Novato forecasts budget deficit of at least $1.4M in 2023-2024

For the fourth year in a row, Novato is projected to have a budget deficit, with an estimated $1.4 million shortfall in the upcoming 2023-2024 fiscal year.

While the city was able to use millions of dollars in one-time funds from property sales and federal stimulus aid to cover deficits in recent years, those funds are now depleted, staff said.

“We’re at the edge of a fiscal cliff now,” Novato Administrative Services Director Amy Cunningham told the council during a budget discussion on Tuesday. “We need to find new revenue sources to maintain existing services. It’s as council acknowledged earlier: It’s unsustainable to live off of our reserves or continue to hope that we get more one-time money to support our day-to-day operations.”

The 2023-2024 fiscal year begins July 1. Ongoing wage negotiations between the city and its employee unions are expected to cause the deficit to increase even more than the $1.4 million estimate, Cunningham told the council.

The council plans to cover the deficit using the city’s emergency reserve fund, which has a balance of about $8.3 million.

The city’s financial staff has warned that without new revenue or major service cuts, the city will continue to draw down on its reserve funds, thus putting it at greater risk in the event of economic downturns or disasters.

The city plans to hold a budget hearing on June 13 and adopt the budget at its June 27 meeting.

Councilmembers stated last month that they do not support making any staffing or service reductions given the cuts the council had to make during the height of the coronavirus pandemic.

“Staffing is always my last option, just looking at how staffing has changed and having cut 17 positions, and we have not built back to that level,” Mayor Susan Wernick said during a budget meeting in April.

The city plans to add three full-time equivalent positions in 2023-2024, of which only one will require money from the general fund, for a total of 198.5 full-time equivalent staff members.

“Given our historically low staffing levels, any reductions would impact services to our community — something council has said they do not want to do,” Cunningham told the council on Tuesday.

The city’s ongoing deficit is the result of rising expenses from inflation, utility rate hikes, increases in payments toward the city’s unfunded pension liability through CalPERS and liability insurance rate hikes, according to Cunningham.

At the same time, the city’s revenues have declined. In 2016, voters replaced a half-percent sales tax with a quarter-percent sales tax, which has cost the city about $1.2 million in revenue.

While Novato voters did approve an increase to the city’s hotel use tax, known as a transient occupancy tax, in 2020, the effects of the pandemic on lodging continue to result in nominal revenue gains, Cunningham said.

The City Council decided on Tuesday to begin discussions on a potential new fiscal sustainability plan proposed by Councilmember Tim O’Connor. O’Connor, who was appointed to the council earlier this year and previously served as a member of the city’s Finance Advisory Commission, called the plan a “top priority.”

“Ultimately without addressing this, all operations will be significantly impacted to an unacceptable degree,” O’Connor said on Tuesday.

The council voted to direct staff to bring back information on city-owned properties, starting with the highest-value properties first, for a discussion on potentially selling or renting them. The council also plans to hold a discussion as part of its strategic plan update this summer on whether to hire consultants to review and recommend changes to staffing levels and city departments and to develop long-term financial forecasts.

On Tuesday, the City Council was tasked with deciding on potential cuts or changes to the proposed general fund budget for 2023-2024. Cunningham warned that while the cuts would provide short-term relief, they would also put the city’s financial sustainability at risk in the long term.

The council voted to pay a $240,000 contribution toward the state retiree health care benefits, a reduction from its usual contribution of $300,000. Reducing the contribution increases the city’s net liability, Cunningham said.

Given the economic downturn in 2022, O’Connor said the city should expect its interest rates to rise. He supported full funding.

“Reducing how much we’re putting in now will cost us more in the very near future, in my opinion,” O’Connor said.

The council also chose not to fund a grant program that allowed eligible businesses to make repairs and improvements to their buildings.

Wernick initially expressed reluctance to cut funding for the program, saying it could help drive in more businesses and thereby increase city revenue. However, she and the rest of the council decided to scrap the funding for this year, citing the administrative burden.

Additionally, the council voted to provide $640,000 in general fund money toward maintaining city streets and facilities as well as $95,000 toward information technology purchases.

The council opted to use $225,000 in Measure A sales tax funds for park maintenance and an estimated $250,000 in savings from staffing vacancies in 2022-2023 to reduce the general fund deficit.

More information on the city budget can be found online at novato.org/budget.