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GENERAL FUND REVENUES

Because of the continued economic malaise, some or our major revenue sources have continued to drop while others have stagnated. General Fund revenues in 2003-04, estimated to be $41.9 million, would be up only 0.8% or $322,000 over the current year’s revised estimates. For all funds, revenues are estimated to be $70.4 million, down 2.5% from the prior year.

Transient Occupancy Tax (TOT), though less than it used to be, 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 TOT growth in the late 1990s.

As the table shows, TOT is projected to increase 2% next year. This modest increase follows three very tough years which saw growth of 1.4% in 2000-01, a decline of 11.5% in 2001-02, and a further decline of 2% projected for 2002-03. Though mid-year TOT projections were that we would end the year flat, recent actual receipts have been down which has caused us to revise the current year’s estimate downward as well. However, discussions with Conference Center staff and area hotel General Managers regarding stronger conference bookings in 2004 and beyond lead us to believe that next fiscal year might show a small increase in TOT.

Another significant revenue is sales tax which is estimated to be $6.4 million in 2003-04, making it the second largest General Fund revenue source (15% of projected revenues). This estimate represents a 1% decrease from the revised projection for the current year. There would have been a small increase in sales tax except that the State Board of Equalization recently informed us that they would be adjusting our sales tax receipts downward by $189,000 in the Fall due to an overpayment in a past year. Notwithstanding this adjustment, as I highlighted at mid-year, sales tax receipts in 2002-03 are falling far short of projections due to the continued weak economy. We are projecting sales tax to come in at $6.5 million this fiscal year which is $600,000 less than originally projected one year ago.

For example, in the 4^th quarter of 2002 (which included Christmas sales), sales tax receipts were down 2.3% from the previous year. This was the sixth consecutive quarter of declines in sales tax receipts. One and one-half years of declines is unprecedented. The table below shows this trend dramatically. The only silver lining in this story is that in the last three quarters the rate of decline has softened.

For 2002, two-thirds 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 2002 was as follows:

For some positive revenue news, property tax receipts continue to come in strong because even though the overall economy is still weak, property values have remained high. This increases the property tax rolls whenever real estate is sold. After a good 4.7% increase in 2001-02, based on receipts so far we anticipate property tax receipts will be $4.3 million in 2002-03 which is 10.3% higher than last year. Property taxes are projected to increase another 4% next year to $4.4 million. Unfortunately, and contrary to popular belief, property taxes are not as big a part of General Fund revenue picture as they once were. This tax generates about 10% of all General Fund revenues.

The motor-vehicle license fee (VLF) is one General Fund revenue source that has been the subject of much discussion over the last year. As you know, cities receive a portion of the VLF paid by vehicle owners each year and the State passed legislation a few years back that lowered the rate by 67.5%. A reduction of this size would amount to approximately $1.1 million to Monterey’s General Fund. So far, the State has been "back-filling" the VLF to cities that would have otherwise been lost due to the rate reduction. Currently, indications are that the VLF rate will be raised back up at the beginning of next fiscal year which means the State would no longer have to "back-fill" cities.

Therefore, our VLF revenue estimate for 2003-04 includes the full amount of $1.7 million. It appears as though we will get the full VLF in the current budget year as well. This additional $1.2 million helped soften the hit that several other revenues sources took this year noted above and at mid-year including TOT, sales tax, interest income and Conference Center revenues.

A final note on the State budget proposal: though we are pleased the State has supported the VLF back-fill so far, Monterey has already lost other State revenues including booking fee reimbursement, library grants, redevelopment agency tax increment and mandated cost reimbursements. For Monterey, these proposed revenue reductions amount to over $700,000 and have already been factored out of our revenue estimates. The League of California Cities has been working aggressively to minimize the impacts of State budget problems on cities.

GENERAL FUND RESERVES

Except for the draw on the Reserve for Economic Uncertainty noted above, all required General Fund reserves continue to be fully funded. After the proposed draw of $1.5 million, the Reserve for Economic Uncertainty will be over $4.7 million. This is equivalent to 10.9% of the proposed General Fund operating expenditures less estimated budget savings (the target reserve is 15%). It is now more apparent than ever that this type of "rainy day" 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 provides for a graceful downsizing of operations. It is the Council’s prudent fiscal policies that have put the City of Monterey in a position to implement a budget reduction plan that is thoughtful, measured and humane.

The Reserve for Art Acquisitions will not receive an allocation of $30,000 next year from the General Fund in accordance with the Budget Reduction Plan. There is currently $70,000 remaining in this reserve.

The City maintains a number of funds other than the General Fund. These funds have been established to account for the revenues and expenditures of activities that are separate from the General Fund for either legal or accounting purposes. A brief overview of the 2003-04 budget picture for some of the more significant of these funds follows.

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 for 2003-04 is $4 million, all of which is reimbursable by the Army. This budget also includes a payment to the General Fund of $325,000 for the overhead and administrative support the City provides to support this contract.

Projected revenues of $983,000 for 2003-04 in the Storm Water Utility Fund exceed operating costs by $113,000. 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. In light of this debt and the small operating surplus this Fund is generating, we are recommending that $100,000 be paid to the Sewer Line Maintenance Fund to begin retiring that debt.

Despite the fact that the Storm Water Utility Fund now receives almost $1 million in user fees annually, the General Fund still had to subsidize the capital program by $400,000 in 2001-02, $550,000 in 2002-03 and now $285,000 is in the proposed CIP budget for 2003-04. In addition, the Neighborhood Improvement Program has funded several important storm drainage projects over the last few years.

The recently approved sewer rate increase will go into effect July 1, 2003. Because of this increase, revenues in the Sewer Line Maintenance Fund are estimated to be $1,259,000 in 2003-04 compared with $880,000 in the current year. This has had a dramatic impact on the ability to repair and maintain our sewer infrastructure. Specifically, the proposed CIP budget includes $725,000 for sewer line repairs which is more than three times what we were able to fund in the current year.

The Cemetery Fund continues to be heavily subsidized by the General Fund. For 2003-04 we project revenues of $252,000 and a $40,000 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 $1.5 million includes debt service on state loans in the amount of $476,000. In addition, the Marina Fund now transfers $125,000 to the General Fund each year to assist with the expense of maintaining Wharf II, up from $75,000 in the current year. This increase is part of the Budget Reduction Plan recently adopted by Council. An additional $25,000 will also be transferred to the General Fund from the Marina Fund in 2003-04 due to the recent increase in the Transient Berthing fees. Total estimated revenues for 2003-04 are $1.9 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 now includes $132,000 to pay for the cost of the WAVE shuttle subsidy program. The General Fund currently pays $48,750 of this total but, again as part of the Budget Reduction Plan, beginning next fiscal year the Parking Fund will pay the whole City share of this program.

The budget of the Housing program, which was adopted by Council separately on May 6, 2003, amounts to $4 million in 2003-04. This represents a decline from the $5.7 million housing budget in the current year which is primarily due to the recent issuance of a $2.3 million loan for the Wave Street Workforce Housing project. Nevertheless, many existing programs continue to be funded such as Community Services ($295,000), Rehabilitation Loans ($500,000) and Historic Preservation ($125,000). In addition, $1,858,000 is still available for new workforce housing programs and projects such as opportunity-buying on Van Buren Street and/or housing on City-owned Ryan Ranch land.

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 CAPITAL IMPROVEMENT PROGRAM BUDGET

The proposed Capital Improvement Program (CIP) budget amounts to $9.5 million for fiscal year 2003-04. Of this total, $2.1 million is allocated for Neighborhood Improvement Projects (NIP). One of the more notable items being proposed for next year is $2.6 million for several street improvement projects. This includes $1,485,000 for rebuilding Del Monte Avenue from Palo Verde to Sloat. Note that though this project was originally included in the current year’s CIP budget, it was to be partially funded by State Transportation Improvement Program money which was subsequently lost. Staff is proposing funding $1,300,000 of this project with a loan from the Parking Fund and the remainder from the General Fund. Repayment would be made with future allocations from TAMC, CMAQ and RSTP monies. This will be discussed in greater detail in the CIP staff report also found on the June 17 agenda.

Also included in this CIP program is $615,000 to complete funding for North Fremont Storm Drain Improvements Phase I; $700,000 in Tidelands money for Window on the Bay opportunity-buying; $275,000 for roof repairs and replacements on Few Memorial Hall/Brown Underwood and El Cuartel; and $250,000 for the City’s share of the Highway 68 and Ragsdale traffic control and improvement project. The proposed CIP program does not currently include funding for any Catellus improvements. Upon adoption of the interim Catellus master plan, Parking funds could be made available for the parking improvements. A fuller discussion of the entire 2003-04 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. Proposing a budget plan for 2003-04 was particularly challenging because of the Council directive to implement as much of the Budget Reduction Plan in the next fiscal year as possible, short of layoffs. Even with the implementation of one-half of the Budget Reduction Plan, there are still a few important new issues that need to be addressed. The following discussion highlights the more significant programs that are included in the proposed budget for 2003-04.

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 $700,000 for the purchase of these parcels when they become available. This brings the total reserve currently allocated to Window on the Bay acquisition to $1.7 million.

In light of historic concerns that have been raised and the budget climate that exists, the architects for the Public Service Center have been instructed by the Council sub-committee to bring back to the full Council several alternative designs that are smaller, less costly and more historically sensitive. These alternate plans will be ready for review in the near future. This continues to be a very high-priority project.

As part of the funding plan for the CIP proposal for next year we are recommending that $275,000 be transferred from the Public Service Center Fund to pay for two related capital projects: the reroofing of Few Memorial/Brown Underwood buildings and design costs associated with roof repairs and replacements for El Cuartel. Though this is not directly related to the construction of the new Public Service Center, staff believe it is crucial that we keep existing buildings in good repair. Current Council direction is to pay for the construction of the Public Service Center with cash. Even with this transfer, a reserve of over $13 million would remain.

Another important priority is the upkeep of the City’s streets, sewers and storm drains. Toward that end, almost $4 million is included in next year’s CIP budget proposal for just such projects. It includes the following: $1,485,000 to improve Del Monte Avenue; $700,000 in street resurfacing (not including Presidio and Navy); $725,000 for sewer line repair; and an additional $615,000 for the North Fremont Phase I storm drain project. In addition to these funds for infrastructure maintenance, there is in excess of $682,000 in the NIP budget for other drainage improvement projects. There remains a substantial back log of unfunded projects in streets, storm drains and buildings.

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As a result of the recently presented feasibility analysis of the use of the State Theater as an addition to the Conference Center, it was decided that further analysis was appropriate. The NIP budget includes $25,000 to study market demand, program analysis, architectural/costs, fund raising methodology and the operations of the Theater. It will also evaluate all reports developed for the potential acquisition and operation of this facility and provide alternatives for possible funding. There is currently no other funding or reserves allocated to this project.

The proposed 2003-04 budget includes funding for 1 additional Police Services Technician (PST) and the extension of overfill authority for 2 additional PSTs at a total first year cost of $123,000 to address inadequate staffing levels in the Support Division of the Police Department. The personnel assigned to the Police Department’s PST positions work in the Jail, answer telephone calls from the public, handle walk-in traffic at the public counter and perform a variety of police records and reporting functions including property and evidence control. Due to the Department’s long history of shortages in this classification, and the difficulty in recruiting and hiring qualified individuals to fill these positions, the Department has considered closing the Jail permanently and requiring police officers to transport all arrestees to the County Jail in Salinas for booking.

This alternative is not feasible, as the number of arrestees requiring transportation would leave the City with inadequate police coverage for extended periods, particularly on busy weekend nights. This situation is critical now, as the Department has several police officer positions vacant and will not be able to fill them with fully functioning personnel for quite some time. It is also not feasible because we would still need to staff the other PST functions, even if the Jail were closed. Therefore, there would be little economic advantage.

The reason for requesting 2 overfill positions rather than permanent positions is that staff believes some of the staffing issues described here are due to inefficiencies built into the processes used currently to manage police records and reporting. Therefore, some of the urgent staffing needs felt today could go away once the business processes in this division are thoroughly reviewed and reengineered. This will be one of the top priorities of the new Deputy Police Chief expected to come on board this Summer.

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As I reported last year, the Monterey Peninsula Hotel project remains the highest economic development priority in the City. The developers have encountered significant delays and the weak tourism economy continues to make the hotel construction environment difficult to operate in. Nevertheless, staff still understands the project is moving forward, albeit very slowly. The completion of this project would provide a significant increase to the City’s tax base. This would be extremely helpful given the economic downturn of the last two years. Besides providing funds to better serve the community, this project would also rehabilitate a currently "blighted" area on Cannery Row and provide public access to McAbee Beach.

Included in this budget proposal is $428,000 for the Monterey County Convention and Visitors Bureau (MCCVB) leisure advertising program. This is $100,000 more than the City is investing in the current year. Staff believes it is imperative in these difficult economic times that we redouble our efforts to attract increasingly scarce leisure travel dollars to Monterey.

In addition to an enhanced marketing effort through the MCCVB, staff has also included in the 2003-04 budget proposal $50,000 as a matching grant for marketing Fisherman’s Wharf as a tourist destination. Under this proposal, the City would match dollar for dollar the advertising expenses for Fisherman’s Wharf not to exceed $50,000. This will provide funds for "new" marketing efforts and will be in addition to the $37,000 we currently match.

Council has requested a more in-depth review of the entire marketing program which is currently scheduled for July 1, 2003. At that time the Council could adjust this appropriation.

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OTHER PROGRAMS

With the current budget situation, staff is looking very closely at our structure and procedures and is concentrating on core functions which are the repair and maintenance of the City's vehicles and equipment. The City's vehicle/equipment fleet has grown to the point that the addition of a full time Parts Clerk is essential. Parts fill rate, parts inventory management and technician productivity and efficiency are some of the top performance measures used by leading fleet management organizations. All these performance measures are directly affected by the lack of a Parts Clerk. The mechanics currently make the decisions regarding which spare parts will be stocked which affects their productivity.

Therefore, the proposed budget includes a new Parts Clerk position on a two-year contract basis to insure it does save money. This proposal does not add new costs to the City budget as the entire cost of the Parts Clerk will be offset by reductions in the cost of parts supplies. We are already reducing parts costs through changes in procedures and will be able to drastically reduce costs even further with the addition of this position.

Based on recent Council guidance, included in this budget is a net amount of $10,000 to fund an additional 2,000 Senior Taxi Scrip booklets for the 2003-04 fiscal year. A total of 1,500 booklets have been made available in the current year. This has been a very well received program by the seniors of Monterey because it gives a certain level of independence to some who otherwise would find it very difficult to get around town. This program, which is jointly subsidized by the City and Yellow Cab Company, enables Monterey seniors to purchase taxi coupons at ½ the regular rate.

As you know, the Monterey County Youth Museum has been searching for a new site to move to for some time. MY Museum staff has informed us that they have a new Monterey site in escrow. They have also asked that the City maintain their current below-market rent of $0.50 per square foot for the duration of their stay at their current location in the Cannery Row garage (12 to 14 months from close of escrow in August 2003). This subsidy would result in a transfer of $16,770 in 2003-04 from the General Fund to the Parking Fund which would otherwise receive this amount in rent. Based on recent input from Council we have included this subsidy in the proposed budget for the next fiscal year. It is proposed that the rent level increase to market rate on July 1, 2004 if MY Museum has not relocated by then.

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LONG-TERM GENERAL FUND FORECAST

As I mentioned earlier, we will have to dip into the Reserve for Economic Uncertainty to balance the General Fund operating budget for the 2003-04 fiscal year. However, because we were able to implement such a large portion of the Budget Reduction Plan early, the draw on this reserve of about $1.5 million is smaller than first projected.

For 2004-05, the budget gap that was estimated to be $5 million at one point will be down to $391,000 given current assumptions. Note that the 2004-05 budget gap would have been zero if not for the very recent TOT and sales tax revenue estimate adjustments noted earlier. We are not, however, out of the woods just yet. As you know, there continue to be many demands placed upon the resources of the City of Monterey. All "financial pressure points" we have been discussing for the last year and a half are still very much with us. The major areas putting pressure on the budget continue to be:

• Revenue shortfalls (TOT, sales tax, interest, State take-aways)
• Infrastructure maintenance (streets, sewers, storm drains)
• Employees (housing, health care, and especially retirement costs)
• New open space/facilities (Window on the Bay, Public Service Center)

Of all the financial issues facing the City, the uncertainty of how the State and County will chose to balance their own budgets and the dramatic rise in retirement costs have the potential to impact the City budget most. For example, current State plans include shifting approximately one-half million dollars from Redevelopment Agency tax increment revenues to the State to help with their budget. This would have a direct impact on the City’s ability to fund our capital renewal program. As for retirement costs, they continue to get worse as portfolio returns at PERS languish. The County is also making budget decisions that have the potential for impacting our Public Safety costs by several hundred thousand dollars.

Obviously, balancing competing priorities and continuing to fund services at adequate levels will continue to be a challenge. However, in accordance with Council direction the budget plan presented here is designed to 1) implement as much of the Budget Reduction Plan as possible, 2) maintain as high a level of service to our citizens as possible, and 3) continue to maintain our critical facilities and infrastructure. I believe this budget plan accomplishes this balance in a prudent and fiscally responsible manner.

Fred Meurer

CITY OF MONTEREY

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