With cautious optimism that the lingering economic slowdown in Silicon Valley may finally be turning around, the City adopted a $535.5 million budget for fiscal year 2007-08, an 8.9% increase over last year. The key factors for this year's budget are the increase in the capital projects budget and continued diligence to maintain balance in the General Fund for citywide operations.

Most of the increase in this year's budget is due to an 85% increase (a $26.4 million increase) for delayed capital projects. As the City begins to emerge from the prolonged economic downturn, the adopted 2007-08 Capital Improvement Project budget is the first in several years to begin addressing funding needs for deferred maintenance and improvements, all necessary to ensure the continuing integrity of the City's infrastructure. Most of the capital projects are budgeted for the City's enterprise funds (primarily the Electric Utility: $17.2 million). The capital projects budget also includes $450,000 in initial funding toward the design work for the George F. Haines International Swim Center refurbishment. In addition, the General Capital Project Reserve had to be drawn down to less than $1 million in order to fund the needed projects for the General Fund. A backlog remains of $63 million in delayed non-utility capital projects, projects placed on hold during the economic downturn; $57 million of the deferred projects have no identified funding source. The first of two challenges will be to fund these capital needs over the next 5 years.

The second key challenge lies on the operating side for the General Fund. Continued diligence is needed to maintain structurally balanced funding to ensure the long-term financial health of the City. For the City's 2007-08 operations, the General Fund represents $142.4 million of the total City budget, and is a 5.26% increase over the prior fiscal year. The General Fund is the budget that provides such services as City libraries, parks, recreation, public safety, planning, inspection, public works, street maintenance, etc. For fiscal year 2007-08, revenue to support the General Fund is projected to come from sales tax ($43.5 million), property tax ($26.9 million), fees for City services ($18 million), contribution in-lieu from the City utilities ($15.5 million), rents/leases of City-owned property and facilities ($14 million), transient occupancy tax collected at hotels and motels ($10.7 million) and miscellaneous other sources. The City Council reviewed long-term budget projections for the City through fiscal year 2012-13, showing revenues covering expenditures - if the economy continues to recover and if the City remains diligent in keeping expenses under control, including holding 30 positions vacant throughout this time period.

A small surplus of $4.1 million is projected for this fiscal year, with smaller surpluses for the years 2008-09 through 2011-12. These surpluses assume the City continues to hold about 30 positions frozen during this period. During the recession experienced over the past five years, the City used $20.5 million of the Working Capital (Emergency) Reserves to help balance the General Fund. If projections hold true, the City will not need to dip into reserves again for several years, although the rapid decline in the economy in 2001-02 is a vivid reminder of how quickly the economy can change.

The City is also developing a strategy to replenish the emergency reserves to their budget goal level of 25% of the General Fund budget. The policy level of a 3-month reserve is so that the City has sufficient funds to conduct business for 90 days in the case of an emergency such as a major earthquake or another financial downturn.

The Council approved a five-year plan proposed by the City Manager that is proactive in maintaining a balanced budget. It includes six elements:

• Continue fee increases to achieve cost recovery for City services, and develop other revenue sources (lease revenues, etc.) that are recurring.
• Reorganize department functions to handle expected retirements and 30-35 frozen positions.
  
• Delay or eliminate some capital projects because of the impact they would have on operational costs. Find alternative financing for those that are critical or essential projects.
  
• Continue to work with developers and the community to retain and add revenue-producing businesses.
  
• Implement a strategy to replenish the General Fund Emergency Reserves.
  
• Research tax and/or fee increases based on need.

More information about the City's 2007-08 budget is on the City website and copies of the budget can be viewed at City Hall and in the libraries.