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The City declared a fiscal emergency because its declining financial condition is worsening to the point of emergency. The City expects growing annual deficits of $1 to $3 million, as the cost of doing business is greater than the revenues coming into the City. Currently, to make up the gap, the City plans to draw down its emergency safety-net reserves. This does not address the imbalance in the budget and within three years, if the deficit is not corrected, the City’s reserves will be completely depleted. After that, the City is projected to operate with growing, unsustainable debt reaching nearly $6 million by Fiscal Year 2023/2024, which is nearly half of the total General Fund budget of $12.9 million.
The City cannot operate with structural debt and would have to make deep service cuts to balance the budget. Declaring a fiscal emergency enables the City to place a tax measure on the March 2020 ballot so that the community can decide whether it wants the City to continue providing the same level of services, or not.
Scotts Valley operates with a lean budget that focuses on efficient delivery of essential, core city services. Scotts Valley is a very low-tax city, compared to other California cities. In particular, the property tax collected by the city – 6.5% – is one of the lowest. Overall, the City doesn’t receive the same level of revenues than other comparable cities. This lower revenue base challenges the City to keep up with normal increases in the cost of operations.
In addition, there are a few notable threats to the City’s financial outlook, which affect all California cities.
First, cities are challenged by a changing economy and consumer patterns that do not fit traditional revenue models. Shifts in the tax base such as online sales, more purchases of (non-taxable) services and fewer of (taxable) goods, and the rise of fuel efficiency and electric cars are creating revenue loss and uncertainty for governments.
Next, the cost of providing services grows each year and each year the improvement needs grow. Like all businesses, costs in construction, supplies and services, personnel and utilities are increasing for the City. This is compounded by growing need for capital investment—in our streets, storm drains, sidewalks, parks and public facilities. Many projects have been deferred for years due to budget shortfalls and the problems are reaching critical levels.
Third, cities are forced to backfill state investment losses with the statewide public retirement system, CalPERS. CalPERS funds and manages pensions for state and local government employees. Pensions are paid with a mix of investment returns and payments from public entities, like the City. During the Great Recession, CalPERS did not adjust investment earnings projections to realistic market levels. This resulted in significant losses and a gap between their actual investment revenues and what was paid out. CalPERS’ solution was to require extra payments from local entities, like the City.
The City has undertaken all of the steps it can to address its funding shortfall without cutting back on services that residents tell us they want.
The City cannot offer the same level of services if the deficit is not corrected. For years, the City balanced the budget with cuts and reductions in all parts of the City, while trying to insulate the police department. However, the City cut back extensively elsewhere and would have to also look to reductions in the police department, which makes up 45% of the General Fund budget, in addition to the other General Fund services, such as parks, infrastructure and storm drain maintenance, and emergency planning and response. This necessarily would affect the scope and quality of General Fund services that Scotts Valley could deliver.
The City has been in a budget-tightening mode for at least the past 15 years. Typically, City budgets are about 75% staffing, as city services are delivered by people. Therefore, the principal tool used by the City has been to reduce staffing. In the 2003-2004 budget, for instance, the City had 76 employees, which is 20% more than today’s staffing level. Over the years, the City cut positions and left others unfilled to balance the budget. The reductions mostly occurred in the departments other than public safety. The City also held salaries nearly flat and employees are paying their share of pension costs.
For the past three years as the budget projections worsened, the City engaged in intensive Fiscal Sustainability Planning. This work examined revenues and carefully analyzed expenditures across the City. From information produced in workshops, public meetings and budget analysis, the Council developed a list of actions to reduce expenditures and enhance revenues.
On the cost control side, in addition to the staffing reductions, the City contracted out building and planning services, is exploring contracted fleet maintenance, and shares the Chief Building Official with the City of Capitola. The City also refinanced debt this past summer, which will result in net savings of over $1 million. Finally, where the City can afford to do so, it makes smart financial management decisions to save money and decrease future obligations.
On the revenue side, the City updated its fee schedule to adjust cost recovery to over 80 percent for specific services requested of the City. The City also asked the voters to support a 1 percent hotel tax increase in 2018; this yields about $250,000 annually in new revenues. The City supported the development of 1440 Multiversity and the Four Points Sheraton, which have helped the City budget and provided important amenities for Scotts Valley.
The City examined every corner of the organization before it placed Measure Z on the ballot. For more information about the City’s Fiscal Sustainability Planning work, click here to see the most recent update from May 2019.