NEW! On June 24, 2008, the City Council passed the FY 2009 Biennial Budget Update. Read the report here FY 2009 Mid-Biennial Budget Update - Adoption (June 24, 2008) and the Mayor's Proposed FY 2009 Budget Amendments (June 20, 2008).

What’s the budget situation?

The fiscal outlook for both the national and local economy is worsening. Based on numbers released in January, the federal deficit could rise as high as $368 billion to cover the cost of the economic stimulus package. On January 10, 2008, the Governor released his proposed budget for FY 2009 – forecasting a $14 billion deficit. This forecast is expected to be revised mid-May.
 
The volatile real estate industry is a key driver in the economic picture. The Bay Area is experiencing the biggest home sales decline in nearly two decades. Mirroring this trend, the number of Berkeley homes sold in January dropped 69 percent from last January, and transfer tax revenue dropped 67 percent for the same period. This results in a significant amount of lost revenue. Two other Berkeley revenue streams, sales tax and the utility users tax, are also relatively flat and won’t compensate for the decreases in property-based revenues.

Although the City of Berkeley has done a good job of controlling costs, the reduction in local revenue and state and federal funding are squeezing the City’s budget. We won’t know the actual extent of any funding reductions until the state budget is adopted this summer, but given what we know right now, the cuts that are already planned for FY 2009 will allow the City’s budget to stay balanced.

What is the City doing to minimize impact on services?

Like with your budget at home, the City has two basic choices—cut expenses and/or increase revenues.

Over the past four years, the City Council has taken many steps to reduce General Fund spending. They have cut $20 million in recurring costs and have been using one-time tax revenue to do one-time infrastructure projects, such as maintenance on streets and storm drains.

By reducing recurring spending and implementing this “one-time money for one-time expenses” policy, the Council placed the City in a better position to address the latest economic downturn. The recent improvement of the City’s bond rating confirms that the City is using good fiscal policy and validates the Council’s approach.

The Council also anticipated the changing economic picture, and the FY 2009 Adopted Budget (passed last year) contains about $750,000 in General Fund cuts. In addition, the FY 2009 budget includes funding for only half of the Fire Department overtime budget, which provides full staffing only through December 2009.  These cuts are needed to balance the budget into FY 2010.  Absent new revenue, the Fire Department may once again face reduced operations.

In order to minimize service reductions and make needed improvements to City services, the City needs new revenue. The Council has been considering placing some measures on the November 2008 ballot for high-priority services like public safety, youth, and storm drain infrastructure, and is exploring other ways to improve the City’s economic picture.

What about the City’s reserve?

The City Council’s policy is to keep a reserve of at least 6 percent of the General Fund revenues, and that reserve is currently at 10 percent. The reserve provides some flexibility to help balance the budget, to smooth out economic swings, and to fund emergencies such as natural disasters.

However, it is a one-time source of funds that should not be used for recurring costs. Although 10 percent sounds like a large reserve, it provides only 30 days worth of City services in the event of a major disaster.

What happens next?

As long is there is no further decline in revenue and the planned reductions are taken, the City will have a balanced budget in the next fiscal year. If the economic picture does not improve and increase City revenue in FY 2010, however, the City will face a deficit by FY 2011. More reductions in programs and/or services may be necessary. Staff’s budget recommendations to the Council will attempt to balance long-term fiscal stability against the continuing challenges of the volatile economy and the variety of competing priorities.

Want more information?

For a more detailed summary and analysis, see the February report to the Council. For updated revenue projections and the City’s budget update, read the Council report here (FY 2009 Mid-Biennial Budget Update (PDF)).

For more information about the federal budget deficit, visit the Government Accountability Office at http://www.gao.gov/financial/fy2007financialreport.html.

For more information about the state budget deficit, visit the Legislative Analyst’s Office
 http://www.lao.ca.gov/laoapp/main.aspx