SunnyvaleRTC

February 3, 2004

SUBJECT: Proposed Revisions to the Development and Presentation of the Recommended FY 2004/2005 and FY 2005/2006 Annual Budget and Long-Term Financial Plan

REPORT IN BRIEF

The City Council will again be forced to make difficult and painful choices as it considers the recommended FY 2004/2005 and FY 2005/2006 annual budget and long-term financial plan. As a result, Council has indicated its preference to use a different approach for reviewing, providing initial policy direction, and approving the annual budget and long-term financial plan. This revised approach will amend the current budget process in three ways:.

1. Council will prioritize all City services as the recommended budget is being developed, rather than after the recommended budget has been presented to Council in May.

2. Council may consider an unbalanced budget in April, and provide preliminary policy direction on options that City staff will examine and potentially use to prepare a balanced recommended annual budget and long-term financial plan.

3. Additional meeting dates will be added to the budget calendar to allow more and earlier Council involvement.

4. Public hearings will be provided at the additional budget meetings to encourage more public involvement and participation in the budget process.

These changes will require unplanned time and additional work to develop and implement a revised process for preparing the recommended budget. City staff suggests that a comprehensive review of the outcome management budget system be postponed until FY 2004/2005 at the earliest. Work would continue to restructure programs that are scheduled or anticipated to convert to outcome management in FY 2003/2004 and FY 2004/2005 (including programs managed by the Department of Public Safety).

BACKGROUND

City staff developed a 6-Point Action Plan to respond to a budget and fiscal crisis that the City faced last fiscal year. This action plan changed the process used to develop and present a recommended annual budget and long-term financial plan for consideration and final approval by the City Council.

This year, three familiar factors are again playing havoc with the City's financial condition. Revenues received from key sources such as Sales Taxes and Transient Occupancy Taxes (TOT) are lower than projections for the current year. The State of California has proposed to shift more local property tax revenue from cities and counties to help solve the State's fiscal crisis. Additional reductions in State provided revenues might happen if ballot measures to bond for current operating expenses and to cap future State spending are not approved by voters in March 2004. Finally, provisions in existing memorandum of agreements (MOUs) continue to drive City personnel costs higher than expected.

Given these continuing financial problems, the City Council has indicated its desire that staff use a different approach for preparing the recommended annual budget. This approach will result in changes to the process used to prepare the recommended budget. In study sessions conducted during the last two months, Council and staff have discussed the budget process and possible revisions to it. Council has indicated its desire to revise this process so that it can provide preliminary policy direction that staff can incorporate into the recommended annual budget and long-term financial plan. In addition, Council would like to provide more opportunities for public comment and suggestions as staff is preparing the recommended budget and financial plan.

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

Possible revisions have been developed to the budget process to address Council direction. The revised process will produce four key results:

Council will review and prioritize all City services during two, full-day workshops;
City staff will present a preliminary budget to Council in April. At this point, the long-term financial plan will not be balanced. Staff will ask for preliminary policy direction from Council in order to balance revenues and expenses;
The Budget Process Master Calendar will be amended to add workshop and/or special meetings where Council policy direction can be provided and public comment can be taken.

City Service Review. The revised budget process would allow Council to prioritize all City services. Three steps would be involved in this effort.

In Step One, Council would receive a set of Service Review Worksheets that have been prepared by City staff. Worksheets would be prepared for all existing service delivery plans (SDPs) that are contained in the FY 2003/2004 annual budget. Each worksheet will contain background information about the SDP, listing the activities included in the SDP, providing current costs for providing the service, and indicating whether the service is provided to residents, businesses, for internal support, or some other type of customer group. A cost recovery ratio will also be provided if the SDP generates revenues, fees, or grant funds.

Some SDPs provide two or more different services. In those cases, staff will complete a Service Review Worksheet for a specific activity or groups of activities, rather than the entire SDP. This will allow for individual activities to be prioritized by Council. A copy of a Service Review Worksheet and an example of a completed worksheet that Council would use are included as Attachments A and B. It should be noted that the Service Review Worksheet included with this report is longer than the actual worksheet that will be used. The instructions included on the worksheet will be deleted, resulting in a shorter worksheet. Instructions are included now to provide Council with a more complete understanding of the information that will be included with the worksheet.

At a workshop or special meeting, Council Members will assign the SDP (or activity(s) if more than one service is provided through the SDP) in one of five categories: legally mandated service or required by contract, core external service, core internal service, expected/traditional service, or optional service. This category assignment will begin the process of prioritizing the SDPs and the services that the City delivers to residents, businesses, and to support internal organizational functions such as payroll, information technology, and program management. The City Council will rank SDPs assigned to categories such as expected/traditional services and optional services at a special meeting later in the budget process. In addition, Council will also use the service review worksheets to assign the SDP as either high population/low cost, high population/high cost, low population/low cost, or low population/high cost. This assignment will provide additional information that the City Council may use at this special meeting to add or delete services, or to raise or reduce service levels. Criteria and definitions will be provided for Council members to use in completing the worksheets.

Each Council Member will complete a Service Review Worksheet for each SDP (or activity(s) if more than one service is provided through the SDP). City staff will tabulate the worksheets completed by Council members. The tabulated results for each SDP will be reported at a future workshop or special meeting.

It is anticipated that all City services will be prioritized this year. In future years, selected SDPs will be scheduled for Council review and priority setting so that all SDPs are reviewed once every eight years.

In Step Two, staff will determine and report on the City's current financial condition. This report will provide both a short-term and long-term assessment of City revenues and expenditures. It will also describe the capacity of the City's budget to absorb new services or service level increases for existing services. Finally, the report will determine whether the current spending levels that are reflected in the annual budget and long-term financial plan need to be reduced in light of reduced revenues or higher than expected costs.

In Step Three, Council will address two key issues. First, Council will discuss its vision for Sunnyvale. This discussion will include the mix of services that the City will provide to the community in the future, new private or public funded projects that may be constructed in the next five to-ten years, and the continuing evolution of the make up of the City's residential and business populations. Discussion of a vision for the community can also be used tin examining the quality of life that Council would like to establish for Sunnyvale. Council will be able to use this sense of vision in providing policy direction for immediate issues, such as what level of public safety, library, or internal support services that the City will provide during the next two years. This vision can also be considered as new issues emerge that Council will address in the future.

Second, Council will rank and prioritize the existing mix of City services so that the delivery of City services will align to Council's vision for Sunnyvale. To do this, Council will identify options that staff should examine and potentially use in preparing the recommended annual budget and long-term financial plan. This direction will be especially important given that the current demand for City services at current service levels exceeds the available financial resources (or capacity) of the annual budget and long-term financial plan. In providing this direction, Council may decide to:

Rank all services that have been prioritized as either expected/traditional services, or optional services for either a reduction to service level or service elimination,
Review services that have been prioritized as legally required, core external service, or core internal service to revise existing service levels.
Initiate efforts to raise additional revenues.
Provide policy direction on budget related issues or items.

Council will address both its vision for Sunnyvale and service ranking and prioritizing at workshops or special meetings.

Preliminary Annual Budget. Staff plans to present a preliminary annual budget and long-term financial plan for FY 2004/2005 and FY 2005/2006. Given the City's current financial condition, staff anticipates that required expenses to fund existing services and current levels of service will exceed available revenues. The preliminary budget will provide Council with an opportunity to provide direction that staff will use to prepare the recommended budget and balanced long-term financial plan. It is anticipated that the preliminary, unbalanced budget will be presented to Council in April. In past years, only a final, recommended budget that was fully balanced was presented to Council in late May or early June.

Revised Budget Process Master Calendar. Additional meeting dates will need to be added to the budget master calendar for the service review workshops, for discussing the City's financial condition, and for presenting the preliminary budget and receiving preliminary policy direction from Council. The following are the key current meeting dates and the proposed additional meeting dates (new dates are highlighted in boldface type):

Date

Subject

December 18, 2003

Council Study Issues Workshop

February 10, 2004

Future Fiscal Issues

March 13, 2004

First Service Review

March 20, 2004

Second Service Review

April 10, 2004

Preliminary Budget, Service Ranking and Priority Setting, and Council Policy Direction

April 17, 2004

Preliminary Budget, Service Ranking and Priority Setting, and Council Policy Direction

1^st Week of May

Outside Group Funding Meeting

May 11, 2004

Recommended Annual Budget and Long-Term Financial Plans Submitted to Council

May 24, 2004

Budget Workshop

June 1, 2004

Public Hearing on Recommended Budget

June 15, 2004

Final Council Consideration/Adoption of Annual Budget and Long-Term Fianacial Plans

Public Involvement and Participation

The City Council asked staff to look for ways to revise the budget process so that the public can have more and earlier opportunities to offer ideas, comments, and suggestions regarding the services that the City provides. One approach to meet this direction will be to include public hearings during the additional workshops that are proposed to be added to the budget process in March and April. Traditionally, public comments were taken only at the public hearing held in late May or early June on the recommended budget, and when Council took final action to approve the budget in June. Including additional meetings will give the public the opportunity to comment on existing or proposed changes to City services as staff is preparing the recommended annual budget and long-term financial plan. A copy of the FY 2004/2005 Budget Process Master Calendar is included as Attachment C.

It will take a significant amount of staff time to develop information that will be used by Council at the service review workshops, and to implement the other revisions to the process used to prepare the annual budget and long-term financial plan. Staff in the Office of the City Manager and the Finance Department will be especially involved in these efforts. As a result, it is recommended that work planned to revise the outcome management budget system be postponed. Council has indicated an interest in revising this critical component to the City's Planning and Management System (PAMS) so that outcome measures could be more directly tied to the level of resources allocated to programs. Council also wanted to consider more options when either approving a program's outcome measures, or when allocating resources to a program. It is recommended that staff time planned for this effort be refocused to making the revisions to the budget process. Staff will continue to work on program restructures scheduled for this fiscal year, and on anticipated program restructures for next fiscal year. Staff would restart work to review and revise the outcome management system during FY 2004/2005 at the earliest.

FISCAL IMPACT

There is no direct fiscal impact from revising the budget process as described in this report. Department staff will have to absorb the additional work required to prepare for and attend the service review and preliminary presentation workshops. The additional work required to be completed by OCM and Finance Department staff will be offset by the postponement of major revisions to the outcome management budget system, as described in this report.

PUBLIC CONTACT

The public was notified of this item through publication of the Council Agenda (public hearing items) in the San Jose Mercury News and the posting of the Council Agenda and Report on the City of Sunnyvale internet home page.

ALTERNATIVES

There are three alternatives for Council to consider.

Alternative 1. It is recommended that the City Council authorize City staff to take the following actions:

a. develop and present a Service Review Worksheet for all existing service delivery plans contained in the current approved annual budget. The City Council will use these worksheets to review and prioritize existing City services at two full day workshops;

b. develop and present a preliminary budget at a workshop or special meeting. The preliminary budget may be unbalanced and require Council to provide preliminary policy direction that City staff will examine and potentially use in preparing the recommended FY 2004/2005 and FY 2005/2006 annual budget and long-term financial plan;

c. add the following meeting dates to the Budget Process Master Calendar:

March 13, 2004

First Service Review

March 20, 2004

Second Service Review

April 10, 2004

Preliminary Budget, Service Ranking and Priority Setting, and Council Policy Direction

April 17, 2004

Preliminary Budget, Service Ranking and Priority Setting, and Council Policy Direction

d. provide public hearings at the meetings added to the Budget Process Master Calendar so that the public can have earlier involvement and more participation as the recommended annual budget and long-term financial plan is being prepared;

e. postpone a comprehensive review of the outcome management budget system to address issues raised by Council to FY 2004/2005 at the earliest.

Alternative 2. It is recommended that the City Council modify any of the five work efforts described above, and then authorize City staff to implement the revised work efforts.

Alternative 3. It is recommended that the City Council direct staff to examine other approaches for preparing the recommended FY 2004/2005 and FY 2005/2006 annual budget and long-term financial plan, and report back to Council for further policy direction.

RECOMMENDATION

It is recommended that the City Council approve Alternative 1.

Prepared by:

Charles J. Schwabe,
Deputy City Manager

Approved by:

Amy Chan,
Acting City Manager

Attachments

A. Service Review Worksheet (pdf format)

B. Example of Service Review Worksheet for Code Enforcement SDP (pdf format)

C. FY 2004/2005 Budget Process Current Master Calendar