Budget outlook raises prospect of service cuts
Novato is facing service cuts if it cannot find new sources of revenue to cover rising costs, the city's finance director said.
While federal stimulus dollars from the American Rescue Plan and recent city property sales will address budget shortfalls in the near term, the funds are only a stopgap solution and will not address ongoing employee, utility and maintenance costs that will continue to rise, Amy Cunningham said.
“It's going to be difficult for us to contain costs further without reducing service levels if the goal is a balanced budget for next year,” Cunningham told the City Council on Tuesday.
The city is preparing its 2022-2023 budget that will take effect July 1. The council is set to hold its next budget workshop on May 10, when it plans to provide more direction on the changes it wants to make.
Council members expressed concern about the budget forecast on Tuesday.
“Looking at our revenue challenge and these dramatically rising expenses, it's incredibly stressful,” said Mayor Pro Tem Susan Wernick.
The city is expected to end the fiscal year with a $357,000 deficit, up from about $208,000 when the budget was adopted last year. Staff attributed the increase to pay and benefit increases for city employees, increased utility costs and an increased allocation to the city's youth financial assistance program for its summer programs.
Money from the city's rainy day fund or one-time funding such as the stimulus dollars will be used to cover the deficit if other savings cannot be found in the coming months. The city has about $8.3 million in stimulus funds and $3.6 million in other one-time funding available.
“We can't keep pulling blood out of our staff.”
— Denise Athas, Novato City Council
Had the city not received $16.1 million last year from the American Rescue Plan and city property sales and agreements, the deficit would be even larger, Cunningham told the council. At the height of the pandemic, the city had forecast it would begin the current fiscal year with a $5.7 million deficit. The city was able to cut the deficit down to $2.5 million after cutting 17 staff positions — its first layoffs since the Great Recession — and further reduced it to $208,000 using stimulus funds and one-time funding.
But Cunningham said relying on one-time dollars and the city's rainy day fund to cover ongoing costs is not sus
tainable.
American Rescue Plan funds have all essentially been budgeted and are not available to backfill revenue shortfalls in the coming fiscal year, Cunningham said.
Novato is expected to face several cost hikes next year and as the city continues to restore service from the pandemic, Cunningham said.
The city's payments to the California Public Employees' Retirement System, or CalPERS, are set to increase by nearly 18% to $4.9 million next year. Utility costs such as garbage, water, electricity and sewage are set to increase by as much as 19%, Cunningham said.
The budget also assumes employee pay is expected to increase by 3%, including an additional 1% for certain employees who are paid below the market median to address an ongoing issue of employee turnover.
On Tuesday, the council approved a 1.5% pay bump for much of its police staff to address the high turnover of officers in recent years.
The city has also lost revenue sources. The $1.2 million in annual revenue from the city's previous half-cent sales tax from 2010 to 2016 was depleted last year. The expired halfpercent tax was replaced by a quarter-percent sales tax in 2016.
The city has already begun exploring new sources of revenue, including a potential ballot measure for November to increase the local sales tax back up to a half percent. Voters also approved a 2% increase to the city's hotel use tax in 2020.
The more than 250 residents who responded to an online survey about the 2022-2023 budget said the city should prioritize and increase funding for public safety services, addressing homelessness and mental health, and fixing roads. In exchange, the respondents said the city should reduce funding for residential and commercial permitting, environmental and sustainability programs and maintenance of city buildings and facilities.
City Manager Adam McGill, a former police chief for the city, said demand for increased police staffing is often an emotional response from residents and not something he would recommend. The challenge the city faces, McGill said, is that positions are not being filled and employees leaving for higher-paying jobs.
“It's not that we need more police officers, it's that we need to deploy and keep the ones we have,” McGill told the council. “We've had the relative same number for 20 years.”
Council members also discussed the potential of using some funding to hire consultants to aid city staff in different departments.
“I know people don't like to hear that we use consultants,” Councilmember Denise Athas said. “But I think there has to be some consideration for the fact that we can't keep pulling blood out of our staff, in trying to have these high expectations and not be able to fulfill it.”