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Budget Clarification Regarding City's Financial Condition

From: Rojas, Glen <grojas_at_(domain_name_was_removed)>
Date: Thu, 28 Oct 2010 17:17:05 -0700


A recent e-mail to CCIN asserts that the City is operating at an annual deficit of $3-4 million deficit is without merit. The financial records of the City show that for the fiscal year ended June 30, 2010, General Fund expenditures exceeded General Fund revenues by $1,339,311. As was explained at the Council meeting last week (October 19th), Council authorized funding of the Down Town/El Camino Real Specific Plan project ($388,795 in 2009-10) out of the General Fund Reserve. In addition, a revenue reduction of $312,591 was posted to reflect a decrease in the unrealized gain of the City's portfolio - a non-cash accounting adjustment for financial statement purposes only. Therefore, the Budget-to-Actual analysis presented showed an actual "net operating revenue" of negative $637,925, as opposed to the budgeted $690,291 deficit. Variances from the budget (for both revenue and expenditures) were discussed in the staff report #10144(http://service.govdelivery.com/docs/CAMENLO/CAMENLO_104/CAMENLO_104_20101019_020000_en.pdf).

For the current fiscal year (2010-11), the budget provides for expenditures to exceed revenues by $1,012,167, after allowing for a final year of the Specific Plan Project and providing $440,494 for prior year commitments. The Budget-to-Actual Report attached to Tuesday night's information item (Staff Report #10-149 http://service.govdelivery.com/docs/CAMENLO/CAMENLO_104/CAMENLO_104_20101026_030000_en.pdf) should not be taken out of context. It provides a useful analysis ONLY when the City's normal cash flow is taken in to consideration. The report reflects a very normal cash flow for the City. Each revenue source is received at differing times - heavily weighted towards the end of the fiscal year. Expenditures, however, are paid out in the form of weekly accounts payable and bi-weekly payroll processes. So we will always see expenditures greatly outpacing revenues in the first quarter of each fiscal year (July 1 - September 30) even in the best of times.

The "analysis" attached to the e-mail contains many flawed assumptions. The assumption that 2010-11 revenues will be the same as in 2009-10 casts much too broad a brush over the City's revenue mix. The Staff Report (#10-149) analyzes the discernable trends on each specific revenue category. For example, hotel taxes reflected a 21 % increase in the April 1 -June 30, 2010 quarter as compared to the same quarter for the prior period - and this does not include the Rosewood Hotel, which was too new to add to that comparison. It is reasonable to assume that the hotels will fare much better than in 2010-11 based on our discussion with local hotel executives. To the extent that the 2009-10 short fall in sales tax revenue was due to faulty reporting of these receipts to the state, the City will more than likely receive positive sales tax adjustments in the current fiscal year. The analysis also assumes that the City will experience a drop in the unrealized gain on its portfolio. While it is possible that the fair market value of the City's investments will show a decrease by the end of the fiscal year, the City does not budget for such non-cash accounting adjustments.

Because Menlo Park's revenues were impacted by the economic downturn over the past decade, City staff and Council are aggressively pursuing strategies to reduce long-term costs further to resolve the structural deficit for a sustainable budget. A sustainable budget is one where the costs of the services provided equal the revenues received over a period of years and through varying economic cycles. For the current year, once we have actual data for decision making, if action is needed we will be prepared. The Council has established achieving a sustainable budget as one of their highest priority goals.

Glen Rojas
City Manager
City of Menlo Park
701 Laurel Street
Menlo Park, CA 94025
(650) 330-6610 Received on Thu Oct 28 2010 - 17:17:01 PDT


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