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5. b-C-D. I REPORT To the Honorable Mayor and City Council From the Cit Mana er February 5, 2005 Subject Council Direction for 2005/2006 General Fund Budget Recommendation 1. Revisit Council policy regarding the use of reserves as compared to budget reductions for the 2005/2006 general fund operating budget, 2. Provide direction on format and information needed for June budget hearings, and 3. Confirm budget hearing dates. Background Council Policy regarding use of reserves On January 2004 at the Council Budget Study Session, staff presented Council with initial projections regarding the 2004/2005 and 2005/2006 general fund operating budgets. At that time, in order to make up for the initially projected deficit, Council direction was to use 50% of reserves and make 50% in budget reductions for 2004/2005, and to use 33% of reserves and make 67% in budget reductions for 2005/2006. In June 2004, Redwood City faced a $9.2 million deficit for fiscal year 2004/2005. During the budget hearings, Council proposed to take $4.1 million from reserves and make budget reductions in the amount of $5.1 million, which was projected to yield a fund balance equal to 12% at the end of fiscal year 2006/2007. You will recall, that Council's initial policy is for reserves to be 15% to 20% of anticipated revenues. Staff has received updated information regarding revenues and has been able to revise the projections for 2005/2006. The current data, allows us to provide more accurate projections than what we were able to provide in January and July of 2004. The revised projections show an additional $2.8 million in revenues that we have added since July 2004. We are also starting to see indications that the economy is starting to gradually recover. Please see "Assumptions" Attachment which describes the assumptions that have been included in the projections. Given, the revised projections, staff feels we should revisit the current policy and take a higher percentage from reserves than originally endorsed at the last priority setting session. Therefore, staff is presenting four new possible alternatives (Options B, C, D and E) to Council's current policy (Option A), which are listed below from most conservative to least conservative.