AgdaPkt 2003-02-03 - Laserfiche WebLink

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REPORT Tp the Honorable Mayor and City Council From the City Manager February 3, 2003 Subject General Fund Financial Condition �A1 Recommendation Approve the City Manager's initial recommendation to direct City departments to identify savings equal to at least 1/3 ($1.2 million) of the projected 2002/03 deficit of $3.5 million and draw down our reserves by the remaining 2/3 ($2.3 million). Approve the suggested calendar for future meetings and decisions to work on the short-term and long -term solutions to our deficit problem. Background Effect of the Slowdown in the Local Economv The City continues to experience a substantial erosion in sales taxes and transient occupancy taxes (TOT) due to the slowdown in the local economy. Together, staff expects that these two revenues will be about $3.5 million lower than estimated when the FY 2002/03 budget was adopted by Council in August 2002. The $3.5 million decline in the revenues represents about 5.7% of the current year's general fund revenue. Since the budget that Council adopted was balanced, this shortfall, if not corrected, will reduce the City general fund reserves by $3.5 million. It is important to be mindful of the fact that we do not yet know whether these two revenue sources have "bottomed out" or if they will decline further this fiscal year. While the TOT is received monthly, sales tax is received quarterly and is reported to the City approximately 2 Yz months after the close of the calendar quarter. For example, the information on sales tax for the quarter covering July — September of 2002 is not known until December 2002. Accordingly, at this point we only have information for one of the four quarters of this fiscal year. In FY 2003/04, staff forecasts a $5.2 million operating deficit along with a $9.3 million operating deficit in FY 2004/05 if no action is taken in 2002/03 or 2003/04 to correct the problem. In each of these two years, the problem goes beyond the decline in revenues as the City will also experience increased retirement system costs due to the poor investment returns experienced by CalPERS. The following table summarizes the major components behind the projected deficits forthis year and the following two fiscal years: All Figures are Deficits FY02 /03 FY03 /04 FY04 /05 Original Forecasted Deficit ---- - -- $0.2M $1.8M Sales Tax Decline 3.OM $3.1 M $3.2M TOT Decline 0.5M 0.6M 0.6M Increased PERS Costs - - -- JAM 3.8M Current Projected Deficit $3.5M $5.3M $9.4M Percentage of Revenues 5.7% 8.2% 13.8%