A variety of techniques were used to balance the budget that included expenditure reductions and reallocations, potential fee increases and some one-time sources. In summary form, this proposal closes the budget gap in the following manner:

For example, this budget reflects over $500,000 in additional salary savings, which includes vacant or frozen positions (see Attachment A). Another $685,000 in staffing costs will be saved in the General Fund by reallocating these expenditures to appropriate enterprise and capital project activities. A summary of all proposed expenditure reductions/reallocations to help close the budget gap follows:

In addition to reductions in operating expenditures, in order to help balance the 2002-03 General Fund operating budget several departments have recommended adjustments to a variety of fees. If approved by Council, these fee changes would result in an estimated additional $772,000 in the General Fund. Attachment B details staff’s best estimate at this time of the various fees recommended to be adjusted and the resulting revenues. At the June 18 public hearing, Council will be asked to approve these adjustments in concept except for some Recreation and Fire Department fees which staff will be recommending for approval on June 18 in order to include them in the next Recreation Program Guide. Staff will then return to Council in the next fiscal year for consideration of the remaining fee adjustments.

When Council was presented at mid-year with a strategy for balancing the budget, it was noted that one-time sources would likely need to be used. This budget proposes using three one-time sources to help balance the budget next year. One is the repayment of a $454,000 advance from the General Fund to the Tidelands Funds. The Tidelands Fund now has sufficient resources to repay this advance and staff is recommending that this be done. This budget proposal also includes a transfer of $600,000 from the Equipment Replacement Fund to the General Fund. A policy change last year in how funds are set aside for vehicles has resulted in a lower cash balance being necessary in this fund. Finally, staff recommends a transfer of $112,000 from the Operational Contingency Reserve to help balance the budget.

Whereas staff believes these recommendations are prudent and reasonable, it is something of a "red flag" when one-time sources are required to balance the operating budget. Use of these one-time sources does, however, allow us to preserve the Reserve for Economic Uncertainty which would stand at $6.4 million. Keep in mind that depending on how the economy performs and how the State decides to balance its budget, some of this reserve may need to be used in the 2003-04 budget season.

During this budget season all Boards, Commissions and staff, also at Council’s direction, submitted plans for how to balance the budget in 2003-04. While much progress has been made, more time is necessary to analyze the budget reduction proposals that were submitted. Staff intends to bring back to Council a further budget reduction plan by mid-year.

Overall, for 2002-03 the proposed General Fund operating expenditures amount to $44.3 million, which represents a decrease of 0.5% from the 2001-02 amended budget and a 3.3% increase over the original 2001-02 budget. The total proposed 2002-03 operating expenditures for all funds are $71.5 million, which represents a decrease of 2% from the 2001-02 amended budget and a 5.8% increase over the original 2001-02 budget. Most of this increase is attributed to an 86% increase in funding available for housing projects. This is discussed in more detail later in this report.

GENERAL FUND RESERVES

All required General Fund reserves continue to be fully funded. As mentioned above, this includes a Reserve for Economic Uncertainty of $6.4 million, which is equivalent to 15% of the proposed General Fund operating expenditures less estimated budget savings. This type of reserve is extremely important to cities like Monterey whose tax base is heavily reliant on one industry such as tourism. This reserve is the primary budgetary tool the City possesses that would allow for a graceful downsizing of operations should the economy not recover in the near future. This budget proposal does not recommend using this reserve at this time though it may be necessary to do so in the next year.

The Reserve for Art Acquisitions receives an allocation of $30,000 per year from the General Fund. This reserve has been used in the past to fund such acquisitions as the On the Golden Road sculpture and the California Grizzly Bears sculptures in front of Colton Hall. Future acquisitions could include public art for the Public Service Center. This budget proposal includes funding this allocation for 2002-03. However, funding this reserve in the following year may be difficult.

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GENERAL FUND REVENUES

As mentioned above, we estimate that total General Fund revenues will amount to $41.9 million for 2002-03. Transient Occupancy Tax (T.O.T.), though down for the year, is still the City’s largest revenue source. It makes up 26% of the General Fund estimated revenue total for next year.

As shown in the following table, the City experienced strong T.O.T. growth in late 1990s.

However, due to the economy and 9/11, we are projecting that T.O.T. in the current year will be down 12% to $10.7 million in the General Fund ($12.8 total). This is $1.8 million less than originally projected. For next year, 2002-03, we expect T.O.T. to rebound slightly to $11 million in the General Fund and $2.1 million in the NIP Fund for a total of $13.1 million. This estimate represents no growth over the current year though it does factor out the severe drop in occupancy that occurred last Fall right after 9/11. The inherent assumption then, and of course our hope, is that we will not suffer another tragedy of the proportions seen last year.

Another significant revenue is sales tax which is estimated to be $7.1 million in 2002-03, making it the second largest General Fund revenue source (18% of projected revenues). This estimate represents a modest 2% increase over the revised estimate for the current year. However, like T.O.T., sales tax receipts in 2001-02 fell short of projections due to the weak economy. We are projecting sales tax to come in at $7 million this fiscal year which is $400,000, or 5%, less than originally projected. For example, in the 4^th quarter of 2001 (which included Christmas sales), sales tax receipts were down 10.2%. In the Monterey Bay region, only Seaside and Sand City showed positive growth in that quarter.

For 2001, 63% of all sales tax receipts were from retail sales and restaurants. Other large categories included transportation (new and used auto sales and gas stations) and business-to-business sales. Sales tax by category in 2001 was as follows:

For some positive revenue news, we anticipate property tax receipts to be $3.9 million in 2001-02 which is 6.8% higher than last year. Though the economy is soft and even the real estate market has cooled, property values have remained high which in turn increases the property tax roles whenever real estate turns over. Property taxes are projected to increase 3% next year to $4.1 million. This tax generates 10% of all General Fund revenues.

One significant revenue source that needs to be highlighted is the motor-vehicle license fee (VLF). As you know, cities receive a portion of the VLF paid by vehicle owners each year. We estimate that the City will receive $1.6 million from this source in 2001-02. The State passed legislation that lowered the rate paid by taxpayers by 67.5%. A reduction of this size would amount to approximately $1 million to Monterey’s General Fund.

In order to keep city revenues whole, the State has included in its budget a line item that "back-fills" the VLF to cities that would have been otherwise lost due to the rate reduction. So far this has worked fine and the Governor has again included the back-fill in his 2002-03 budget proposal. However, because the most current estimates are that the State is facing a $24 billion shortfall, many cities are concerned that this VLF back-fill program will be a tempting one to cut.

So, due to the State’s precarious budget situation, and our own conservatism, this proposed budget does not rely on the VLF back-fill to stay in balance. In other words, we have assumed that $1 million in VLF will eventually be taken from the City by the State and have therefore factored it out of the budget. This was extremely difficult to do in light of the already diminished revenue picture detailed above. But staff feels it is important to not build a budget on revenues that stand a very good chance of disappearing.

If by mid-year next year this revenue source is still fully intact, the City’s revenue picture will be significantly bolstered. This would definitely help balance the budget in 2003-04. The League of California Cities has begun a grassroots program called LOCAL (Leave Our Community Assets Local) whose goal is to raise public awareness of, and garner support for, the importance of protecting local revenue sources and services. The City has been very supportive of this grassroots effort.

A final note on the Governor’s State budget proposal: though we are pleased the Governor has supported the VLF back-fill program up to this point, cities have taken some hits to funds for booking fee reimbursement, library grants, redevelopment agency tax increment and housing. For Monterey, these proposed revenue reductions amount to over $200,000 and have already been factored out of our revenue estimates.

SPECIAL FUNDS

The City has a number of other funds including Special Revenue Funds, Proprietary Funds and Trust Funds. Special Revenue Funds and Trust Funds are accounted for very much like the General Fund but their resources can only be used for specific purposes. Examples would be the NIP Fund, Gas Tax Fund and Scholtze Trust Funds. Proprietary Funds are accounted for more like a business, and their operations are meant to be funded by user fees.

Examples of this type of fund include the Parking Fund, Marina Fund and Vehicle Management Fund. All of these "other funds" are programmed with balanced operating budgets. Several funds are also paying for capital project expenditures including the Gas Tax Fund, Tidelands Trust Fund and Sewer Line Maintenance Fund.

The Presidio Public Works Authority Fund was established in 1998 to account for the operational activities, capital projects, and revenues associated with the municipal services contract between the City and the U.S. Army at the Presidio of Monterey. Services provided to the Army include maintenance of buildings, streets, sewers, storm drains and water systems and other special projects. The proposed operating budget for this fund is $3.8 million, all of which is reimbursable by the Army. This budget also includes a payment to the General Fund of over $300,000 for the overhead and administrative support the City provides to support this contract.

Projected revenues of $983,000 for 2002-03 in the Storm Water Utility Fund exceed operating costs by $155,000. However, this Fund still owes $1.5 million to three other funds (Sewer Line Maintenance Fund, $232,000; Sewer Main Fund, $575,000; and General Fund, $690,000) for past loans for storm drainage projects. It is because of this debt, we are recommending in the CIP budget that the General Fund pay for the $550,000 North Fremont storm drain project rather than the Storm Water Utility Fund.

In the past the assumption has been that the existing rate structure in the Storm Water Utility Fund would be able to pay for its operating costs, current capital costs as well as repay the $1.5 million in past debts mentioned above. But even though the Storm Water Utility fee was fully phased in this past year, the continuing need for capital improvements and the addition of unfunded mandated costs related to storm drainage has kept this utility under-funded. For example, mandated (but unfunded) permit fees and public education costs of $27,000 are included in this Fund’s budget.

Despite the fact that the Storm Water Utility Fund now receives almost $1 million in user fees, the General Fund still had to subsidize the capital program in 2001-02 by $400,000, and by a proposed additional $550,000 in 2002-03. Because of these continued shortfalls, the Public Works Department is currently reviewing the Storm Water Utility fee to determine its adequacy.

The Sewer Line Maintenance budget proposal includes $602,000 in operating expenditures and another $225,000 in the CIP budget for sewer line repairs. The operating budget in this fund is fully funded by current revenues of $763,000. The capital budget proposal would have been larger, but $225,000 is all the Sewer Line Maintenance Fund can afford given that it is still owed $232,000 by the Storm Water Utility Fund as mentioned above. The Public Works Department is also reviewing the fee structure in this Fund.

The Cemetery Fund continues to be heavily subsidized by the General Fund. This is particularly burdensome in a tight budget year. For 2002-03 we project revenues of $228,000 and a $51,000 operating shortfall. In addition, the Cemetery Fund will require an advance from the General Fund of $118,000 to cover the debt service payments on the columbarium.

This amount will be recorded as an interfund loan as it is projected that over time sales of all niches from the columbarium will far exceed the total debt service costs. However, since the columbarium loan will be paid off more quickly than all niches will be sold, there will be a need for advances from the General Fund in the meantime.

The Marina Fund’s proposed budget of $1.4 million includes debt service on state loans in the amount of $486,000. In addition, the Marina Fund transfers $75,000 to the General Fund each year to assist with the expense of maintaining Wharf II. Total estimated revenues for 2002-03 are $1.8 million.

The proposed $5.4 million Parking Fund budget includes $1.9 million in debt service. The largest portion of that debt service payment is related to the Cannery Row Parking Garage. The Parking Fund budget includes $83,000 for its share of the cost of the WAVE shuttle subsidy program which is $20,000 less than last year due to the elimination of the Del Monte Center stop. The General Fund pays $48,750 as its share which is also $20,000 less than the previous year.

The Parking Fund budget for 2002-03 also includes $66,000 for one Autofind Parking Enforcement System. This system eliminates the need for chalking the tires of parked vehicles by taking a digital photo instead which is stored in memory and compared to photos taken on the next pass. A successful demo of this system earlier this year and the potential for reducing injuries prompted this request.

To help reduce costs, two Parking Fund positions are proposed to be underfilled: 1) underfill a Senior Parking Control Officer with a Parking Control Officer and 2) underfill a Senior Parking Attendant with a Regular Part-time (30 hour) Parking Attendant.

The budget of the Housing program has increased by $2.6 million, or 86%, to $5.7 million which is by far the largest increase in any Fund, including the General Fund. This increase reflects the high priority housing issues have become. Many existing programs continue to be funded such as Community Services ($207,000), Rehabilitation Loans ($500,000) and Historic Preservation ($125,000, up from $90,000 last year). However, approximately $4,000,000 is available for new housing programs and projects such as opportunity-buying on Van Buren Street.

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 CAPITAL IMPROVEMENT PROGRAM BUDGET

The proposed Capital Improvement Program (CIP) budget amounts to $7.2 million for fiscal year 2002-03. Of this total, $2.1 million is allocated for Neighborhood Improvement Projects (NIP). One of the more notable projects being proposed for next year is $1.8 million for street improvements (including Del Monte Avenue from Palo Verde to Sloat) which is funded by gas taxes and State Transportation Improvement Program money. Also included in this program is $550,000 for North Fremont Storm Drain Improvements Phase I, $600,000 in Tidelands money for Window on the Bay opportunity-buying, and $280,000 for a Police Investigations Modular Building. A fuller discussion of the 2002-03 capital program is provided in a separate report to Council.

CITY COUNCIL PRIORITY PROGRAMS

This budget proposal represents an action plan for accomplishing the goals, objectives, and priorities of the City Council as representatives of the citizens of Monterey. The following discussion highlights some of the more significant programs that are being addressed within the proposed budget plan.

One of the community’s top priorities continues to be the Window on the Bay project, and much progress has been made. Just this past January a combination of State Coastal Conservancy grants, a Packard Foundation grant and debt financing was used to purchase the $3.96 million Catellus East parcel. This property, along with the Catellus West parcel purchased two years ago by the Parking Fund, will allow the City to expand the Window on the Bay park, provide greater public access to coastal areas as well as adequate parking. Next year’s CIP budget proposal includes $365,000 for master plan development, building deconstruction and park improvements on this site.

There are two parcels remaining in the Window on the Bay "West" section and staff continues to work toward acquisition of these properties on an opportunity-buying basis. As noted above, the CIP budget for next year includes an additional $600,000 for the purchase of these parcels when they become available.

The Monterey Sports Center Expansion is well underway and should be completed by late 2002. Funding for this project includes approximately $800,000 in donations to be used primarily for equipment and furnishings, $150,000 from a State grant and $6.5 million in debt financing which was issued in May 2002. The proposed NIP budget also includes $100,000 for improvements to the Tot Activity Room.

As mentioned earlier, this budget was balanced in part by recommending increased fees in several areas. Some of the more significant revenue increases are expected to come from the Sports Center operations should Council approve them. Revenues would be expected to increase in any case once the expanded facility is opened due to increased attendance at the facility. However, the Recreation Department will be asking Council to consider adjusting the fee schedule at the Sports Center as this has not been done since this facility was opened. If fee adjustments are fully implemented we project it will add $332,000 to General Fund revenues in 2002-03.

The Public Service Center project design and environmental review are currently underway. This high-priority project includes a building on Madison and Van Buren Streets that will house Planning, Engineering, Building Safety, Construction Management, Housing, City Attorney, Personnel, Information Services and Finance.

As part of the funding plan for this project we are recommending in this budget that $1,000,000 be added to the Public Service Center reserve. Current Council direction is to pay for the construction of this facility with cash. To that end a reserve of $13 million has been accumulated so far. This recommended transfer would add to this reserve.

Another important priority is the development of a maintenance needs analysis and financing plan for the City’s street, sewers and storm drains. While it is important that we move forward with high priority facility expansion programs such as Window on the Bay, Sports Center and Public Service Center, we continue to invest in the critical infrastructure assets the City already owns and is responsible for. Toward that end, over $2.5 million is included in next year’s budget proposal for just such projects. It breaks down as follows: streets, $1.8 million (this includes funds to improve Del Monte Avenue); sewer line repair, $225,000; and storm drains (North Fremont Phase I), $550,000. In addition to these funds for infrastructure maintenance, there is in excess of $700,000 in the NIP budget for other drainage improvement projects.

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The proposed budget includes $55,000 for a feasibility analysis of the use of the State Theater as an addition to the Conference Center. What will be studied is whether access to a refurbished facility of this size would, given its close proximity, enable the Conference Center to capture group sales that require a larger auditorium.

To encourage property owners to participate in historic preservation, the proposed budget includes $125,000 in the Housing program for historic preservation grants. This funding level is $25,000 higher than last year as this program has been successful and demand is expected to continue.

Another high priority that has emerged is the need for affordable housing in the Monterey Peninsula area. To address this need, the proposed housing budget includes ongoing housing programs such as rehabilitation loans ($500,000) and down-payment assistance loans ($300,000). In addition, this budget has approximately $4 million programmed into it for new housing programs or opportunity-buying of properties such as the Van Buren properties. More information about the proposed Housing budget will be presented for Council consideration in a separate report.

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One issue that has emerged this past year is a desire to expand the City’s collaboration with the Monterey Peninsula Unified School District in order to better meet the needs of the community. In response to this issue, a committee made up of City and District officials has been formed to explore areas where collaboration may be possible. Some early ideas include the potential addition of part-time staff at the City to support its relationship with the District in the areas of recreation, music, art and library services. These services would be provided on a cost-reimbursable basis. A proposal will be brought before the Council in the near future.

The addition of new programs in the Police Department and new mandated record-keeping and reporting requirements over the last few years has increased the administrative burden to the point that Council has approved the addition of three full-time Office Assistant II positions. Programs needing additional support include the Youth Diversion Coordinator, Reserves, School Resource Officers, Explorers, Volunteers, Community Action Team, and K-9 Unit. In addition, there have been new mandated notifications with regard to restraining orders and release of domestic violence offenders, new logs required with regard to Alzheimer related events and new forms and procedures related to confidentiality and the release of information. All of these programs and mandates require appropriate clerical staffing.

In the Fire Department budget, a Thermal Imager has been recommended for approval. This $10,500 device works by detecting differences in heat and displaying this information on a screen. Objects that generate heat, such as a human body, will appear brighter on the screen. This makes it possible to "see" through smoke and darkness. Use of a thermal imager improves fire fighter and civilian safety by decreasing search times, and by the ability to see hazards such as fire in the ceiling, holes in the floor and weakened structures.

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The Monterey Peninsula Hotel project remains the highest economic development priority in the City. The developers have encountered significant delays and the events of 9/11 have made the hotel construction environment much more difficult. Nevertheless, staff understands the project is still moving forward. The completion of this project would, of course, provide a significant increase to the City’s tax base which is all the more crucial given the economic downturn of the last year. Besides allowing for more and better service to the community, this project would also rehabilitate a currently "blighted" area on Cannery Row and provide public access to McAbee Beach.

We propose continuing the funding in the Economic Development budget for the commercial building façade grant program, albeit at the reduced amount of $30,000. This program was funded at the $54,000 level in the current year.

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LONG-TERM GENERAL FUND FORECAST

For the 2002-03 fiscal year, we have a balanced budget and an unappropriated General Fund ending balance of approximately $131,000. However, given our current revenue and expenditure growth assumptions, we will be out of balance in 2003-04 by $1.5 million. As discussed above, one potential major addition to the City tax base that has not yet been factored into our projections is the impact of the new Monterey Peninsula Hotel. That facility alone could generate sufficient revenues to the City to more than offset the potential deficits mentioned above. However, the outcome of this project is uncertain enough that related revenues cannot be factored into the long-term revenue picture at this time.

Like all levels of government, the City of Monterey will be facing some difficult financial times in the next few years. It is because of the prudence and conservatism of the Council’s financial policies and direction that I am able to present to you now a budget that is balanced, without having to resort to painful program cuts or layoffs. It is more important now than ever that we continue to follow this course as 2003-04 and beyond could be much more difficult to balance without reductions in service levels, and possibly even layoffs.

As mentioned earlier, staff is gathering and analyzing input from Boards, Commissions and staff regarding suggestions for net budget reductions totaling $3 million that was requested by Council at mid-year. We will be returning to Council at a later date with a recommendation for how to deal with these out-year budget imbalances. Should the economy change for the better in the next year, or should the State not ultimately take the VLF back-fill money from cities, this would of course affect the budget outlook of Monterey substantially. And our projections would be altered accordingly. In the meantime, however, we will continue with a cautious, conservative approach to budgeting.

As you know, there continue to be many demands placed upon the resources of the City of Monterey. All "financial pressure points" we discussed at mid-year are still very much with us. The major areas putting pressure on the budget are:

• Revenue shortfalls (T.O.T., sales tax, VLF, etc.)
• Infrastructure maintenance (streets, sewers, storm drains)
• Employees (rising costs of housing, health care, PERS)
• Open space acquisition and new facilities (Window on the Bay, Sports Center, Public Service Center)

Balancing these competing priorities will be more challenging than ever in the next few years. The budget plan presented here is designed to accomplish as many Council Priorities as possible in a prudent and fiscally responsible manner.

Fred Meurer

CITY OF MONTEREY

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