CC 04-16-2024 Item No. 11. Attachment B - Service-Level Reductions Staff Report 1.17.20241
CITY COUNCIL STAFF REPORT
Meeting: January 17, 2024
Subject
Provide input to staff on potential service-level reductions for the FY 2024-25 Proposed
and Final Budgets
Recommended Action
Provide input to staff on potential service-level reductions for the FY 2024-25 Proposed
and Final Budgets
Executive Summary
As the Fiscal Year (FY) 2024-25 budget process approaches, this study session aims to
provide an update on the City’s budget forecast and gather City Council input on priority
areas for a balanced budget.
Multiple strategies for addressing the structural deficit are under consideration. These
strategies aim to strike a balance between expense reductions and revenue generation to
ensure the continuity of core city services. They fall into three strategic categories:
Revenue-generating opportunities
Service-level reductions
Fee increases
On December 5, the Council provided direction to staff on revenue-generating
opportunities. That work is ongoing, and staff will provide an update in February.
This study session is meant to explore the second element: service-level reductions.
A comprehensive study of the City’s fees and charges is in the final stages. This will allow
for the comparison of current city fees to cost recovery rates and to market rates (for
example, in Parks and Recreation fees). The results and recommendations of that study
will be provided to Council in February as well.
Attachment B
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After Council discussions, these sources of revenue generation or expense reductions will
be refined and consolidated into one package for Council consideration during the
comprehensive discussion of the next fiscal year's budget, beginning in May. This
approach allows the Council and the public to consider each strategy individually,
followed by the combined budget discussion where tradeoffs between approaches will
lead to a balanced budget.
Reasons for Recommendation
Background
In May 2022, a California Department of Tax and Fee Administration (CDTFA) audit of a
taxpayer was highlighted to the Council, raising concerns about potential budget impacts.
Information associated the audit, including financial figures, decisions impacting other
jurisdictions statewide that may indicate future outcomes for Cupertino, and discussions
with stakeholders such as the CDTFA, shaped an evolving forecast. Staff remains
committed to providing ongoing updates to ensure that budgeting decisions are based on
the most current forecast.
Following discussions with the affected taxpayer and the CDTFA, an updated forecast
was presented to the Council on April 13, 2023. The impact was estimated to be a 73%
decline in sales tax revenue, equating to an ongoing $30 million decrease. This shifted the
City’s financial outlook from a surplus to a structural deficit, where ongoing expenses
exceed revenue.
Council Actions
The Council and staff have demonstrated proactive fiscal stewardship in response to the
evolving financial landscape. The FY 2023-24 Adopted Budget, which Council adopted on
June 6, 2023, incorporated significant expenditure reductions of more than $15 million
dollars, including:
Eliminating 14 vacant positions ($2.6 million)
Decreasing materials, contract services, special projects, capital outlays, and
contingency expenditures ($5.9 million)
Decreasing transfers from the General Fund to other funds ($5.5 million)
Using the City's Section 115 Trust to fund OPEB (Other Post-Employment
Benefits) costs ($1.4 million)
Additionally, on October 10, 2023, the Council established a committed Sales Tax
Repayment Reserve with an initial allocation of $56.5 million. This reserve was designed
to address a potential adverse CDTFA decision and the uncertain outcome of the
anticipated legal challenge. Funding came from Unassigned fund balance, the Capital
Projects Reserve, and the Economic Uncertainty Reserve.
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On November 21, 2023, as part of the FY 2023-24 First Quarter Financial Report, staff
sought Council direction on several potential FY 2024-25 budget reductions. These
required earlier discussion as the planning and implementation of these items required
advance commitments. The Council approved the defunding of $138,000 of the $145,000
budgeted for the 4th of July event in FY 2024-25, with $7,000 retained for morning events.
The Council further directed staff to explore funding options and return to Council with
recommendations. The Council also voted to cap the Community Grant Funding Program
at $32,500 (saving up to $57,500) and defund the Weed Abatement subsidy (saving
approximately $8,000).
Moreover, on December 5, 2023, staff sought Council direction to explore the feasibility of
potential revenue tax measures through opinion research. Urban Futures, Inc. (UFI), a
consultant, presented various revenue tax measure options, highlighting the advantages,
disadvantages, comparisons with neighboring cities, and projected revenue impacts of
each option. The Council decided to revisit the issue in early 2024 after staff had the
opportunity to engage the business community regarding potential measures.
Budget Forecast
Annually, staff constructs a financial forecast to guide budget decisions. The forecast is
not a rigid plan, but rather a dynamic model dependent on assumptions that are
continually updated as new information emerges.
This forecast assumes the complete repayment of facility debt by FY 2029-30, $2 million
in annual funding for capital projects, and $1 million in annual funding for Special Projects
and City Work Program projects. Salaries and benefits reflect the cost-of-living
adjustments approved by the Council on November 7, 2023. Salaries are expected to
increase by the CalPERS payroll growth rate in subsequent years.
Additionally, the forecast anticipates periods of economic downturn, reflecting no
revenue growth in FY 2024-25 and FY 2028-29. The ongoing impacts of new development
projects are not factored in until the developments are entitled and permitted. HdL, the
City’s retained consultant, provides the sales tax and property tax forecasts. Sales tax
revenues account for an ongoing decrease due to the CDTFA audit.
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Even with the implemented expenditure reductions, a $15 million structural deficit
persists due to the significant loss in sales tax revenue. Although the City’s conservative
budgeting has allowed the City to accumulate fund balance in previous years, use of this
fund balance is only a short-term measure. It gives the City a window to explore and
gradually implement revenue-generation and expenditure-reduction strategies, but is not
an ongoing solution to the fiscal challenge.
Potential Service-Level Reductions
Staff requests the Council’s input on potential service-level reductions. Staff will use this
input to develop the proposed budget, which is scheduled for a study session in May and
adoption in June.
In October, departments conducted an extensive review of their budgets, evaluating all
line items to identify areas for potential reductions. This thorough review aimed to
uncover opportunities to help address the City’s $15 million structural deficit.
In evaluating these potential service-level reductions, staff conducted a thorough
assessment based on multiple criteria. The criteria encompass financial impacts, service
implications, operational efficiencies, and community impacts. Each proposed reduction
was scrutinized for its financial ramifications and its impact on community services.
Additionally, consideration was given to potential implications on our workforce,
including any necessary adjustments or reassignments, as well as potential community
feedback. This detailed evaluation aims to provide the Council with a comprehensive
understanding of the implications associated with the proposed reductions, facilitating
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informed decision-making aligned with the City's long-term objectives and community
priorities.
Recognizing the significant role of community feedback in decision-making, the approach
involves engaging the community through multiple avenues. Interactive town hall
meetings in February and April will encourage open dialogue between Council members,
city staff, and the public, allowing for direct input and discussion on financial matters
affecting the community. In addition, surveys and focus groups will gather diverse
perspectives from residents, businesses, and other stakeholders. This feedback will be
integrated into the recommendations, ensuring that the voices and concerns of the
community are actively considered in the decision-making process. The goal is to nurture
transparency, responsiveness, and a collaborative environment where the community's
input helps shape the City's direction and service priorities.
The potential service-level reductions include various operational adjustments and
realignment of responsibilities. If approved, the reductions marked with a footnote would
take place over time. Staffing reductions will occur through attrition as positions become
vacant. Attachment A describes each reduction.
The reductions fall into two categories: Service-Level Reductions ($8.0 million) and Fiscal
Accountability ($2.6 million). Service-Level Reductions (SLR) aim to lower expenses or
modify how services are provided, while Fiscal Accountability measures focus on
aligning budgets with actual costs and streamlining expenses. These strategies blend cost
reduction with service adjustment, reflecting an effort to manage financial constraints,
optimize resource allocation, and consider potential impacts on community services.
Next Steps
Regular reports on the City’s budget will be provided to the Council. This study session,
in addition to a Council check-in in April and the mid-year budget update in February,
will provide opportunities to communicate progress on the CDTFA audit and strategy to
balance the budget.
To encourage community involvement, interactive town hall meetings in February and
April will engage residents, businesses, and stakeholders. These sessions aim to enhance
transparency and collaboration, fostering inclusive decision-making processes.
Sustainability Impact
No sustainability impact.
Fiscal Impact
Proposed service-level reductions are estimated to reduce ongoing expenditures by
approximately $10.5 million annually. Implementing these reductions would significantly
help reduce the $15 million structural deficit.
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California Environmental Quality Act
Not applicable.
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Prepared by: Thomas Leung, Budget Manager
Reviewed by: Kristina Alfaro, Director of Administrative Services
Matt Morley, Assistant City Manager
Approved for Submission by: Pamela Wu, City Manager
Attachments:
A – Potential Service-Level Reductions Summary