Facing a $5.7 million deficit in the upcoming fiscal year, Novato is planning buyouts and furloughs before considering potentially deeper cuts later this year.
The city was already facing a $3.9 million deficit in its 2020-21 budget. But updated financial projections presented to the City Council on Tuesday showed an additional $1.8 million in losses from the coronavirus pandemic’s impacts on taxes and revenue streams.
“The reality is we just don’t have the resources to support this probably for the next couple of years the way it’s currently being purported,” Amy Cunningham, the city finance director, told the council.
Decisions on staffing or service cuts are expected to be made in September, when the financial impacts of the pandemic will be more clear. The city has the equivalent of 205.5 full-time workers.
In an effort to soften the blow later in the year, the council voted unanimously on Tuesday to approve two programs offering the voluntary buyouts and furloughs.
For the buyout program, employees with 10 or more years with the city who are eligible for CalPERS retirement benefits can ask to retire by Aug. 1. The employee will receive $1,000 for each year of full-time employment with a cap at $30,000.
Should every eligible employee sign up for the buyouts — which Assistant City Manager Jessica Deakyne said would be unlikely — the city would face a cost of $860,000 and lose 42 employees. Deakyne said city staff are meeting with labor groups this week to discuss the programs.
The council voted to place a $400,000 spending cap on the buyout program. The savings will be unknown until the application period ends in June.
The furlough program would last for six months and give employees flexibility on how to spread out their forfeited time. City staffers say the intent is to retain employees while still cutting costs.
Other staffing changes have already taken place. About 100 seasonal and part-time employees in the Parks, Recreation and Community Services Department have been laid off. In addition, a hiring and promotion freeze is in place. About 19.5 positions of the nearly 21 vacant city staff positions across various departments are frozen, including four vacant police officer positions and two police dispatcher positions.
Mayor Pro Tem Pat Eklund had called for a reduction in the city’s staff in the past, including during last year’s budget discussions. She said the city needs a more “realistic” staff size based on the amount of ongoing revenue the city generates.
“I don’t really enjoy having us go really down far like we did in 2008-2009, and then over the last three years really beef up our staff to the point where a lot of funds were used that we could have used during this time,” Eklund said.
The city is taking a wait-and-see approach with its 2020-21 budget by adopting a carryover budget that largely mirrors the city’s $42 million general fund budget for 2019-20. The entire budget is about $82 million.
However, the upcoming budget is incorporating new financial projections from the city’s financial consultants at HdL Companies. The projections show declines in sales tax, department revenues and other revenue sources compared to the 2019-20 budget.
The city is also facing rising insurance and pension expenses.
Unfunded liability payments with CalPERS, the California Public Employees’ Retirement System, are set to increase by about 14.6%, from $3.09 million to about $3.53 million in the 2020-21 fiscal year. The city’s unfunded pension liability is about $47 million, according to the city’s most recent audit from June 2018.
These costs were already expected to increase, Cunningham said. CalPERS has been lowering its discount rate since the 2018-19 fiscal year. The rate is set to drop from 7.5% to 7% for the upcoming 2020-21 fiscal year. The discount rate indicates how much CalPERS’ investments are expected to earn in the future. Lowering the discount rate increases the costs of pension benefits as well as the unfunded liability.
The city’s financial staff says it’s likely that investment losses caused by the pandemic will have an impact on the city’s liability payments, especially in upcoming years. These impacts will be fully felt in 2022-23, Cunningham said.
The city’s liability insurance, including workers compensation, is set to increase by about $483,000, or 39%, which Cunningham called significant. The city has a pooled insurance policy with other Bay Area cities, with Cunningham attributing the rising costs to increases in jury awards and severity of claims.
In addition, the city general fund will be covering $1.17 million in staff and program costs that were previously supported by the city’s now depleted sales tax revenue reserves from Measure F. Measure F was a five-year, half-cent sales tax that expired in 2015 and was replaced with a quarter-cent sales tax, Measure C.
Options to address the deficit include service cuts, use of reserves and deferring projects and other programs.
Mayor Denise Athas, who began her council tenure amid the Great Recession, said she wished that she would never have to go through a similar experience. Athas said she felt the city was beginning to experience growth in services and “building our city back.”
“This has really set us back,” Athas said, “but I have hope with our leadership and our wonderful staff that we’ll look at ways to be able to accomplish this. I want to wait to see what that looks like.”
City Manager Adam McGill said that while there are further federal stimulus proposals being considered in Congress, the city should not craft a budget on that possibility.
“We should assume that it’s as bad as it is right now and it’s going to stay this way,” McGill said.
The council is set to review the draft budget at its next meeting on June 9. Budget adoption is set to occur on June 23.
