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Archived News Release from 2004

For Immediate Release

Redwood City Forecasts Budget Deficits; Has Plan to Endure Financial Situation

Redwood City, CA - March 12 , 2004 - Like many, if not most, cities in California, Redwood City’s budget has a structural problem – expenditures are increasing faster than revenues. This fiscal year (’03-’04) the City has experienced a $2.7 million deficit (4.3% of expenses). For the fiscal year beginning July 1, 2004, the City projects a substantial deficit of $7 million (9.9% of expenses), and expects diminishing deficits the following two fiscal years, at $5.8 million (8.2% of expenses) and $1.9 million (2.7% of expenses).

The reasons for these deficits are noted below – but of principal importance is how the City will deal with this financial situation. Cutting expenditures is the primary way to address the budget deficit. The City will couple the necessary reductions with cautious use of reserves, providing time to adjust expenditures and examine how to gain revenue. Reserves are not intended to fund ongoing operations. With staff salaries and benefits accounting for 71% of all City expenditures, there will potentially be, based on current forecasts, a reduction in the City workforce during each of the next three fiscal years, resulting in less City services to the community.

It’s important that the people of Redwood City know that there will be fewer City services, or a lower level of services, due to this ongoing budget problem. In fiscal year ‘03/’04, the police and fire departments cut 4.5% of their spending, and all other departments cut 7%. The spending cuts for fiscal year ‘04/’05 will be even higher, and each year’s cuts are additive in that the overall budget is reduced, and future cuts are from that lower level.

In broad summary form, here is the current plan for how the deficit will be addressed in coming years, both through the use of reserves, and significant expenditure reductions:

Fiscal Year: 2004-2005
Estimated Deficit: $7 million (9.9% of expenditures)
Use of Reserves: $3.5 million (50% of deficit)
Expenditure Cuts: $3.5 million (50% of deficit)

Fiscal Year: 2005-2006
Estimated Deficit: $5.8 million (8.2% of expenditures)
Use of Reserves: $1.9 million (33% of deficit)
Expenditure Cuts: $3.9 million (67% of deficit)

Fiscal Year: 2006-2007
Estimated Deficit: $1.9 million (2.7% of expenditures)
Use of Reserves: $0
Expenditure Cuts: $1.9 million (100% of deficit)

All projections are as of January 16, 2004. As shown above, the City will depend less on reserves as we move forward, in order to be assured that those reserves are maintained at a prudent level.

The budget deficit has four basic causes: the overall slow economy and its local effects, including loss of sales tax and businesses leaving Redwood City; the trend to sell software electronically (non-taxable); increases in the City’s required PERS (Public Employee Retirement System) program contributions; and the continuing State takeaways of local funding.

The economy is something the cities can do little about, except try to attract more businesses. But in a slow economy, not many businesses are in a position to expand or move. As a result, annual sales tax revenue here has dropped significantly from a high of $20 million down to $15 million. This drop is largely due to the dot-com bust - there is less “business-to-business” sales activity and therefore less sales tax revenue. Some businesses have downsized, some have moved, while others simply no longer exist. Also related to the economy is the City’s property tax revenue, which is currently its largest single source of revenue. It went up significantly during 1999-2000, but has leveled off since then and only a slow increase is projected in upcoming years.

The electronic delivery of software is a trend whereby vendors deliver software in an electronic format, and thus the sale is not subject to sales tax. For large-scale software sales, this has a significant impact on Redwood City’s sales tax revenues.

PERS retirement program expenditures are dramatically increasing on an annual basis. As the economy and the stock market went down, the asset value that the City own in PERS also went down. As this occurs, PERS requires the City to put more money in to make up for that reduction in value. Additionally, contract amendments for Redwood City’s public safety employees have significantly driven up our PERS rates. This year, our PERS-required employer contribution is $3.5 million. Next fiscal year it will more than double, to $7.3 million, and then go up to $8.6 million the year after that.

The State has continued to take funds from local governments over the last decade and more. This began with the so-called Educational Revenue Augmentation Fund (ERAF) property tax “shift,” continued with State-mandated programs that the State neglects to fund, and more recently includes the State seizure of local funds, including Redevelopment Agency funds and Vehicle License Fee (VLF) funds. The State has taken an astounding $35 million from Redwood City taxpayers since 1992 through the property tax “shift.” And each year, the State takes more ($4.4 million this year alone) right out of your City services. Add to this another $440,000 that the State is now taking from our Redevelopment Agency, its failure to reimburse us for mandated programs in the amount of at least another $200,000, and $1.5 million lost from the reduction in the VLF and the State’s failure to keep its promise to fully “backfill” this amount. In summary, for this fiscal year the State has taken over $6.5 million from the Redwood City community.

This is a difficult time for Redwood City – with staff facing layoffs, budget cuts, and necessary reductions in services to the community. The public should be assured, though, that City staff and the Council are approaching this situation intelligently, cautiously, and creatively, with a great deal of confidence in their ability to successfully meet this challenge.

Visit Redwood City’s website at for information about the City and its services, the community, recreation programs, education, and City government.

Contact: Ed Everett
City Manager
(650) 780-7300



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