December 7, 2004
SUBJECT: Annual Service and Budget Review Process
REPORT IN BRIEF
The City Council indicated that it wants to examine selected programs and services annually to review and potentially adjust services, service levels, and budgeted costs. Staff re-examined the process used last year by Council to review and prioritize programs and services. This effort was designed to see if a revised process could be developed that meets Council’s intent while reducing the work effort required to complete the review process. Staff has developed a revised process, which uses existing budget information and reports, and is tied to a series of either special or regular City Council meetings that will be included in the master budget calendar. These meetings will provide the public opportunities to participate in the review process. The revised process is described in detail in this report. The report also includes examples of the data and budget reports that staff would provide to Council as they complete the review process.
BACKGROUND
The City Council completed a comprehensive review of City services, service levels, and program budgets last year. This work was undertaken to address a continuing structural gap in the City’s budget and long-term financial plan. As part of this effort, Council amended the traditional budget calendar to include five special meetings. These meetings were used to:
- review and prioritize City services,
- discuss a preliminary, unbalanced budget for FY 04/05,
- provide the public with additional opportunities to participate in the budget process,
- provide preliminary policy direction for the City Manager to use in preparing the recommended two-year budget and long-term financial plan.
Council indicated that it should complete a service and budget review on a regular basis. This service and budget review process should insure that all City services and programs are reviewed at least once every eight years.
Staff developed and prepared a number of one-time analyses and special reports as part of the process used last year. Although these analyses and special reports met Council’s needs, they required many hours of unplanned staff time. Staff workloads have increased because of budget reductions implemented in FY 03/04 and in anticipation of additional budget reductions this fiscal year. Given Council’s direction to complete a service and budget review process annually, staff explored ways to make the process more efficient without changing what Council will accomplish through the process. This revised process is discussed later in this report.
EXISTING POLICY
Fiscal Sub-Element of the General Plan
Goal 7.1B: Financial Practices: Maintain Sound Financial Practices Which Meet All Applicable Standards and Direct the City's Financial Resources Toward Meeting the City's Long-Term Goals.
Policy 7.1B.5: Performance Budget System: Maintain and refine the Performance Budget System to assure its use for multi-year planning, full cost accounting, and budget monitoring.
DISCUSSION
The proposed annual service and budget review process includes six key steps. This process is designed so that:
1) Council can review and prioritize a selected number of City programs, services, service levels and budgets,
2) Council can have earlier and more involvement in the development of the recommended budget and long-term financial plan,
3) The public can be more involved and participate in the budget process.
The service and budget review process can be completed in conjunction with several special or regular Council meetings that will be included in the master budget calendar.
Step 1: Select Programs and Services
At the annual Fiscal Issues Workshop, the City Manager will recommend the programs and services to be included in the annual service and budget review by the City Council. Several criteria will be used to make this recommendation, including whether the programs complement each other, whether the programs are budgeted in the General Fund, enterprise funds, or other special funds, and the departments that manage the programs. A tentative grouping of programs and services is listed in Attachment A.
The City Council will approve the programs and services that will be included in the review process. Council may add to or delete programs and services from the list recommended by the City Manager.
Step 2. Prepare Data and Information
During February, staff will prepare a Report to Council that provides information on performance measures, costs, work hours, and products for each program and service selected for the review process. Unlike last year, this data and information will be presented using existing reports that staff use to manage their assigned programs. These reports will include:
1) the most current accounting period MBO report for the current fiscal year,
2) a three year trend report that compares planned results to actual results for outcome measures, program costs, work hours, and products.
By using these reports, it will require fewer work hours for staff to collect and present the data and information that Council will use to complete the review process. An example of each of these reports is included in Attachments B and C.
Step 3. Review Services and Budget Levels
The City Council will review program data and reports at one or more Service and Budget Review meetings scheduled in March. These will be special meetings of the City Council which will include opportunities for public input.
Staff will present the programs included in the review process, describing the services offered through these programs, the service levels that Council has set, the programs’ budgets, and the programs’ past and current performance. Council will ask questions and discuss each program. A public hearing will be conducted so that residents, business leaders, and neighborhood/community representatives can provide their input. Council will provide any preliminary policy direction regarding changes to services, service levels, or budget levels for the programs included in the review process.
Step 4. Prepare Recommended Budget
The City Manager will use Council’s preliminary policy direction to prepare the recommended budget and long-term financial plan for the upcoming fiscal year. Budget supplements will be prepared for programs where services are recommended to be added, expanded, reduced, or deleted and where service or budget levels are recommended to change.
Step 5. Review Recommended Budget
The City Manager will present the recommended budget and long-term financial plan at the annual Budget Workshop. Public input on the recommended budget will be taken at the annual Budget Public Hearing, scheduled in June. Both meetings will provide Council with continued opportunities to provide policy direction on the programs and services offered by the City.
Step 6. Adopt Budget
The City Council will provide final policy direction on services, service levels, and budget levels when it adopts the upcoming fiscal year’s budget and long-term financial plan at a regular meeting in June.
Staff anticipates that the annual service and budget review process can be used to educate the public, building awareness and understanding of the programs and services offered by the City. The review process can also be used to prioritize City services and adjust service and budget levels. Even if no changes were made to services or budget levels, the process will still result in a broader understanding of the services provided by the City, the results that are planned to be reached, how much the services cost, and who pays for these services.
Financial Reports and Fiscal Issues Workshop
The proposed service and budget review process will be completed in addition to existing reports and an annual workshop where the City’s overall financial position is presented to the City Council. These reports and annual workshop include the Year End Financial Report, the Comprehensive Annual Financial Report, and the Fiscal Issues Workshop.
Year End Financial Report and Comprehensive Annual Financial Report
In either November or December, staff provides Council with budget, fiscal, and economic data to describe the City’s overall financial condition. Staff prepares a Report to Council (RTC) that:
- describes the City’s financial position at the end of the previous fiscal year,
- includes the Comprehensive Annual Financial Report (CAFR),
- assesses the mid-year status of the key assumptions that were used in developing the current budget and long-term financial plan.
This year, Council will consider this Report to Council at its December 7, 2004 regular meeting. Council will be asked to review and file the year-end financial report and the CAFR.
Fiscal Issues Workshop
The Fiscal Issues Workshop is held annually, usually in January or February. At this workshop, staff provides Council with information on fiscal and budget issues that will be examined or used to prepare the City Manager’s Recommended Budget. Two types of issues are addressed at this workshop:
1) Long-Term Budget Assumptions. Staff will present and discuss the key assumptions that will be used to prepare the recommended budget and long-term financial plan. Examples of these assumptions include future salary expenses, pension costs, inflation rates, and trends for revenue growth. These assumptions will set the context for the development of the budget and long-term financial plan.
2) Budget Issues. Council may identify budget issues at this workshop. A budget issue will trigger an examination of a program or service that is not included as part of the service and budget review process for the current year. A budget issue could involve a new service, an expansion of an existing service, a service reduction, a change in service and budget level, or a new capital improvement project. Staff will develop a budget supplement to examine and to develop a response to a budget issue identified by the City Council.
This year, the Fiscal Issues Workshop is tentatively scheduled for January 20, 2005. An agenda will be prepared once the final date and time are scheduled with the City Council. Staff is suggesting to add two topics to this year’s workshop. They are:
(1) FY 04/05 Budget and Service Reduction Package. Staff will prepare and present a Report to Council that updates the status of Budget and Service Reduction Package. Council adopted this package as part of the FY 04/05 Budget and Long-Term Financial Plan, but deferred implementation given the uncertainties regarding further reductions in FY 04/05 to State provided revenues to the City, local economic conditions, and Proposition IA on future City revenue take-aways by the State.
(2) Service and Budget Review Process. As discussed earlier, Council will set in motion the annual review process by approving the programs and services that will be included in the review process for the upcoming year.
Other Issues
The City’s budget covers two fiscal years. One year, the recommended budget focuses on the operating budget. In the next year, the capital budget is addressed. Every year, the key assumptions are reviewed and updated as needed.
Given this two-year budget cycle, staff examined whether the service and budget review process should be completed annually or every other year. The review process could be tied to the development of the recommended operating budget. This will allow for any budget supplements generated through the review process to be prepared in conjunction with a two year operating budget by program managers and department directors. This would also result in the review process being conducted every other year, and for more programs and services to be included in every cycle of the review process.
The review process could be conducted annually. For those years when staff is focusing on the projects budget, this could result in “opening” the operating budget for those programs where Council is reviewing services, service levels, and budgets. Depending on the number of budget supplements required, this will add to staff’s workload and expand staff’s focus to both the projects and operating budgets during a project budget year.
In addition, staff also examined whether the service and budget review process should be conducted when the City is faced with a fiscal or budget crisis, similar to the last two fiscal years. The review process could continue regardless of the City’s financial condition. However, when faced with the need to close a structural budget gap, those programs and services that are included in the review process will absorb an unbalanced burden of reductions. This may result in greater reductions to services, service levels, and budgets for these programs than if all programs were examined in light of the budget crisis.
As an alternative, the review process could be “suspended” when a structural gap emerges in the budget and long-term financial plan. In effect, the review process could be expanded to include all programs and services, or all programs and services included in designated City funds. This would result in more programs and services being reviewed and potentially revised in order to resolve the budget crisis.
FISCAL IMPACT
There will be no direct fiscal impact for completing the service and budget review process described in this report. Departments will need to absorb the additional work hours required to complete the process. As described earlier, this process will require fewer work hours than the process that was developed and used as part of preparing the recommended FY 04/05 budget and long-term financial plan.
There will be a fiscal impact if Council provides policy direction through the review process. The fiscal impact on a specific program or service will be described and quantified by preparing budget supplements. These supplements will be included in the City Manager’s Recommended FY 05/06 Budget and Long-Term Financial Plan.
Conclusion
Staff has developed a new, annual process for Council’s use in reviewing and prioritizing selected City programs and services. The review process will begin in January at a Fiscal Issues Workshop. Initial policy direction will be examined by staff and included as budget supplements with the City Manager’s Recommended Budget and Long-Term Financial Plan. This new process is intended to reduce the work hours required by staff to provide Council with program and service data and information, while allowing Council to review services, service levels, and program budgets. The review process could be completed annually or every other year in conjunction with the two-year operating budget. The process could be conducted even if the City is faced with a newly emerging structural budget gap or expanded to include additional City programs and services in addition to those selected for the service and budget review. A staff recommendation is included in this report.
PUBLIC CONTACT
Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the Library and the City Clerk’s office.
ALTERNATIVES
1. Direct staff to implement the service and budget review process so that all City programs are reviewed at least once every eight years, as described in this report, as part of the development of the City Manager’s FY 05/06 Recommended Budget and Long-Term Financial Plan. Council will complete the service and budget review process on an annual basis. This review process will be expanded when the City is faced with a structural budget gap so that additional programs and services will be reviewed in addition to those scheduled to be included in the annual review process.
2. Direct staff to implement the service and budget review process as described in this report as part of the development of the City Manager’s FY 05/06 Recommended Budget and Long-Term Financial Plan, but complete the review process every other year in conjunction with the two-year operating budget.
3. Direct staff to implement the service and budget review process as described in this report as part of the development of the City Manager’s FY 05/06 Recommended Budget and Long-Term Financial Plan and use the process annually regardless of whether a structural budget gap has emerged.
4. Amend the service and budget review process and direct staff to implement the amended process as part of the development of the City Manager’s FY 05/06 Recommended Budget and Long-Term Financial Plan.
5. Direct staff to develop a new process and return the process for consideration at a future City Council meeting.
RECOMMENDATION
Alternative 1. Direct staff to implement the service and budget review process so that all City programs are reviewed at least once every eight years, as described in this report, as part of the development of the City Manager’s FY 05/06 Recommended Budget and Long-Term Financial Plan. Council will complete the service and budget review process on an annual basis. This review process will be expanded when the City is faced with a structural budget gap so that additional programs and services will be reviewed in addition to those scheduled to be included in the annual review process.
Approved by:
Amy Chan
City Manager
Prepared by: Charles J. Schwabe
Deputy City Manager
Attachments (pdf format)
Attachment A: Annual Programs and Services Review Groups
Attachment B: Accounting Period 4 MBO Report
Attachment C: Three Year Trend Report