SunnyvaleRTC

SUBJECT: FY 04/05 Service and Budget Reduction Package and Budget Modification No. 24

The City Council approved a service and budget reduction package as part of the approved FY 04/05 Budget and 10-Year Resource Allocation Plan. Implementation of the budget reduction package was deferred until January 2005. City staff has identified the service and staffing implications if the budget reduction package was implemented this fiscal year. The budget would be reduced by an estimated $717,000 in FY 04/05, and $947,000 annually through FY 11/12. This would result in a total reduction of about $8 million. Three positions would be eliminated Only one position is currently filled. A temporary employee is assigned to this position.

The City Council will consider the budget reduction package at its annual Fiscal Issues Workshop. This workshop is scheduled for January 31, 2005. City staff will provide an overview of both mid-year and long-term budget assumptions, which will provide a context for re-examining the budget reduction package. Four alternative courses of action are available for Council consideration, ranging from implementing the budget reduction package as scheduled to taking no action. A staff recommendation is included in this report.

Finally, Budget Modification No. 24 is included with this report. This budget modification provides funding for service increases for three services identified by the City Council as part of the review and prioritization of all City services and program budget. This review was completed in April 2004. The budget modification also removes $288,000 from Program 487 - Public Safety Administration, as part of the elimination of the assistant director of public safety job classification that was approved on December 14, 2004. These funds are recommended to be transferred to the General Fund Service Level Stabilization Reserve. Finally, the budget modification authorizes a 50 cent increase in golf tournament fees from April 2005 through March 2006.

The City Council completed a comprehensive review of all City services and program budgets in April 2004 as part of the development of the annual budget and long-term financial plan for FY 04/05. As part of this review, Council provided preliminary policy direction to eliminate 2 services, to reduce 64 services by 5-15 percent, and to restore funding or increase budgets for 3 programs. The City Manager’s recommendation, based on City Council policy direction, totaled $2.3 million in planned budget reductions.

The service and budget reductions were undertaken to address an on-going, structural gap in the City’s budget, which first emerged near the end of the FY 01/02 fiscal year. Beginning in FY 04/05, the budget gap had been reduced to about $5 million on an annualized basis. The City Manager’s Recommended FY 04/05 Budget and 10-Year Resource Allocation Plan included $2.3 million in reduced spending for 8 years and $2.7 million in increased revenues annually to address the annualize budget gap.

The FY 04/05 budget incorporated City Council’s policy direction on services and program budgets in several ways. The 10-Year Resource Allocation Plan reflected a $1.1 million reduction for FY 04/05, and a $2.3 million annual reduction (including an inflation factor) through FY 11/12. The FY 04/05 budget included a total of $922,000 in budget reductions that were scheduled to be implemented in January 2005. An additional $1.3 million in budget reductions were identified that required additional study. These reductions include:

Dept/Program Title	Service Name	Fund	CM Reduction Pending Study
Public Safety Fire Services	Reduce 1 piece of apparatus	General	$1,073,994
Public Safety Public Safety Admin	Reduce recruit hiring by 1 recruit	General	$ 169,436
Public Safety Public Safety Admin	Reduce 621 hours of 1 senior office assistant	General	$ 27,509
Public Safety Public Safety Admin	Reduce 900 hours of cadet position	General	$ 34,353

Finally, the budget included 94 strategies and cost savings ideas. These strategies and ideas were to be studied by staff during FY 04/05 to determine if they could generate cost savings, and if so how much, in order to help close the budget gap.

The City Council adopted the FY 04/05 budget in June, deferring the budget reductions until January 2005, and directing staff to continuing studying additional budget savings and the strategies and cost saving ideas.

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.

Four factors lead the City Manager to recommend in June 2004 to defer implementation of the service and budget reductions until January 2005. They were the changing state of the local economy, the state budget and ballot initiatives, City employee wage and benefit costs, and cost savings opportunities.

· Local economic conditions. The health of the local economy appeared to stabilize as the recommended budget for FY 04/05 was being developed. As a result, the declines in many key revenue sources reached bottom last fiscal year, and were projected to improve this fiscal year. For example, nearly the same sales tax revenues were expected in FY 04/05 as were collected in FY 03/04, rather than a continuing drop in revenues. Property tax revenues were expected to increase by 2.0 percent in FY 04/05, as compared to the FY 03/04 budget estimates. Transient Occupancy Tax revenues were projected to increase by 10.0 percent. Both State revenues and permits and licenses revenues were expected to increase by about 5.0 per cent.

· State budget and state-wide propositions. The Governor’s proposed FY 04/05 State budget included reductions to state revenues that are provided to cities and counties, at the level as estimated by City staff. However, the budget had not been adopted by the State Legislature at the time that the City Council was considering final adoption of the City’s budget. In addition, the League of California Cities was successful in placing a state wide initiative on the November 2004 ballot. This initiative, and a second that was brokered by the governor, were designed to protect city and county revenues from future state take aways. Again, no action was taken at the time the City Council needed to adopt the FY 04/05 budget.

· Employee wage and benefits costs. Memorandums of understanding expired with the Sunnyvale Employees Association and the Communication Officers Association. On June 20, 2004 and December 31, 2004, Council directed staff to negotiate new agreements with both employee associations. This provided the opportunity to explore ways to reduce future employee wage or benefit costs. Neither agreement was concluded by the time Council needed to approve the FY 04/05 budget.

· Potential Cost Saving Strategies and Ideas. Staff developed a list of 94 strategies and cost savings ideas as part of Council’s review and prioritizing of City services and programs. These ideas and strategies have the potential to generate cost savings that could be used to address the budget gap. Further staff study would be required in order to determine if cost savings would result, the level of cost savings, and expected implementation dates.

It is too early to tell if the worst of the City’s budget problems are over. However, there are some encouraging signs that the pressure points or reasons for the budget gap may be easing.

· FY 03/04 Year End Financial Report. Overall, the City’s General Fund ended the year approximately $4.8 million better than the May 2004 budget estimate. General Fund revenues for FY 03/04 were higher than the May 2004 estimate; expenditures were less than the May estimate. Staff had estimated drawing down on the reserves by $13.5 million for FY 03/04. The actual draw down was $8.7 million. Council directed staff to place the $4.8 million difference into the General Fund Service Level Stabilization Reserve pending further action at the January 2005 Fiscal Issues Workshop.

· Budget Assumptions. Staff will present an assessment of the assumptions used to prepare the FY 04/05 Budget and 10-Year Resource Allocation Plan at the January 31, 2005 Fiscal Issues Workshop. Revenue trends, the Governor’s proposed budget, and projected wage and benefit expenses are especially important. Revenues from sales tax, transient occupancy tax, and permits and licenses fees are higher than projected so far. It is too early to tell if property tax revenues will meet or exceed the projected level that was included in the FY 04/05 budget. The Governor’s recommended FY 05/06 state budget does not include any budget reductions that affect the City in addition to what has been included in the City’s 10-Year Resource Allocation Plan. The City Council ratified a new agreement with the Sunnyvale Employee Association. Discussions are underway on a new agreement with the Communication Officers Association. The City received its updated contribution rates from the California Public Employees Retirement System (PERS) for FY 05/06 for the safety and miscellaneous employee groups. This will result in a significant negative impact on the City’s Long-Range Financial Plans.

· State-Wide Initiatives. California voters approved Proposition IA in November 2004. In the long-term, this initiative will protect City revenues from future state reductions. Reductions to City Revenues in the FY 05/06 state budget have already been factored into the 10-Year Resource Allocation Plan.

· Strategies and Cost Savings Ideas. A total of 94 strategies and cost savings ideas were identified as potential methods to reduce expenses or increase revenues to close the structural gap in the City’s General Fund. Staff selected 49 of these strategies and ideas to examine in detail this fiscal year. Attachment A provides a status on current results from this effort, and the additional work that will be completed this fiscal year. So far, work is underway to examine most of the strategies and ideas. Work has been completed on 7 strategies and cost savings ideas, resulting in an estimated $995,000 in savings. These savings can be reflected in the 20-Year Long Range Financial Plan. These strategies and cost savings ideas include:

Attachment B summarizes the FY 04/05 service and budget reduction package. The attachment lists the total budget reduction, the affected programs, and effects on services by department. The budget reduction totals $717,000 for FY 04/05 and $947,000 annually for a full fiscal year. This is slightly higher than the original estimate of $922,000 because one pending study reduction item can now take effect. A staff retirement has allowed the Parks and Recreation Department to reduce staff costs by $30,640 in the Parks and Recreation Management Program. Staff is continuing to study an additional $1.3 million in potential reductions in programs managed by the Public Safety Department. If implemented, these two efforts would result in a $2.3 million annual budget reduction, beginning in FY 05/06.

A total of three full time positions will be eliminated if the service and budget reduction package is implemented during the second half of FY 04/05. The following departments and programs will be affected.

Department	Program	Job Classification	# of Positions
Human Resources	Personnel Services	Staff Office Assistant	1
Public Safety	Various programs	Assistant Director	1
Public Works	Roadway and Median Right of Way Services	Grounds worker	1

A vacant position exists in the Human Resource Department, providing a placement opportunity for the employee currently in the staff office assistant position. The assistant director position in the Public Safety Department is vacant. The grounds worker position is currently filled by a temporary employee in the Public Works Department. Temporary appointments are routinely terminated when planned work is completed or when funding has been expended.

The City’s 10-Year Resource Allocation Plan includes a line item titled “Fiscal Strategies”. This line item shows a $1.1 million budget reduction for FY 04/05, and a $2.3 million budget reduction (increasing with inflation) annually through FY 11/12.

Three approaches are available to address the $1.1 million budget reduction for FY 04/05. The City Council directed staff to place $4.8 million from the FY 03/04 year end into the General Fund Service Level Stabilization Reserve. This reserve account has a current balance of $9.7 million. A total of $1.1 million could be used from this reserve to address the budget reduction planned for FY 04/05.

Second, the City Council could direct staff to postpone the implementation of the FY 04/05 budget reduction package until July 1, 2005. This will allow the Council to re-examine the budget reduction package as it considers the FY 05/06 Budget and 10-Year Resource Allocation Plan.

Third, the City Council could direct staff to implement the budget reduction as planned. This would result in the service reductions and position eliminations described in this report. Actual implementation would take place in the later part of this fiscal year.

In addition, Council increased funding for several services as it completed the service and budget review and prioritization process last April. These increases were reflected in the budget reduction package. At that time, Parks and Recreation Department staff recommended increasing the tournament fee from $2.00 to $2.50 from April 1, 2005 through March 31, 2006 in order to generate additional revenue. Staff is asking the City Council to approve this action.

Finally, Council eliminated the assistant director of public safety job classification on December 14, 2004. Two assistant director positions are included and funded in the FY 04/05 budget. Funding for one position was used to fund the department reorganization, which was also approved on December 14, 2004. A total of $288,000 for the second assistant director position should be removed from Program 487 – Public Safety Administration to reflect Council’s action.

Department	Program	Service	Increase/ (Decrease)
Community Development	Economic Prosperity	Developing & Implementing Marketing Opportunities to Strengthen and Support Retail and Hospitality Businesses	$1,206
Parks and Recreation	Neighborhood Parks and Open Space Management	Restore Water Features for Part of the Year	$24,745
Parks and Recreation	Customer Service, Registration, and Publicity for Recreation Programs and Activities	Waive Park Building Use Fees for Non-Profit Groups	$26,791
Parks and Recreation	Golf Course Maintenance Operations and Golf Course Services	Increase tournament fees from $2.00 to $2.50	$4,198*
Public Safety	Public Safety Administration	Eliminate Assistant Director Position	($288,415)

*The $4,198 represents a projected increase in revenues for this program. These revenues will go to the Community Recreation Fund.

It should be noted that Council direction was to waive park building use fees for a one year trial period. Therefore, the budget modification for this adjustment is only for FY 04/05.

BUDGET MODIFICATION NO. 24 Fiscal Year 2004/2005
	Current	Increase (Decrease)	Revised
General Fund
Expenditures:
Program 244 – Economic Prosperity	$515,680	$1,206	$516,940
Program 265 – Neighborhood Parks and Open Space Management	$6,112,772	$24,745	$6,137,517
Program 487—Public Safety Administration	$4,713,423	($288,415)	$4,425,008

Reserves:
Service Level Stabilization	$9,687,657	$262,410	$9,950,067

Community Recreation Fund
Revenues:
Golf Tournament Fees	$0	$4,198	$4,198

Expenditures:
Program 640 - Customer Service, Registration, and Publicity for Programs and Activities	$2,443,250	$26,791	$2,470,041
Reserves:
20 Year RAP	$933,551	($22,593)	$910,958

These increases were reflected in the budget reduction package that was approved as part of the FY 04/05 Budget and 10-Year Resource Allocation Plan.

A service and program budget reduction package was adopted by the City Council in June 2004. However, the Council deferred implementing the reduction package until January 2005. This action was taken to see if improvements to the local economy would result in higher City revenues than expected, and to allow staff time to examine strategies and cost savings ideas. Council is scheduled to reconsider the budget reduction package at its annual Fiscal Issues Workshop on January 31, 2005. In addition, Budget Modification 24 is presented. This budget modification identifies funding that is required to increase the following services:

· Develop and implement marketing opportunities to strengthen and support retail and hospitality businesses,

· Waive park building use fees for non-profit groups for a one year pilot period during FY 04/05.

The budget modification also reflects a $288,000 reduction in funding for the Public Safety Department, resulting from the elimination of the assistant director job classification and one of two funded positions. Finally, the budget modification increases revenues in the Community Recreation Fund for golf tournament fees.

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.