%; possible reduction in internal affairs staffing, if grant funds expire; reduce 33% the number of inspections of permitted hazardous materials facilities; increase from three to five days for issuing hazardous material permits; increase from one to 1.5 the number of hazardous substance releases to the environment per 100 permitted facilities; use about $356,000 from the EMS set-aside to fund three positions dedicated to EMS services; reorganize the department's command structure, eliminating one level of command and establishing four major bureaus in the department.
Outcome measure changes	3 of 46 measures will be reduced; service level reductions may result in lower performance in the future for additional measures.
Funding changes	6.95% total; $954,585 in cuts and $2,466,376 in estimated savings from realignment to FY2001/2002 service levels.
Work hour reductions	3,800 hours from service level reduction and 45,314 hours from budget to actual realignment.
Position reductions	2 positions reduced for service level reduction and 19 full time positions and 4.5 part time positions reduced through budget to actual realignment.

Public Works Department

The department manages 11 programs; five programs are included in the General Fund.  Reductions are also recommended for other programs managed by this department.  Please refer to page 20 for a total savings for these reductions.

General Fund recommended reductions include:

Service level changes	Examples include: less traffic calming studies, reduce staff participation in intergovernmental advisory meetings, drop "skin coat" application for pavement maintenance, cut street sweeping from two weeks to four weeks, eliminate annual flower planting in street medians and along roadways, extend tree pruning cycles from 4.5 to 5.5 years, and eliminate the use of outside inspector reviews of completed capital projects.  In addition, the cost of sidewalk/curb and gutter repairs would be shared 50/50 with property owners, new fees would be charged for development review projects and the placement of non-emergency temporary traffic controls.
Outcome/Performance measure changes	5 of 32 outcome measures are reduced.
Funding changes	10.41% total; $794,535 in cuts and $448,212 in increased revenues.
Work hour reductions	17,419 hours
Position reductions	6 full time positions and .5 part time positions

3. Other Options for Addressing the General Fund Funding Gap

Staff's examination of these six budget strategies generated several other options for reducing expenses.  They include potential cost reductions resulting from changes to rental rates charged to General Fund programs, recommended changes to budget "set-asides", and General Fund subsidies provided to Dependent Funds.

1. Operating Cost Reductions Generated by Rental Rate Changes

The City Council discussed the report on recommended changes to rental rates and in-lieu fees/inter-fund charges at its regular meeting on March 25^th.  As you recall, rental rates can be considered as overhead charges to allocate the costs of support services to operating departments.  Rental rates include two key components: equipment costs (both acquisition and replacement) and operating maintenance costs.  City staff identified potential operating cost savings in vehicle and equipment replacement, City office space and furniture, communications and information technology equipment replacement, workers' compensation, and employee benefits.  Rental rates are established for four General Services Fund programs.  These programs are managed by Public Works, Parks and Recreation, and Information Technology departments.  Recommended cost savings and levels of service reductions for these programs are described below. 

Public Works Department

The department manages Program 763 Provision of Vehicles and Motorized Equipment.  Through this program, staff acquires, maintains, replaces, and disposes of the City's vehicle and equipment fleet, which includes all rolling stock such as police cars, light and heavy-duty trucks, backhoes, and other specialized equipment.

Service level changes	15% reduction to size of vehicle and equipment fleet; reductions to take home cars as recommended by affected departments.
Outcome measure changes	No changes to outcome measures
Funding changes	$400,000-$500,000 annually
Work hour reductions	3,857 hours
Position reductions	2 full time positions

Parks and Recreation Department

The department manages Program769 Facilities Management.  Through this program, staff maintains 91 buildings within the City, and purchases, repairs, and maintains a wide range of equipment and furniture within these buildings.

Service level changes	Reduce janitorial services by 40%; increase response times for information requests and reporting; reduce completion of non-essential work orders submitted by City staff; eliminate proactive preventative maintenance.
Outcome measure changes	6 of 8 measures will be reduced.
Funding changes	$410,900 annually
Work hour reductions	5,400 hours
Position reductions.	3 full time positions

Information Technology Department

The department manages two programs: Program 760 Communication Systems and Office Equipment Support and Program 766 Information Processing. Through this program, staff maintains the central computers, desktop computers and networks, and other information technology systems and networks.  Staff also develops hardware and software application specifications, manages hardware and software maintenance contracts, and provides copies and mail room services.

Service level changes	Delete three centralized print and copy center activities, increasing turnaround time from 10-20 working days; increase from 1-3 working days response to cable TV subscriber complaints; increase response times for telephone relocation requests; increase response times to computing hardware and software requests; shift IT training to outside vendor; increase response time to help desk complaints from one to 10 working days.
Performance measure changes	15 measures will be reduced; 7 measures will be eliminated.
Funding changes	9.61% or $566,087 from two programs.
Work hour reductions	8,644 hours
Position reductions	4 full time positions

The recommended reduction to operating expenses to these four program totals $1,426,987 annually for the next 20 years.

2. Operating Cost Reductions Generated by Additive Rate Changes

Additive rate schedules are updated annually to allocate personnel costs such as holiday and vacation leave, and other types of employee benefits, to all programs.  Additive rate costs are charged to departments based on their number of full and part-time employees.  Staff in the Human Resources Department examined the four programs that make up the additive rates to identify any potential cost savings.  Recommended reductions were identified in two programs: Program 784 Insurances, Retirement, and Incentives, and Program 785 Workers' Compensation.  Through these programs, staff manages the benefit programs provided to City employees and oversees the City's employee safety and workers' compensation and occupational health efforts.

Human Resources Department

Service level changes	Eliminate ECO passes and employee suggestion awards programs; drop ergonomic evaluations conducted by outside contractors; use outside vendors for employee training efforts.
Performance measure changes	Eliminate one measure.
Funding changes	1.57% or $278,193 from two programs.
Work hour reductions	925  hours
Position reductions	.5 full time positions

Three programs are included in the Community Recreation Fund: Leisure Services, Leisure Services for Dependent Populations, and Leisure Services for Non-Dependent Populations.  The Parks and Recreation Department manages all three programs.  Staff identified opportunities to reduce operating expenses in all three programs.  If enacted, this would help to mitigate the required increase in General Fund subsidy to this fund, as described earlier in this report. The following are the recommended reductions for all three programs:

Service level changes	Close the Creative Arts Center Gallery; reduce therapeutic direct programming based on low attendance and low City resident participation; reduce youth programming activities, such as eliminating future use of Peterson Middle school swimming pool, cut by 50% the Sunnyvale Youth Basketball League, eliminate programming provided for elementary school aged children on teacher training days, eliminate recreational day camps; reduce the use of the recreation web site to market classes, activities, and events; eliminate summer picnic ambassadors activity;
Performance measure changes	4 measures will be reduced.
Net funding changes	14.03%, General Fund Subsidy, or $332,923.
Work hour reductions	5,384 hours
Position reductions	1 full time position and 4 part time positions

4. Recommended Reduction to Budgeted "Set-Asides" Funding

Two expense categories are included in the expenditures section of the long-term financial plan as “set asides” for particular purposes. They are fiscal uncertainties and public facilities space issues.  Fiscal uncertainties represents the ongoing latitude that is available to increase service levels, add new programs, or address unexpected fiscal pressures.  Public facilities space issues represents an amount set aside annually in the financial plan to begin to address the City’s substantial,