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MANAGEMENT'S DISCUSSION AND ANALYSIS 6.1. B. - Page 38 Business-Type Activities The $1.9 million decrease in Construction in Progress resulted primarily from the recycled water project. Equipment increased primarily due to the purchase of pump equipment and software for the water utility. The increase in improvements was related to the water and sewer system replacement and the recycled water distribution system. Long-Term Debt - Issues described in detail in Notes 6 and 7 to Financial Statements. Outstanding Debt (in Millions) Governmental Business-Type Activities Activities Total 2011 2010 2011 2010 2011 2010 Variance $ $ $ $ $ $ Revenue bonds 7.892 9.808 76.266 78.236 84.158 88.044 -4.414% Tax increment bonds 43.767 43.423 43.767 43.423 0.792% Loans 0.085 0.127 1.819 1.848 1.904 1.975 -3.595% Accrued sick leave and vacation 9.539 9.644 0.833 0.851 10.372 10.495 -1.172% Total long term debt 61.283 63.002 78.918 80.935 140.201 143.937 -2.596% SPECIAL ASSESSMENT DISTRICT DEBT Special assessment districts in different parts of the City have also issued debt to finance infrastructure and facilities construction in their respective districts. At June 30, 2011, a total of $27.1 million in special assessment district debt was outstanding, issued by three special assessment districts. This debt is secured only by special assessments on the real property in the district issuing the debt, and is not the City's responsibility, although the City does act as these Districts' agent in the collection and remittance of assessments. ECONOMIC OUTLOOK AND NEXT YEAR'S BUDGET Redwood City continues to be impacted by the recession that enveloped the nation in late 2007. Although the recession officially ended in June 2009 the affects continue to impact local governments in California. Redwood City, lil<e many cities, is heavily dependent upon property taxes and sales taxes with these revenues accounting for 40% and 18% of general fund revenues respectively. Both of these revenue sources are heavily reliant on the consumer who has pulled bacl< in the recent recession due of the massive job losses, continued high unemployment, and stock marl<et declines. Until we see a decline in unemployment to levels seen before the onset of the most recent recession we are not optimistic that annual increases in property tax and sales tax revenues will rebound to healthy levels. With slow growth expected for property taxes and sales taxes in the coming years along with higher expected contributions to the California Public Employees Retirement System, staff is projecting annual deficits in the general fund in the coming years that top out at $2 million (or 2.4% of general fund revenues) in FY 2013/14. The adopted FY 2011/12 budget projects a deficit of $436,000 or about 0.6% of anticipated revenues. We consider this essentially a balanced budget. Although the City Council and staff have made significant progress in bringing on-going general fund revenues and expenditures into balance, more work remains ahead as do risks to major general fund revenues. Most of the changes implemented in the past few years have focused on reducing expenditures through programmatic reductions and reducing the cost of employee benefits. 12