Difficult financial outlook for Novato

`Tough choices' to balance budget

The city of Novato is heading into the upcoming fiscal year with a $2.3 million budget shortfall as it grapples with rising costs.

Presenting the draft 20222023 budget to the City Council this week, City Manager Adam McGill said Novato faces increasing costs in everything from basic utilities to employee pensions. Additionally, the city has been experiencing high employee turnover because of comparably high wages elsewhere.

“We simply do not have enough revenue available to balance the budget and maintain existing service levels,” McGill told the council on Tuesday.

For the 2022-2023 fiscal year beginning July 1, the city's general fund — money that the council has discretionary control of — includes an estimated $46.8 million in revenues and $49.1 million in expenses.

The council faces “tough choices” to balance the budget, McGill said. Onetime funds from the American Rescue Plan Act federal stimulus package and other sources are available to cover the 2022-2023 budget shortfall, but not the ongoing deficits projected in future years, he said.

That leaves the council with options such as cutting services and staff, dipping further into an estimated $8 million in emergency reserve funds and finding revenue sources like a sales tax increase.

The council will hold a final discussion on the budget on June 14 before approving it on June 28.

Utility rate increases, liability insurance hikes and city payments toward its unfunded liabilities with the state pension program, CalPERS, account for $1.7 million in increased expenses this year, city Finance Director Amy Cunningham told the council.

The city's liability insurance costs will increase by 56%, or about $802,000, in the 2022-2023 fiscal year, Cunningham said. The city is conducting a study of ways to reduce the rates.

“It does get rather scary when you see our risk management costs surpassing our increases in pension liability,” Cunningham told the council on Tuesday.

The city's pension liability payments, set by the state, are set to increase by 17%, or $728,000.

The city has already reduced staffing from about 209 positions in the 20192020 fiscal year to 192. Further staff reductions would impact city services, McGill said.

The City Council voted unanimously Tuesday to add certain projects and expenses to the budget.

The costs include consulting fees for development regulations for hillsides and ridgelines; $250,000 for deferred maintenance at city sites; and $5,000 for the city's Streetscape Committee for monthly cleanups and street median maintenance. These funds will be covered by one-time dollars in the general fund.

The shortfall is set to be covered with one-time funds and the emergency reserve fund.

The city received nearly $16.2 million in one-time funding last year, including $9.1 million from the American Rescue Plan Act. The rest was from property sales, agreements such as the sale of the Hamilton commissary property, and general fund savings from the previous budget. About $3.4 million of the funding has yet to be allocated.

Cunningham said the budget and the shortfall amount are subject to change in the coming months. One notable change will be an estimated $1.2 million increase in annual revenue from city fee increases set to take effect later this year. The fee revenues are expected to provide about $1 million in additional revenue for the 2022-2023 budget, Cunningham said.

Novato has also been exploring other revenue sources it could add, including a potential November ballot measure to increase the city's local sales and use tax from a quarter-percent rate to a halfpercent.

The city previously had a half-percent sales tax rate from 2010 to 2016, which provided an additional $1.2 million in annual funding until last year. Voters replaced the half-percent tax with the quarter-percent tax in 2016.

“I really long for the day when we're not sitting here making these tough decisions, what gets cut to fill somewhere else,” Mayor Pro Tem Susan Wernick said.

More information about the city's budget and upcoming meetings is at novato.org/budget.