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Why did staff recommend scenario B? • Scenario A requires deeper cuts sooner, and hence more reductions in service levels to citizens, and does not draw down reserves to the 15% minimum level. • Scenario B and C both leave reserves at approximately the same level four years out, 13% versus 15% (please remember that based on all of our assumptions and estimates, our estimated reserves could easily move several percentage points in either direction) so we see these two as probably identical. • Scenario B allows the time to ease into our cuts. Most experts suggest the economy is still a year off from a strong recovery. However, we do not want to make deeper cuts in service levels if there is a chance that the economy could come back faster. • Scenario B allows us a gradual stepping down to wean us off of reserves and to get expenditures and revenues in balance. • Staff does not think that it will be difficult to develop a plan to again increase our reserves from 13% to 15% (at the most two -three years). • The Council has already seen the impact of the 2% cut (previous agenda item). Scenario B will mean a 4.5% cut (which is two times larger than FY 02/03 cuts), while scenarios A and C will represent a 6.1% cut (three times greater than FY 02/03 cuts). Alternative The Council could choose scenario A or C or some other variation. How will all this actually work? If the Council accepts staffs recommendation, I will ask each department to develop three levels of cuts, 2 %, 4.5 %, and 7 %. This will help in two ways. First, it will give us flexibility. If the State does not take away Redwood City revenues, then we could use the two lower figures to develop a reduction package to present to the City Council. If the State takes more than our estimates, then we will use the higher expenditure cut figures in developing budget cuts for you. Having several levels of cuts means we only have to ask the organization to go through this painful exercise once. Secondly, if we have guessed correctly about the State, the range of cuts will then allow staff to give the Council options in making cuts for FY 03/04. Will these numbers change? Absolutely! As we get more information, our projections will get better. In early April, we will have the 4th quarter sales tax (October, November, and December of 2002). This will allows us to revise projections if necessary. We also hope that the State "May Revise" will give us more information about what the State will do. Summary We are recommending a policy based on scenario B for FY 03/04. This does not mean Page 4 of 5 Reserves as a % of Required Expenditure Expenditure Cuts Scenario Revenue on 6/30/06 Cuts FY 03/04 as %ofBudoet- FY03 /04 A 18% $4.2M 6.1% B 13% $3.1 M 4.5% C 15% $4.2M 6.1% Why did staff recommend scenario B? • Scenario A requires deeper cuts sooner, and hence more reductions in service levels to citizens, and does not draw down reserves to the 15% minimum level. • Scenario B and C both leave reserves at approximately the same level four years out, 13% versus 15% (please remember that based on all of our assumptions and estimates, our estimated reserves could easily move several percentage points in either direction) so we see these two as probably identical. • Scenario B allows the time to ease into our cuts. Most experts suggest the economy is still a year off from a strong recovery. However, we do not want to make deeper cuts in service levels if there is a chance that the economy could come back faster. • Scenario B allows us a gradual stepping down to wean us off of reserves and to get expenditures and revenues in balance. • Staff does not think that it will be difficult to develop a plan to again increase our reserves from 13% to 15% (at the most two -three years). • The Council has already seen the impact of the 2% cut (previous agenda item). Scenario B will mean a 4.5% cut (which is two times larger than FY 02/03 cuts), while scenarios A and C will represent a 6.1% cut (three times greater than FY 02/03 cuts). Alternative The Council could choose scenario A or C or some other variation. How will all this actually work? If the Council accepts staffs recommendation, I will ask each department to develop three levels of cuts, 2 %, 4.5 %, and 7 %. This will help in two ways. First, it will give us flexibility. If the State does not take away Redwood City revenues, then we could use the two lower figures to develop a reduction package to present to the City Council. If the State takes more than our estimates, then we will use the higher expenditure cut figures in developing budget cuts for you. Having several levels of cuts means we only have to ask the organization to go through this painful exercise once. Secondly, if we have guessed correctly about the State, the range of cuts will then allow staff to give the Council options in making cuts for FY 03/04. Will these numbers change? Absolutely! As we get more information, our projections will get better. In early April, we will have the 4th quarter sales tax (October, November, and December of 2002). This will allows us to revise projections if necessary. We also hope that the State "May Revise" will give us more information about what the State will do. Summary We are recommending a policy based on scenario B for FY 03/04. This does not mean Page 4 of 5