I recommend that the City Council:

1. Approve the proposed Midyear Budget actions related to:

a) 2000-2001 Midyear Operating and Capital Budget Review.

b) Appropriation ordinance and amendments to the funding sources resolution for the 2000-2001 Midyear Operating and Capital Budget Review.

c) Resolution making certain determinations regarding the expenditure of Redevelopment Agency funds on certain public improvements.

2. Accept the Administration’s Five-year Forecast

In February 1999, the Council agreed with my recommendation that we should not increase ongoing staff expenditures unless they are fee-related or absolutely time-sensitive. Discussion about increasing the City’s operating costs should occur during our June budget discussion when we have evaluated all our needs and anticipated revenues.

This policy of limiting expenditures at midyear has proven healthy for our fiscal stability. We should set priorities for ongoing expenditures in June when Council can review and set priorities for all aspects of our City’s activities.

The Administration has followed this policy and therefore has strictly limited recommended operating budget revisions at this time. Administration recommendations have been limited to the following categories:

• Proposals previously directed by Council;
• Proposals necessary to correct an error in the budget or unavoidable expense increases;
• Critical timing issues or opportunities;
• Establishment of reserves for future needs; and
• Additions offset by revenues from grants, reimbursements or fees.

Of the $36,143,350 in recommended adjustments for the midyear budget, only $2,989,687 falls into the category of Upgrades/Augmentations. The largest augmentation at this time would provide $1.3 million for a number of additions related to the implementation of the Fire Services Master Plan.

In November 2000, the Finance and Technology Committee approved recommendations from Councilmember Diquisto and me related to the Fire Services Master Plan. This action directed the City Administration and the Mayor’s office to develop and submit budget proposals for the Midyear and June budget processes for implementing immediate and short-term priorities of the strategic plan for fire services. The recommended actions in the midyear budget follow this direction, and they include: Funding for tools and equipment to equip the majority of units in the reserve fleet (seven engines and three rescue units); funding the replacement of three rescue units; and funding to improve fire recruit academies. In addition, funding is also recommended to purchase a new fire engine for Station 31.

Other midyear additions include:

• an appropriation to help defray costs related to the capital plan called for by the passage of Measures O and P that are ineligible for bond issuance support ($626,000);
• funding for hardware and software upgrades for the City Attorney’s Office ($279,000);
• funding for the San José Ballet to be used as a "challenge" for matching private contributions ($250,000); and
• funding to replace an aging aerial bucket van and crane lift used to maintain street signals, streetlights, and trees ($225,000).

The majority of the actions recommended at this time establish reserves for future needs ($23.0 million), the largest of which is a $17 million Ending Fund Balance Reserve. Setting aside the majority of available funds for reserves is prudent fiscal policy to prepare our City for any unforeseen future needs.

In June of 2000, I recommended a Council policy that would commit the first increment of the City’s annual ending fund balance (EFB) to ensure a balanced budget for the following fiscal year. I recommended that our first priority be to reserve adequate funds from the ending fund balance to prevent the projected deficit in the following year The 2001-2002 General Fund Forecast assumes that $17 million in excess revenues and/or expenditure savings in 2000-2001 will be available for use in 2001-02. This Ending Fund Balance Reserve guarantees that this funding will be available.

Other reserve adjustments recommended include the following: increase the Contingency Reserve to remain in compliance with the 3% Council policy ($1.06 million); establish a Reserve for Gas and Electric Cost Increases to address potential costs reflecting the volatility of the electric and gas markets ($350,000); establish a Future Capital Projects Reserve to fund some combination of future costs for the Strong Neighborhood Initiative, ineligible bond expenditures for Measures O and P, and/or the new City Hall project ($3.6 million); and establish a Computer Aided Dispatch System Replacement Reserve to set aside funding for a portion of the remaining cost estimated necessary to replace the current system for Police and Fire ($1.0 million).

For the second year now, the budget forecast projects a surplus in year one of the five-year forecast. This is the result of the Council’s policy actions of the past two years. This fiscal restraint is already proving beneficial to the city’s long-term financial outlook.

The majority of the actions recommended by the Administration at this time establish reserves for future needs ($23.0 million), the largest of which is a $17 million Ending Fund Balance Reserve. The 2001-2002 General Fund Forecast assumes that $17 million in excess revenues and/or expenditures savings in 2000-2001 will be available for use in 2001-02. This Ending Fund Balance Reserve guarantees that this funding will be available.