On Monday, the City Council and School Board met to begin planning for next year’s budget. This is an annual meeting every fall to ensure that both elected bodies see the same financial projections and discuss budget strategy for the coming year. These joint planning meetings have been very important for sharing information and building collaboration between the two elected boards. What is new this year is that the City Council will provide more formal early budget guidance than has been done in the past.

The value of early budget guidance was discussed at the Council retreat on September 24, and I believe it will provide an improvement to the City’s budget development process. Early budget guidance will help frame up the budget development work that the schools and general government do over the winter months prior to the City Manager’s budget recommendations to the City Council in March. It does not preclude the Council from arriving at different conclusions at the end of the process, after hearing from the community on service levels, tax rates, and capital planning needs.

At this year’s budget planning meeting, I provided the following projections from the City Finance Department:

• Revenues: a projected decline in revenues of $1.9 million (-1.7%), principally due to declining real estate values.

• Expenditures: a projected increase in operating costs of $1.2 million (+1.8%).

• Fund Balance Restoration: a plan for fund balance restoration of $1.2 million per year.

Property taxes constitute 60% of the City’s operating revenues. We currently project a 2.8% decline in assessed value in the City, with the greatest drops in the commercial sector. Due to the importance of property taxes, I provided three real estate revenue scenarios, each with a different gap between revenue and expenditures. As I emphasized to the Council and the School Board, these are early projections that may change for the better or for the worse over the coming months.

1) No change to the tax rate. Under this scenario, we project a $3.2 million gap between expenses and revenues for the coming year (FY12).

2) An “equalized” tax rate, in which the tax rate is increased by 4 cents to make up for the decrease in assessed value, and generate an equal amount of revenue next year (FY12) as this year (FY11).This would narrow the budget gap to $1.6 million.

3) A 3 percent increase in real estate revenue, which would require a 6 cent increase in the tax rate. This would narrow the gap for FY12 to $890,000.

With these projections in hand, the City Council will now be considering guidance on broad strategy toward building the FY2012 City Budget.

Capital planning will be a very important part of budget planning this year. The City is developing a long range facility plan to address school, public safety, park, and library facility needs over the coming 20 years. We will be developing a financial plan for meeting these facility needs, and the first step is restoring the City fund balance. The City has a policy of maintaining cash reserves equal to 12% of annual revenues. Over recent years, the City drew down its reserves to 8% of annual revenues as it dealt with revenue shortfalls. The City currently dedicates $600,000 toward fund balance restoration, and we will need to increase that to get back to the policy target by FY14. A solid fund balance helps the City weather unexpected shortfalls, and is important to maintaining the excellent bond ratings that allow the City to borrow funds for schools and other city facilities at low cost.

I think it is important and useful to get early guidance from the Council on budget strategy, goals and objectives.

I think it is important and useful to get early guidance from Council on budget strategy, goals and objectives. As can be seen from the revenue scenarios listed above, there are wide swings based on what the assumption is for real estate. The goal is to work through these scenarios, and their implications on spending cuts, early in the process. Spending reductions should be made with an eye toward long term strategy and sustainability.

To put these gap projections into context, last year the City was grappling with a revenue shortfall of $8 million, or 12% of the annual budget. Through good communication and collaboration, the School Board and the City Council worked closely with the community and to make the decisions necessary to close the shortfall through raising revenues and cutting costs. Together the schools and general government reduced the City budget by $3 million or 7%, reduced staffing levels by 11%, and set aside money to restore the City fund balance.

Council will be discussing FY12 budget guidance at its work session on November 15. I believe this will build on improvements we have made over the past several years toward better communication and collaboration with the community on budgeting for the city services we provide.