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As the city of Oakland prepares its 2019 – 21 budget, Make Oakland Better Now! has reviewed the documents presented to the City Council. Our summary below will provide background for the budget actions in the months ahead. Clearly, the city is facing significant budget challenges.

In February, the City Council received a budget briefing on the financial realities the city will face in the next two years. Then in March, the five-year fiscal forecast was presented to the Finance and Management Committee. Both of these reports show the city is facing a structural deficit with substantial financial challenges. Here are the highlights:

Budget Briefing. 

The budget briefing stated the following:

• The City started with a balanced budget in the General Purpose Fund (GPF) for fiscal year 2018-19 ($602.45 million, including the planned use of $1.2 million in reserves).
•  The FY 2018-19 Second Quarter Revenue & Expenditure Report shows a projected operating deficit of $6.3 million, with projected expenditures exceeding projected revenues. This would leave the City short of its 7.5% emergency reserve by approximately $1.7 million.
• The City’s GPF tax revenues are expected to grow at a normal rate. Over a long-term period, GPF tax revenues generally track the Bay Area rate of inflation over the long-term.However, GPF expenditures are growing at two to three times the rate of inflation and revenue growth, driven primarily by growth in fixed personnel costs (pensions, fringe benefits, OPEB, etc.), self-insurance claims/premiums, and other operational costs (fuel, utilities, etc.). As a result, the preliminary GPF baseline shows a nearly $25 million deficit in FY 2019-20 (1st year of biennial budget) and an $18 million deficit in FY 2020-21 (2nd year of biennial budget).

The report also noted that this gap assumes status quo operations relative to the Midcycle Budget, which calls into question the long-term sustainability and affordability of existing operations. There is a need to evaluate programs and services in terms of long-term and the continued financial pressures on the City’s core services.

How should the City and its budget handle financial uncertainty over the next two years? How should it respond to the risk of recession? How can it maintain affordability and ensure that reserves are sufficient to mitigate impacts of any unanticipated downturn in GPF revenues?

The report closed with the following Summary: The economy is returning to a more “normal” growth pattern:

• Growth in property tax revenues continue to be stable, resulting from growth in assessed valuations.
• Growth in property tax revenues is somewhat muted by more moderate growth in other revenue categories such as sales taxes, utility user taxes, and parking taxes.
• Volume of residential real estate sales is leveling off, though home sale values continue to climb.
• New graduated real estate transfer tax tax rate should help to buffer any downturns in this revenue category, but it is too early to estimate impact with any great deal of certainty.

Five-Year Forecast.

Turning now to the highlights of the five-year forecast. The full 90-page report is available here. The report is based on the following assumptions:

• The Forecast Assumes the Continuation of the Baseline Budget without Policy Interventions.
• 4,490 FTE (full-time equivalent or workload of an employed person) are assumed throughout the forecast period.
• Existing Fiscal Policies continue including reserve policies, the rainy-day policy, and the recently adopted OPEB policy.
• Does NOT assume any changes to expenditures to meet additional demands for service or other policy concerns such as the add-back one-time expenses.”
• The Forecast Does NOT include the possibility of a recession, however by July 2019 the current economic expansion will be longest Post WWII.
• The Forecast assumes the continuation of Grants and Renewal of any Local Measures that expire during the forecast period.

City Revenue growth, particularly in the General Purpose Fund, is highly tied to the performance of the real estate market resulting in a 3.9% approximate average annual growth rate over the forecast period.

All Funds revenues are expected to grow at roughly 2.5% annually due to revenues form fees and grants in Non-GPF revenues growing more slowly than GPF tax revenues.

The following table shows the five-year forecast:

The obvious conclusion to be drawn from both the budget briefing and five-year forecast is that the City of Oakland is facing serious financial challenges even if the economy remains stable and there are no unforeseen federal budget actions. In addition, the forecast does not assume predictable salary increases and other desirable or needed increases in program funding.

We look forward to the Mayor’s Budget as the next step in the Budget process which shows how the City can address these challenges. At that time, MOBN! will weigh in with our suggestions.