June 21, 2005

SUBJECT: Adoption of the FY 2005/2006 Budget, Master Fee Schedule and Appropriations Limit

REPORT IN BRIEF

This report outlines the required actions for adoption of the proposed FY 2005/2006 Master Fee Schedule, Recommended FY 2005/2006 Budget and the FY 2005/2006 Appropriations Limit.  It is recommended that the City Council adopt each of the resolutions as presented in this report.  A separate action on each budget component is not necessary, unless the City Council wishes to change any recommendation.  It is recommended that the FY 2005/2006 Budget be approved as described in Alternative 1, with Council’s desired changes being dealt with as amendments to Alternative 1.

BACKGROUND

On May 23, 2005, City Council held a Budget Workshop to review in detail the Recommended FY 2005/2006 Budget and the Ten-Year Resource Allocation Plan.  On June 7, 2005, City Council held a Public Hearing on the Recommended FY 2005/2006 Budget, Establishment of Appropriations Limit, and Master Fee Schedule.  At this hearing, members of the public offered comments regarding the Recommended FY 2005/2006 Budget.  Notice of the Public Hearing was sent to those persons specifically requesting notice pursuant to the provisions of the Government Code on fee increases. 

EXISTING POLICY

Section 1304 of the City Charter requires the City Council to adopt the budget for the upcoming fiscal year on or before June 30.  State legislation requires that the City annually adopt an appropriations limit for the coming year.

DISCUSSION

Three actions by the City Council are required at the meeting of June 21, 2005.  First, the City Council must consider and take action on proposed fee changes.  It is recommended that the Council adopt the fees as presented in this report.  The Fees, Rates and Charges Resolution is provided as Attachment A.

Second, the City Council must adopt the FY 2005/2006 Budget by June 30.  This has traditionally been done by resolution.  It is recommended that Council adopt the Budget as presented in this report.  Changes to the Recommended Budget, as presented to Council at the Budget Workshop, are detailed below.  The Budget Resolution, as well as exhibits depicting the appropriations by fund, fund transfers and reserve increases and decreases necessary for implementation of the budget as recommended in this report, is presented as Attachment B.

Third, the City Council must adopt, by resolution, the FY 2005/2006 Appropriations Limit.  The calculations and the detailed supporting information are contained in Attachment C.  A discussion concerning each of the three actions required by Council is described below.

Fees and Charges

The Public Hearing on the proposed fee changes was held as part of the Public Hearing for the Recommended FY 2005/2006 Budget on June 7, 2005.  The current fees and charges of the City have been reviewed in accordance with the Fiscal Sub-element of the General Plan.  Staff has made adjustments to the proposed fee schedule as necessary to ensure that all fees and charges are aligned with the cost of service, except for those fees that are legally limited.  For those fees that are adjusted by inflation, a standard percentage of 3% has been applied. 

As part of the annual fee review process staff has proposed new fees and has adjusted a number of fees in order to more closely recover costs associated with the delivery of service.  These new fees and any fees that are proposed to be increased beyond the standard mentioned above are discussed in a detailed Report to Council (05-153) contained in Volume I of the recommended FY 2005/2006 Budget in the User Fees section.

Operating and Project Budgets

Staff recommends adoption of the Operating and Project budgets as presented in the City Manager’s Recommended FY 2005/2006 Budget, with the following changes: 

• The recommended FY 2005/2006 Budget includes a transfer from the General Fund to the Parking District Fund in the amount of $35,000 for the insurance premium payment of the downtown underground parking structure.  In subsequent discussions, it was determined the insurance premium is higher than originally anticipated by $10,000, for a total of $45,000.  Furthermore, staff has concluded that the payment should more appropriately be made directly in the General Fund, since the parking structure is an integral part of the Plaza del Sol and the operating costs of that facility are contained in the General Fund.  A special project has been set up in the General Fund to account for the insurance premium payment of the downtown underground parking structure.  This change is reflected in Exhibit A of Attachment B - FY 2005/2006 Budget Resolution (page 27 of 28).
• Murphy Avenue Tree Lights – Per Council direction made at the June 7 Public Hearing, funding in the amount of $20,500 has been included in the FY 2005/2006 Budget, funded by a corresponding transfer from the Downtown Public Improvements Project.  This change is reflected in the project budget on Exhibit A of Attachment B - FY 2005/2006 Budget Resolution (page 21 of 28).
• Santa Clara Valley Urban Runoff Pollution Prevention Program (SCVURPPP) – At its June 14, 2005 meeting, Council took action and approved a new project for the SCVURPPP Contracting and Fiscal Agent services.  This change is reflected in Exhibit A of Attachment B - FY 2005/2006 Budget Resolution (page 28 of 28).
• The recommended FY 2005/2006 financial plan for the Community Development Block Grant/Revolving Loan Sub-Fund (RLF) included anticipated interest earnings throughout the 20 year plan.  It was subsequently determined that the RLF should not reflect any interest earnings.  Per Section 570.500(b) of the CDBG final rule, any interest earned in the RLF must be remitted to the US Housing and Urban Development for transmittal to the US Treasury no less than annually.  There is no fiscal impact to the RLF because interest earnings were not appropriated in the recommended FY 2005/2006 Budget and the 20 year plan. 

A Ten-Year Resource Allocation Plan, as well as long-range projections for an additional ten years, was provided earlier to Council as part of the budget document.  Since FY 1993/1994, Council has approved a financial plan that has been balanced to the twentieth year. The Fiscal Sub-Element of the General Plan requires under action statement 7.1B.5i that the City Manager "Present a balanced Ten-Year Resource Allocation Plan to the City Council annually . . .” Although budgets are required by the Charter only on an annual basis, the Fiscal Sub-Element requires a multi-year plan.  

Appropriations Limit

Article XIIIB of the California Constitution established an appropriations limit on government agencies within California.  Attachment C provides information on the appropriations limit, which is a calculation of how much the City is allowed to spend.  Calculations for FY 2005/2006 indicate that the City will be below the appropriations limit by approximately $50 million based on the Recommended FY 2005/2006 Budget. State legislation requires that the City annually adopt an appropriations limit for the coming year.  Also, Council must select one factor from each component below by which to calculate the limit.  The options available are as follows:

Inflation Factors

1) California per capita income
2) Increase in non-residential assessed valuation due to new construction

Population factors
1) City population growth
2) County population growth

Staff recommends that Council select the combination of factors that yields the most favorable amount under the appropriations limit.  Those factors for FY 2005/2006 are the California per capita income and the County population growth.  Based on this selection, the appropriations limit for FY 2005/2006 is calculated to be $132,758,486. Expenditures subject to the appropriation limit exclude Redevelopment Agency activity, Enterprise and internal service activity, debt service payments, and capital outlay projects that have a useful life of 10 years or more and a value which exceeds $100,000.  Non-Tax revenues, such as federal and state grants, fees for service, or revenues restricted for particular purposes, are also excluded from the calculation.

Although the City is well below the current appropriations limit, it is beneficial in the long run to select the growth-rate option that maximizes the amount under the appropriations limit.

Summary of Recommended Budget

On May 23, 2005, the City Council held a Budget Workshop to review in detail the City Manager's recommended FY 2005/2006 Budget and Ten-Year Resource Allocation Plan. Although Council is only required to adopt an annual budget by Charter, Council policy calls for a ten-year resource allocation plan.    Staff presented the ten-year resource allocation plan and a twenty-year financial plan for approval in concept as well.

In summary, the total recommended revenue for FY 2005/2006 is approximately $216 million, and total expenditures are approximately $227 million. The total recommended budget for operating expenditures is approximately $197 million. The total project budget is approximately $23 million.  Debt Service totals approximately $7 million.  Details of the revenues and expenditures are contained in the recommended FY 2005/2006 Budget and Ten-Year Resource Allocation Plan, distributed on May 13, 2005.

Over the last several years the City’s General Fund revenues have declined, while costs have risen faster than inflation.  This situation has led to a continuing structural imbalance between revenues and expenditures in the General Fund, over the first part of the Twenty-Year Financial Plan.  To address this imbalance several strategies have been developed and included in the General Fund Long-Term Financial Plan.

On the revenue side, three revenue enhancements have been included.  Approximately $1 million in additional Sales Tax revenues net of new costs from the Town Center Mall Development have been included beginning in FY 2007/2008.  Rent payments from the Utilities Funds to the General Fund for the use of the City’s land by the SMaRT Station ($334,000) and Water Pollution Control Plant ($297,000) have been included in the FY 2005/2006 Budget. 

Other revenue enhancements may be pursued but are currently not included in the Budget.  These include implementation of the Emergency 911 Fee and an increase to the Transient Occupancy Tax and/or the Business License Tax.    We have not included the revenues from the Emergency 911 Fee in the recommended FY 2005/2006 Budget because of the uncertain legal status. When the issues are resolved, implementation as per Council direction will provide approximately $2 million in new revenues to the General Fund. 

Increases to the Transient Occupancy Tax and/or the Business License Tax are not included in the recommended FY 2005/2006 Budget because they require voter approval for adoption.  If approved, these two revenue increases would provide additional financial flexibility as the City addresses its future financial challenges.  On June 7, 2005, Council approved a ballot measure for the November 8, 2005 election to increase the Business License Tax.  The Business License Tax, which currently ranges from $10 to $325, is among the lowest in the County and is significantly lower than San Jose's high of $25,000. Raising this tax could provide approximately $840,000 in additional funds.  Council will be considering the approval of another ballot measure for the November 8, 2005 election to increase the Transient Occupancy Tax at the meeting tonight.  The City's current Transient Occupancy Tax rate is lower than those of our surrounding communities.  An increase in our Transient Occupancy Tax from 8.5% to 9.5%, which is less than the County average of 10%, would generate about $600,000 in additional funds.

On the expenditure side, a $1.1 million reduction is included in the General Fund under fiscal strategies beginning in FY 2006/2007 through FY 2011/2012, increasing with inflation.  In addition, annual reductions or revenue enhancements of approximately $650,000 are included in the Community Recreation Fund starting in FY 2006/2007 through FY 2024/2025.  To fund these reductions, staff is pursuing a three pronged approach: revenue enhancements as detailed above, service level reductions and continuous improvement within the organization.  Service level reductions were proposed last year but deferred.  Staff will be bringing proposed reductions back to Council for review and direction with the mid-year update of the FY 2005/2006 Budget.  Staff is pursuing continuous improvement within the organization by exploring a number of fiscal strategies and cost savings ideas detailed in Appendix B of the recommended Budget’s Transmittal Letter.   

Public Hearing

On June 7, 2005, the City Council held a Public Hearing on the recommended FY 2005/2006 Budget.  At this hearing, members of the public offered comments regarding the Recommended FY 2005/2006 Budget.  A few questions were raised which were answered by Council and City Staff.  A representative from Junior Achievement of Silicon Valley and Monterey Bay spoke at the hearing and expressed appreciation for the City’s continued financial support of Junior Achievement.  The hearing was formally closed on that date.   

Boards and Commissions Budget Review

All of the City’s Boards and Commissions have had the opportunity to review the recommended FY 2005/2006 Budget since May 16, 2005.  At the Public Hearing, Boards and Commission members offered the following comments regarding the FY 2005/2006 Budget:

• The Parks and Recreation Commission, represented by Mr. Robert Lawson, recommended that Council approve the Recommended FY 2005/2006 Fee Schedule and Capital Improvement Projects Budget with the exception of two projects.  The Commssion recommends that Project No. 825580 Plaza Del Sol II be approved with substantial acceleration in time and Project No. 825790 Park Land Acquisition be approved with an increase in funds for land acreage purchases. 
• The Arts Commission, represented by Chair Ms. Monica Draganowski Davis, recommended that Council approve the Recommended FY 2005/2006 Budget and 10-Year Resource Allocation Plan as presented. 

Draft meeting minutes that discuss the Budget from the Sunnyvale Board of Libraries Trustees, Planning Commission, Arts Commission, and Parks and Recreation Commission are included in Attachment D of this report.  No other Boards and Commissions held meetings to discuss the Budget prior to submission of this report.

FISCAL IMPACT

The various fiscal impacts of the budget have been outlined throughout this report and in the materials previously provided to the City Council.  Staff recommends that any amendment approved by Council contain a corresponding reduction or revenue to ensure there is no impact to the fund balance.

Conclusion

This report outlines the required actions for adoption of the proposed FY 2005/2006 Master Fee Schedule, Recommended FY 2005/2006 Budget and the FY 2005/2006 Appropriations Limit.  It is recommended that the City Council adopt each of the resolutions as presented in this report.

PUBLIC CONTACT

The Public Hearing on the recommended FY 2005/2006 Budget was conducted on June 7, 2005 and was formally closed on that date.  City boards and commissions have had the opportunity to review the budget. Additionally, public contact has been accomplished through publication and posting of the Council agenda.  Further, Reports to Council are available in the Library and on the City’s web page. Finally, the entire budget has been posted on the City’s web page.  Copies of the budget are also available for review at the Library, Finance Department, and City Clerk’s Office.

ALTERNATIVES

1. Approve the Recommended FY 2005/2006 Budget, Master Fee Schedule, and Appropriations Limit as presented in this report.

2. Approve the Recommended FY 2005/2006 Budget, Master Fee Schedule, and Appropriations Limit as presented in this report with modifications.  It is recommended that these changes be included as separate amendments to Alternative 1.

RECOMMENDATION

It is recommended that Alternative 1 be approved.

Prepared by:

Charlene Sun
Management Analyst - Budget

Reviewed by:

Mary J. Bradley
Director, Finance

Approved by:
                                               
Amy Chan

City Manager

Attachments

A. FY 2005/2006 Fees, Rates and Charges Resolution (.pdf format)

Exhibit A. FY 2005/2006 Master Fee Schedule (.pdf format)

B. FY 2005/2006 Budget Resolution (.pdf format)

Exhibit A. Appropriations - General Fund, Special Revenue Funds, Enterprise Funds (.pdf format)

Exhibit B. Appropriations – Internal Service Funds (.pdf format)

Exhibit C. Transfers – To/From All Funds (.pdf format)

Exhibit D. Appropriations To/Deductions From Reserves – All Funds (.pdf format)

C. FY 2005/2006 Appropriations Limit Resolution (.pdf format)

D. Draft Board and Commission meeting minutes for the FY 2005/2006 Budget (.pdf format)