SunnyvaleRTC

June 13, 2006

SUBJECT: Public Hearing - FY 2006/2007 Budget and Resource Allocation Plan, Establishment of Appropriation Limitation and Proposed Fee Increases

REPORT IN BRIEF

The City Charter requires that a Public Hearing be held prior to the adoption of the FY 2006/2007 Budget and Resource Allocation Plan. A Public Hearing is also required on proposed adjustments to fees or service charges. As part of this hearing, staff has included the annual establishment of the appropriation limitation. No action is required on the part of the City Council. Adoption of the Budget and Fee Schedule is scheduled for June 20, 2006.

BACKGROUND

Section 1303 of the City Charter states that "At the time so advertised, or at any time to which Public Hearing shall from time to time be adjourned, the City Council shall hold a Public Hearing on the proposed budget, at which interested persons desiring to be heard shall be given such opportunity."

Article XIIIB of the California Constitution established appropriation limitations on government agencies within California. Section 7910 of the Government Code requires that the City annually adopt an appropriation limitation for the coming year. Any challenges to the declared limit must be brought within 45 days of its adoption. The supporting documentation for the establishment of the limitation must be available for public review at least 15 days prior to the adoption of the appropriation limitation resolution. The required material, Attachment A, that provides detailed information on the appropriation limitation, has been available for public review since May 15, 2006 as included in Volume I of the recommended FY 2006/2007 Budget and Resource Allocation Plan.

Section 66016 (a) of the Government Code provides that, prior to levying a new fee or service charge, or approving an increase in an existing fee or service charge, the City shall hold at least one public meeting at which time oral or written presentations can be made.

EXISTING POLICY

In accordance with the City Charter, California Constitution and State Code, a public hearing has been held annually for public comment on the budget and resource allocation plan, appropriation limitation and proposed increase in fees or service charges for the upcoming fiscal year.

DISCUSSION

The purpose of the hearing is to furnish an opportunity for citizens to be heard on the City's budget, the appropriation limitation, and the proposed increase in fees and charges. No action is required on the part of the City Council. The FY 2006/2007 Budget and Twenty-Year Resource Allocation Plan is scheduled for adoption on June 20, 2006.

Appropriations Limit

Article XIIIB of the California Constitution, adopted in November 1979, established appropriation limitations on government agencies within California. Section 7910 of the Government Code requires that the City annually adopt an appropriations limit for the coming year. The appropriations limit is set on an annual basis and is dependent upon the change in population within the jurisdiction and the change in the cost of living as determined by the State.

As shown in Attachment A, the appropriations limit for FY 2006/2007 is approximately $140 million. 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.

As a result of the calculations, the City will be under the allowable appropriations limit by approximately $51 million for FY 2006/2007.

Recommended FY 2006/2007 Budget

On May 23, 2006, the City Council held a Budget Workshop to review in detail the City Manager's recommended FY 2006/2007 Budget and Twenty-Year Resource Allocation Plan.

Staff would like to note an adjustment to the total FY 2006/2007 expenditures reflected in the recommended budget. Due to reclassification of several expenditures as part of the budget restructure and to improve accountability, some of these expenditures were inadvertently not combined into the total. With the adjustments, the total recommended expenditures for FY 2006/2007 is approximately $239 million rather than $237 million. A revised budget summary is provided under Attachment B. The recommended revenue is approximately $232 million and the projected use of reserves is approximately $7 million. The total recommended budget for operating expenditures is approximately $208 million which includes approximately $3.3 million for ten budget supplements recommended by the City Manager for funding. The total project budget is approximately $23 million. Debt Service totals approximately $7 million, Equipment totals $763,050 and the Service Level Set-Aside totals $500,000. Details of the revenues and expenditures are contained in the recommended FY 2006/2007 Budget and Twenty-Year Resource Allocation Plan.

Budget supplements reflect proposed expansion or reduction of service levels from the baseline budget. This year, there are twelve budget supplements included in the budget document for Council’s consideration and the City Manager recommends ten for funding. The fiscal impact to the General Fund is a cost increase of $3.3 million for FY 2006/2007 and $80 million for the 20-year planning period. The impact to the Community Recreation Fund is a cost savings of $309,566 for FY 2006/2007 and $9.6 million for the 20-year planning period. This includes Budget Supplement #12 that details various revenue enhancements or cost savings to address the Community Recreation Fund structural imbalance and a one year case management for seniors pilot program. The impact to the General Services Fund for the 20-year planning period is a cost increase of $548,592, with the cost increase to take place starting in FY 2007/2008. Details of the budget supplements are contained in the Volume I of the recommended FY 2006/2007 Budget and Twenty-Year Resource Allocation Plan.

At the Budget Workshop on May 23, 2006, Council provided direction on the following items:

· Provide funding options for Budget Supplement # 6 (Restoration of Street Sweeping Level) Alternative B for inclusion in the adopted FY 2006/2007 budget.

Approval of this supplement would allow for sweeping streets on a monthly basis during the summer and a two-week schedule during the winter, when it is most needed. Besides the purchase of a sweeper, a seasonal operator would be hired during the winter. An additional 2,900 miles would be swept under this alternative. The fiscal impact to the General Fund is $260,448 for the first year which includes $165,000 for the purchase of a vacuum sweeper. The sweeper has an expected useful life of 10 to 12 years. The ongoing operating costs including the annualized replacement cost for the sweeper is approximately $100,000. The 20 year fiscal impact is a cost increase of $2.8 million with inflation. It should be noted that the 20 year fiscal impact is significantly less than the amount presented at the Budget Workshop based on a more detailed review of the ongoing costs. It was determined that the replacement cost for the sweeper was overstated in the recommended budget document. The adopted budget document will be revised to reflect the correct amount should Council approve this supplement.

One funding option is to offset the cost increase for street sweeping with reductions in other Public Works operating programs. Staff has preliminarily identified services such as street tree pruning, concrete maintenance, and map updating as potential targets for budget cuts. However, implementing budget cuts and reducing service levels of other Public Works operating programs will negatively affect the long term infrastructure maintenance goals of the City. It should also be noted that staff is currently in the process of completing the Public Works Optimal Staffing study. The study may result in cost savings that can be applied to fund this enhanced service. Once the study is completed, Council will have an opportunity to prioritize the services within Public Works and allocate resources required to achieve the desired service levels.

Another funding option would be to fund the cost increase with the General Fund Service Level Set-Aside. The FY 2006/2007 Budget includes $500,000 in annual Service Level Set-Aside funds for the 20-year plan adjusted for inflation. Should Council choose to fund the increase in street sweeping services with the Set-Aside funds, the FY 2006/2007 Set-Aside would be reduced to $239,552 and the on-going Set-Aside will be reduced to $411,689 annually growing with inflation. The 20-year total Set-Aside will be reduced by $2.8 million, from $13.7 million to $10.9 million. Utilizing the General Fund Service Level Set-Aside funds for this supplement reduces the ongoing funds by 20%, restricting the City’s flexibility to meet the demands of our changing community in the future.

Staff does not recommend restoring street sweeping services with either funding options at this time. Staff recommends that Council defer this supplement request until the Public Works Optimal Staffing study is complete and prioritize the street sweeping service in conjunction with other Public Works services.

· Include Budget Supplement # 7 (Construct Restrooms Building at San Antonio Park) in the adopted FY 2006/2007 budget with construction costs funded with Park Dedication monies and operating costs funded from the General Fund Service Level Set-Aside. Council directed the City Manager to recommend the year that design and construction on this project would occur.

This supplement provides for the design, construction and maintenance of a restroom building at San Antonio Park. The cost to construct the restroom is $278,000 and the annual infrastructure and replacement cost is approximately $3,333. Additional annual operating costs associated with the restroom building are estimated to be $20,511 annually starting in FY 2007/08.

Although the Park Dedication Fund currently has sufficient funds to support the construction and ongoing infrastructure replacement costs, staff’s recommendation is to defer this project for Council consideration for one year. Staff would like to evaluate this project as part of the FY 2007/2008 Projects Budget cycle and prioritize it against other projects that are eligible for Park Dedication funding. Currently, the City’s Unfunded Projects List has approximately $10.5 million in Park Dedication Fund eligible projects such as the Morse Avenue Neighborhood Park Development project ($3.2 million), Washington Pool Expansion project ($2.2 million) and Develop Pocket Parks project ($1.5 million). A list of the unfunded park dedication projects is included in Attachment C of this report. Detailed project information sheets for each unfunded project are included in Volume III of the recommended FY 2006/2007 Budget.

Staff is currently exploring alternatives to building the restroom such as contracting with the adjacent private school for public use of the school’s restroom.

· Direct money awarded to the City as a result of litigation be added to the General Fund Service Level Set-Aside. These one-time monies would only increase the Service Level Set-Aside for the year they are received.

Explore two options for decreasing the City’s subsidy for the Fremont Pool over the long term. Staff explored the following two options: 1) an upfront contribution to the endowment, and 2) reinvestment of a portion of the interest back to the endowment. In the recommended FY 2006/2007 Budget, there is a gap between the costs to operate the Fremont Pool ($129,000) and the sum of the interest income from the endowment ($42,000) and the revenues generated from use of the pool ($48,000). The gap of approximately $39,000 is subsidized by the City. The 20-year total subsidy is $1.14 million.

For the first option, staff’s analysis determined that if $984,000 were added to the endowment as a one-time contribution next year, the interest generated would cover the City’s operating expenses for the 20-year financial plan. However, in year 20 the City would only break-even and the City would need to resume providing a subsidy to cover expenses in future years. This is because as expenditures continue to increase, the interest generated from the endowment covers less of the expenditures every year. As a result, a high upfront contribution is required to compensate for the eroding value over the 20 years. Therefore, $984,000 is actually more than the present value of the 20-year total for the City’s annual subsidy of $39,000 growing with inflation.

For the second option, staff investigated numerous alternatives with varying levels of interest reinvestment. Because there is not enough in the endowment to start with and having less money from the interest income each year requires a proportional increase in the City’s contribution, all of the alternatives are more costly to the City than the current subsidy.

Fees and Charges

The current fees and charges of the City have been reviewed in accordance with the Fiscal Sub-element of the General Plan. After an extensive and detailed staff review of fees, adjustments have been made to the proposed fee schedule as necessary to ensure that all fees and charges are aligned with the cost to provide each service, except for those fees that are legally limited or market based. Based on staff’s detailed review, a majority of fees have been adjusted to recover cost of service where appropriate. For those fees that are adjusted by inflation, a standard percentage of 2% has been applied. Fees related to utilities services (water, refuse, and sewer) have been adjusted by the corresponding increase in those utilities’ rates. At the Budget Workshop on May 23, 2006, staff distributed an addendum to the fee schedule for three fees related to the removal of trees. The addendum is included with this report as Attachment D. These fees will be included with the FY 2006/2007 Fee Schedule to be adopted on June 20, 2006. Details of the proposed fee changes are discussed in the Report to Council (06-153) contained in Volume I of the recommended FY 2006/2007 Budget in the User Fees section.

Boards and Commissions Budget Review

All of the City’s Boards and Commissions have had the opportunity to review the recommended FY 2006/2007 Budget since May 15, 2006. Boards and Commissions wishing to make comments, suggestions or recommendations will be testifying at the public hearing on June 13, 2006. Testimony from June 13^th as well as draft Board and Commission meeting minutes that discuss the Budget will be included in the Budget Adoption Report to Council scheduled for June 20, 2006.

FISCAL IMPACT

There is no fiscal impact to this public hearing. Budget adoption is scheduled for June 20, 2006.

PUBLIC CONTACT

Legal ads were published in The Sunnyvale Sun on May 24, 2006, and May 31, 2006 (Attachment E). Notice of the hearing has also been provided to those persons specifically requesting notice pursuant to the provision of the Government Code on fee increases. All potential recipients of the City's outside funding provisions were notified through the City's outside funding procedures. In addition, copies of the budget are available for review at the public library, Finance Department, and City Clerk’s Office. Finally, the City’s website has included the entire recommended FY 2006/2007 Budget and Resource Allocation Plan since May 15, 2006.

RECOMMENDATION

It is recommended that the Public Hearing be held in order to meet the aforementioned requirements. Council should direct staff as to any issue requiring further review prior to the budget adoption on June 20, 2006.

Prepared by:

Charlene Sun

Management Analyst/Budget

Reviewed by:

Mary J. Bradley

Director of Finance

Approved by:

Amy Chan

City Manager

Attachments

A. Appropriations Limit (.pdf)

B. Revised FY 2006/2007 Budget Summary (.pdf format) (.pdf)