July 24, 2017

The FY 2018 Budget Story

The City Manager’s proposed budget for fiscal year 2018 does what it’s supposed to do.  It’s structurally balanced, meets all established parameters, and is guided by the City Council’s adopted Priorities within the constraints suggested by conservative fiscal forecasting.  It’s a good budget that reflects the City’s solid financial position and continued prudent management for the coming fiscal year.  (The proposed budget and accompanying presentation slides are on the City website, here.)

The proposed budget also tells the macro level story of where things stand right now, both the progress we’ve made in recent years and the challenges that lie ahead.  No, the sky is not falling, but we are paying careful attention to the numbers and how they’re trending.  To understand the FY 2018 budget in context, start with the ending General Fund balance and work backwards from there; as we’ve steadily drawn down that balance over the past several years our policy of maintaining a 60-day minimum has become our primary constraint.  Emphasizing these are conservative projections, the trend is readily apparent:

If this sounds familiar that’s because it should.  Just last year we had to address a similar trend in the Enterprise Fund, and even temporarily relaxed the minimum balance requirement in that fund to relieve some pressure on utility rates.

But there’s an important distinction in the General Fund, and on closer inspection the projections aren’t nearly as bleak as they first appear.  Whereas the Enterprise Fund was rapidly approaching insolvency after years of artificially low utility rates that fell further and further behind rising costs, the declining balance in the General Fund results entirely from discretionary expenses we can control.  The General Fund is structurally balanced, meaning that recurring revenues exceed recurring expenses each year.  Given that, the declining ending fund balance must necessarily come from non-recurring expenses, and those are also the easiest to adjust when necessary.

I find it helpful to think of recurring expenses as fixed costs; we’re not going to make up much ground there.  In fact, to achieve key priorities such as remaining competitive in public safety compensation, our base budget must actually increase this year.  So the focus is on cutting non-recurring expenses (variable costs), but without compromising the level of services our residents have come to expect.

Don’t get me wrong, these aren’t frivolous throwaway expenses.  Regular annual contributions to our vehicle and equipment fund and pavement management program, along with any number of capital improvements on our to-do list, are all very important.  But if something’s gotta give in any budget year, it’s going to be in the non-recurring part of the equation.

That’s the central plot of the FY 2018 budget story.  With the 60-day minimum fund balance requirement as our starting point we’re budgeting within our means by reducing contributions to the vehicle replacement fund, including a one-year suspension of “catch up” contributions, and by carrying forward some unexpended pavement management funds left over from FY 2017.  The net result is a slight decrease in the General Fund budget overall.

The proposed budget and the story it tells show that the City is in good financial shape, that we’re keeping a close watch on our numbers and responding to trends responsibly.  Erring on the conservative side in making future projections, those trends don’t show any signs of letting up in the next couple of years, and we’re ready for that.  Strategic planning ensures consistency and predictability in our budgets from year to year, and helps us avoid surprises.

Note that the foregoing is only about the General Fund, which is the City’s primary operating fund and the focus of our annual budget discussion.  Our ongoing infrastructure bond program, for example, is funded by debt service and is unaffected by the General Fund trends addressed above.

The City Council will hold a public hearing on the proposed budget for FY 2018 on August 14 at 6:00 p.m., and as always we welcome your input.  Council discussion will continue with two workshop sessions on August 15 and 21, with final deliberation and adoption of the budget scheduled for September 18.