Firm recommends city create financial strategy, look at adding tax increase to 2020 ballot
The Cloverdale City Council received a presentation last week from San Jose-based financial firm Management Partners regarding a 20-year financial outlook for the city.
The financial forecast, while it is subject to change based on a variety of unknown factors, presents a less-than-ideal picture for Cloverdale’s pocketbook.
According to Robert Leland, senior advisor at Management Solutions, should the city not change its financial actions, it will be facing an unassigned balance deficit of $13,034 beginning in the 2021-22 fiscal year. The projected deficit continues each year, with an unassigned balance deficit of $608,450 in the 2022-23 year, and a $1,1699,212 unassigned balance deficit in 2023-24.
The forecast summary predicts the city having a total fund balance deficit of $267,760 by the 2024-25 fiscal year.
The unassigned balance is the balance of the city’s budget that isn’t already assigned to planned expenses; the unassigned balance also includes a 25% reserve balance for the city.
According to Management Partners, in order to get a view of the city’s financial patterns, they looked at the city’s general fund, revenue and spending patterns since 2004.
“We start with a baseline forecast, which means ‘what are our available revenues,’ and ‘what does it cost to keep doing what we’re doing now’ … and then what are the reasonable increases to expect in terms of everything from labor cost increases to inflation to growth,” Leland said.
Additionally, the prediction includes a “stress test” which attempts to take into account potential recessions, as well as city pension rates and an increase in overall employment costs (such as a 2% cost of living adjustment).
“If you just forecast on a linear straight line without respect to recessions, you’re going to overshoot every time,” he said.
This 20-year forecast model, which predicts the city’s financial state every year until 2039, exists as a moving document, which means that the city’s finance department can change parts of the model as data changes — adapting the program as the finances see fit.
“Twenty years is a long time from now and one thing that I can guarantee you is that what we predict now for 20 years from now isn’t going to come out, not even for 10 year or five years — there are a lot of moving parts. But the validity of the forecast is how realistic the functions are and your (the city’s) ability to continue and update the model.”
Cloverdale, like many other cities, still hasn’t fully recovered from the Great Recession. Moreover, the city’s revenue per capita is still sitting below where it was pre-recession in 2007. This gap between where Cloverdale was and where it sits currently is “one of the larger ones,” Leland said.
While Leland said that other cities are sitting below that pre-recession point as well, he pointed to the reasoning behind Cloverdale’s lag being dual-pronged — part of the post-recession revenue gap is because of “the strength of the underlying economy” and part is because while other cities have gone to voters for an increase in taxes, Cloverdale hasn’t.
“When they have, that gap begins to close — but we haven’t seen anybody statewide that’s closed it yet,” he said.
Floated financial fixes
After setting up the financial picture for Cloverdale’s future, Leland recommended some possible areas of revenue to the council — all of which deal with putting a tax measure on the 2020 ballot.
According to Leland, the city would need a revenue increase or budget cuts of about $650,000 per year to sustain the budget.
The first suggestion, which Leland seemed to favor, was for a local sales and use tax (TUT). Leland recommended Cloverdale look at putting either a 0.5% or 1% sales tax measure on the ballot. The former would bring in approximately $575,000 in fiscal year 2021 while the latter would bring in an anticipated $1.149 million.
The second suggestion put forth was renewing and increasing the user utility tax (UUT). The 3% tax is set to sunset in 2021. If the city were to try and renew the tax with a 3% increase (making it a total of 6%), it would bring in an estimated $469,200.
Finally, Leland floated the idea over increasing the city’s transit occupancy tax (TOT) an additional percent, which would bring in $22,900 of revenue in 2021.
“During this year is the time that you’ve got to do the planning so that whatever expenditure cuts or revenue increases you plan for, and if voter approval is required, can take effect in fiscal 2021,” he said. “If you wait much longer, you’re going to have problems. Your timeline is such that you’ve really got to take action in the next year.”
The possibility of addressing Management Partners’ presentation and recommendations has been added as a standing item on the Finance, Police and Administration subcommittee.
“I think the more immediate thing we have to do … is we can start talking about a ballot initiative. We’re almost out of 2019, 2020 will be hear before we know it,” Vice Mayor Gus Wolter said.
“I don’t know how we can get away with not considering something,” Mayor Melanie Bagby added.
Bagby added that she wants the subcommittee to discuss ways to increase city revenue beyond a ballot measure, citing the need to address things like blight in the downtown and the impact of empty spaces on the city’s tax revenue.
“It’s better to know than not to know,” Bagby said. “And this is the tool to really change our behavior, change our priorities and make sure we don’t end up in bankruptcy.”