City Braces for Budget Cuts

By Jorge Casuso

April 13 -- Facing ever-worsening financial straits, the City is poised to trim the budgets of all departments -- except police and fire -- and to hand out its first pink slips in more than a decade, City officials said last week.

With the ongoing war in Iraq and a historic state budget deficit expected to widen an estimated $12 million budget gap in the upcoming fiscal year, City officials are warning that the public will soon feel the fallout of the belt-tightening measures.

Not only will fewer employees have to perform the routine business of the City, but residents and visitors will be asked to pay higher parking meter rates and fines and to live with fewer of the capital improvement projects they had grown used to during the booming 1990s. In addition, City officials are contemplating raising some taxes.

“This is the most pain the City is going to have in years,” City Manager Susan McCarthy told reporters from the local media Thursday. “People are used to a high level of service. We’re used to a time of plenty, and the time of plenty is gone.

“We’re well aware that there was going to be an end to that economic expansion. We’re not Shangri-La,” McCarthy said. “People are going to fight over every suggestion of cuts we make.”

Compared to the short recession in the early 1990s, McCarthy said, “the cuts are deeper, and there are more constraints on revenues.”

To help save between $4 million and $4.5 million, City department heads are being asked to reduce their budgets by 5 percent, and an across-the-board hiring freeze has been instituted, McCarthy said. The measures will result in a reduction in positions and possible layoffs.

“The budgets submitted by all departments include 5 percent reductions in addition to what happened last year,” when department budgets also were cut, McCarthy said.

Although the City’s police and fire departments are exempt from that mandate, “that does not mean there won’t be cuts,” McCarthy said. However, any proposed public safety cuts would not affect personnel, she added.

“Cutting sworn positions” is not an option, the city manager said, and “even (among the) non-sworn there is a level we can’t go below. At this point we don’t need to do that.”

In order to balance the proposed $383 million budget, the City is also expected to revisit capital projects, which already have been scaled back in recent years.

“New capital projects have been significantly reduced for the last couple of years,” McCarthy said. “Now, we’re re-looking at capital priorities.” These, McCarthy cautioned, “include a certain level of maintenance monies.”

Last month, the City Council held up $21 million worth of capital projects -- from upgrades to Downtown parking structure lobbies and bathrooms to traffic calming to the seismic retrofit of City Hall -- to help pay for the $72 million new Main Library, which includes $12.9 million for additional parking.

For more than a year, forces largely beyond the City’s control have been driving down revenues and increasing expenses, leading to a projected budget gap that continues to widen -- from $9.1 million late last year to $11.2 million in February to a current $12 million.

“We are dealing with a certain amount of uncertainty, and the wild cards are things we can’t get a handle on for some time,” McCarthy said.

It is unclear, for example, how long the war in Iraq will last or what cut backs municipalities will have to make when the State grapples with balancing a budget that is $34.5 billion in the red, said City Finance Director Mike Dennis.

“The effects of recession of 9/11 continued longer than anticipated, and the ramp-up to war caused all these jitters,” Dennis said. “The best estimate right now is that the effects of the war are probably going to push that gap ($11.2 million) up to $12 million.”

The City’s contributions to the retirement system also are higher than initially anticipated due to heavy losses incurred by the State Public Employees Retirement System (PERS), which, like other investors, saw its earnings dwindle.

In addition, the rising cost of health care is increasing health insurance premiums and legislative changes are hiking up workers compensation costs.

The projected $12 million shortfall, Dennis warned, would widen to more than $16 million if the State takes a bigger chunk of property taxes and eliminates a projected $2.5 to $3 million in motor vehicle in lieu tax revenues that go to the jurisdiction where a vehicle is registered. The State reduced the tax during the economic boom, but municipalities continued to reap their portion from the State general fund.

With the State budget likely tied up for months, the City Council will have to adopt its own budget on June 17 without “knowing whether the state will take money from cities,” Dennis said.

“We have less certainty this year that at any point in the past,” McCarthy said.

McCarthy said City officials will have a “strategy in place” to buy time until the State hammers out a budget.

“We can turn to a one-time money source to give us a few months, or we could take cuts for 2004-05 at an earlier juncture,” McCarthy said. “We can buy a few months of time to make adjustments.”

The City, however, “will not dip into reserves,” McCarthy said. She noted that the financial crisis does not warrant such a drastic measure and that the $16.7 million reserve would only carry the City for two months.

“It’s for a terrible circumstance,” McCarthy said of the reserve. “It’s not for a rainy day. It’s for a one hundred-year storm. You don’t touch it unless there is no other option.”

The City’s budget woes are not only due to increasing costs, but also to dwindling revenues. The September 11, 2001 terrorist attacks dealt a major blow to tourism and came in the wake of the demise of dot.coms that had helped to fuel a local economic boom, which saw revenues rise by between 6 and 7 percent a year.

“There’s nothing in the future that suggests that kind of trend,” McCarthy said.

“There’s noting in the horizon economic-wise that would increase the base that would generate revenues,” Dennis said.

In addition, the City’s AAA bond rating -- the highest in the State -- could be jeopardized, making it more costly to borrow money, City officials said.

“The situation at the State level could make it challenging to individual cities to hang on to those ratings… no matter how well financially managed they were,” McCarthy said. “When things are unstable at the State level, there is a cloud.”

In order to increase revenues, the City is exploring raising taxes, a move that could hit the pocket books of businesses, customers and visitors. The taxes being considered are the Transient Occupancy (or bed tax), the business license tax and the City sales tax.