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TO: Kathie Dunbar, Chair

Ways and Means Committee

FROM: Jerry Ambrose, Chief of Staff and Finance Director

DATE: February 14, 2011

RE: Update to FY12 Budget Development

In December, 2010, I discussed with Council the significant financial challenges the City is
facing. Since 2006, in response to a structural imbalance between revenues and expenses, the
City’s workforce has been reduced by 20%, or more than 200 employees. We have accomplished
this without significantly affecting the provision of basic city services, without increasing the
overall tax rate, and without laying off employees. This has only been possible with the willing
cooperation of our employees, who have made changes and concessions as a significant part of
these efforts.

Unfortunately, as the economy has continued to falter, creating a situation where revenues
continue to decline even beyond our expectations, the last two years have ended with expenses
exceeding revenues, requiring the use of our reserves. This has happened because of a shortfall
in revenues, not because of expenses exceeding budgets.

Our goal is to maintain a reserve level equating to between 10% and 15% of general fund
revenues, or (in the context of a $109 million budget), between $10 million and $15 million.
However, our reserves today stand at $6 million. It has impacted the City’s bond rating, and even
more importantly, has significantly reduced our ability to respond to future unplanned events.
The continuing decline in property values and very probable reductions in state revenue sharing,
including the elimination of the personal property tax, are examples.
Our ongoing challenge is reflected significantly in our preparation of the FY 12 budget, which
begins July 1, 2011. We are currently developing the elements of a recommended budget for the
Mayor to present to Council on March 28.

I advised the City Council in December that, as we begin this process, we are projecting a gap
between revenues and expenses of $15 million. This gap is a combination of a continuing decline
in anticipated revenues and the increased costs associated with our current staffing and program
levels. Nearly half of the gap was attributed to anticipated decreases in revenues.

As we have moved forward in budget preparation, we are anticipating that the revenue declines
may be even more severe than anticipated. We continue to see substantiated appeals of property
assessments, income tax receipts and investment income remaining at historically low levels, and
likely reductions in state revenue sharing even greater than initially anticipated, especially
considering the potential of the loss of personal property tax revenues. It is likely that, as the
budget is finalized, it may be addressing a gap closer to $20 million than $15 million, with half
attributable to declining revenues.

The potential General Fund budget which we propose to you may total less than $100 million.
That amount is at least $17 million less than the 2009 adopted budget and $9 million less than
the current budget. With a projected expense base of $118 million for current programming and
staffing, this would equate to nearly a 20% reduction in staff and services. There is no way this
can be accomplished without significantly impacting services provided to our taxpayers. While
we have been able to meet the past challenges without significantly affecting services, it will not
be the case this time. Layoffs and significant reductions in services will be proposed.

Over the next few weeks, the administration will be developing specific budget
recommendations. We will continue to look at how we are organized to provide services, and to
look at how to reduce the cost drivers that increase our expense base year after year. And we will
be making difficult decisions regarding what city services we provide in the future and at what
level. We will do this in the context of:

• Providing essential and expected services to our residents, businesses, and visitors
• Protecting the welfare of our employees
• Remaining financially strong
• Investing in the future of the city by aggressively pursuing economic development

The challenge is significant. For example, $20 million equates to nearly a 20% reduction across
the board in all city services supported by General Fund dollars, a reduction in the workforce of
more than 200 employees, or about two-thirds of what the city spends on health insurance for
employees and retirees annually.

It also equates to more than half the cost of the police department, or more than half the cost of
the fire department, or more than the total cost of the entire Parks Department. It is also nearly
the entire cost of the combined total of the Finance Department, Human Resources, Council,
Mayor, City Attorney, and City Clerk’s budgets.
While Mayor Bernero has been emphatic that public safety will not be compromised, it will not
be possible to achieve the necessary cost reductions without affecting staffing and programming
in the police and fire departments. While specific decisions have yet to be made, without
additional revenue it is likely that the number of officers on patrol will be reduced and that
resources currently dedicated to community policing, neighborhood watch, and school safety
will be targeted for reduction or elimination. It is also likely that the number of fire engines (and
staffing for them) will be reduced, with the closing of one or more fire stations a distinct
possibility. In the worst case scenario, more than 100 positions in the police and fire
departments could be eliminated.

It is also likely that other city services will be reduced to minimal levels. Parks maintenance and
programming will be reduced, with the possibility of closing one or more community centers, as
well as the City’s one remaining golf course. Code Compliance and Building Safety activities
will also be curtailed, as may our support of human services.

Finally, it is also likely that there would be no major road repair or construction projects, an
impact of great concern because of the generally poor condition of many of the City’s roads.
Even money to match state and federal funds for road projects could be lacking. Likewise, there
could be no construction of new sidewalks and minimal repairs.

Within this context, the availability of additional funds from a 4-mill property tax levy would
alleviate some but not all of the impacts of these significant reductions. The estimated $8.5
million from such a levy would reduce the shortfall by nearly half, but we would still be
challenged to find reductions of more than $10 million. The additional funds would mitigate the
most severe reductions in services, particularly in the areas of police, fire, and roads.

Please contact me if you have any questions.