MEMORANDUM
DATE: TO: FROM: SUBJECT:
December 4, 2008 Mayor and City Council Richard C. Wilson, City Manager Budget Update: The Big Picture
The recession that started in December of 2007 is taking its toll on thousands of employers as they struggle to maintain operations in the face of declining income. The City of Santa Cruz is no exception. The City began the recession with reasonable cash reserves, but those reserves are quickly being depleted. As we reported to the City Council at its November 25, 2008 meeting, we forecast a deficit of $7 million for the current fiscal year. The actions taken by the Council on November 25 were a start at addressing the problem, but only a start. The remaining deficit is $4.2 million on a recurring annual basis. The City of Santa Cruz cannot sustain such a deficit, and it dare not deplete the funds available for general government, taxsupported services. The City has no choice but to cut spending, and cut it now. The original budget plan had been to implement a set of cuts in December of 2008, and a second set in June 2009. It was a reasonable plan when it was adopted, or so it seemed. But the economy has rendered that plan woefully inadequate. We are calling the cuts proposed in the accompanying report “emergency cuts,” but we have no idea when and if the City’s revenues would permit restorations of what is being cut. Nor can we be sure that we have hit bottom; it may very well be that the economy will get worse and we will find it necessary to cut more. The most optimistic forecasts we can find call for a resumption of very modest growth sometime in mid to late 2009, which would have little material effect on the deficit we are describing above. Indeed, we will need to see an improvement in tax receipts in Fiscal Year 2010 to avoid even further reductions. Many forecasters think that modest growth may not resume until 2010 or later. We have prepared a menu of options. It includes two categories of cuts. The first category includes cuts the City Council can make on its own authority. Outright cuts and furloughs are in this category. The second category includes cuts the City Council could propose to employee bargaining units, but could not unilaterally implement. A variety of ways to decrease compensation costs are in this category. Usually the second category remains outside public purview, but given the extraordinary circumstances at hand, we thought it advisable to identify the possibilities. The key question for the City’s employees and their bargaining units will be how much of the deficit the workforce is willing to absorb. The more that can be done by measures spread widely across the workforce (the second category), the less will have to be done through outright cuts
SUBJECT: Budget Update: The Big Picture PAGE: 2 and furloughs (the first category). The accompanying report provides budget numbers that illustrate that point. In the best of circumstances, even if the City’s employees prove to be extraordinarily accommodating, it does not seem possible that the City could emerge from this recession providing the full list of services it provided before. Employees report from every quarter that they feel challenged now. It is not realistic to think that the institution can make even further cuts and maintain the same programs and services as if nothing has changed. The landscape of City services must be reduced; there is simply no way to avoid it. The long and short of it is that the City has no choice but to cut spending to match tax receipts.