A $25.9 million grant from President Biden’s stimulus program reduces Santa Clara’s general fund deficit but it doesn’t eliminate it. The $257 million general fund budget’s cumulative shortfall is now $29 million from 2020 through 2022, instead of $41.7 million.* The general fund finances most City services.
The federal money is critical for Santa Clara, enabling the City “to face the [negative] revenue impact and bring forward a budget that’s balanced, that addresses the deficit in a strategic way to meet City goals,” said Santa Clara Finance Director Kenn Lee. The one-time budget boost limits this year’s expense cuts to about $5 million.**
The proposed budget continues $12.7 million in previous cuts that eliminated 550 part-time and as-needed positions, and froze 43 open positions. Another 12 positions were eliminated from this year’s budget.
Reserves Close the Budget Gap
To close the budget gap, $1.5 million will come from the Budget Stabilization Reserve this year and, barring a dramatic revenue increase, and another $15.6 million next year. In addition, $3.2 million from the Land Sale Reserve, currently $23.7 million, will be used next year.
By City Council policy, the Budget Stabilization Reserve, at a minimum, should cover three months — 25 percent — of general fund operations. In the face of the pandemic, the Council approved dropping the reserve to 15 percent of the general fund budget. With the planned use of this reserve, the balances drop to 21 percent of expenditures this year and 15 percent in 2022/23, leaving a balance of $40 million in the reserve fund.
Revenues Looking Up
The largest source of Santa Clara general fund revenue is now property tax — for at least 30 years it was second to sales tax, only catching three years ago. Less volatile than other revenues, property tax revenue grew about $1.5 million last year and is projected to grow $5 million in the coming year and another $3.4 million in 2022/23.
Santa Clara’s second largest general fund revenue source, sales tax, took a small hit last year — about 2 percent — with a decline in business-to-business sales posted in Santa Clara despite booming tech sales. Since 2016, these revenues dropped 7 percent, partly due to the problem of collecting taxes on online sales.
Sales tax revenue is expected to grow about $5 million over the next two years, to $60 million; which is still less than a $64 million peak 2016/17 — $71 million in 2021 dollars.
Santa Clara’s electric utility, Silicon Valley Power (SVP), delivered higher than projected revenue to the general fund last year, and that’s projected to grow by about $2 million to $26.5 million in the coming two years. SVP also made a $960,000 grant to the City’s vehicle replacement fund for new EVs. SVP’s revenues come largely from business customers.
Services fees — fees for City services and reimbursements, including Stadium Authority reimbursements — are projected to grow from $36 million last year to $38 million in the next two years.
Rental income is projected to grow about $2 million to slightly under $12 million.
COVID-19 delivered a predictable hit to Santa Clara’s hotel tax (Transit Occupancy Tax, TOT) revenue last year, reducing it by 75 percent to $3.6 million. That’s expected to grow to $9 million this year and $12 million in 2022/23. The voter-approved hotel tax increase will increase revenue in 2022, but hotel tax isn’t forecast to return to pre-COVID’s $22 million until 2025/26.
Salaries Spending Down This Year
Salary expenditures drop slightly this year, the result of a smaller workforce, but will grow in 2022/23. The majority of Santa Clara salaries are covered by the general fund. Labor costs for the City’s enterprises — e.g. Silicon Valley Power, water and sewer — are covered by those enterprises.
General fund salaries drop 2 percent in 2021/22 to $121.9 million. But they’re projected to grow 4 percent next year to $142.5 million. January’s 10-year forecast shows salaries growing to $187 million by 2031.
Although union contract concessions or executive pay cuts were suggested by some last winter, there’s no mention of them in the proposed budget.
Pension Costs Grow 14% Over 2 Years
Pension costs continue their inexorable growth. Set by the state pension fund CalPERS, these general fund costs will grow 7 percent this year to $48.1 million. All of that growth is police and fire pensions; other pensions dropped about $600,000. Pensions will grow another 7 percent in 2022/23 to $51.4 million; 55 percent is police and firefighters.
Retirement contributions are forecast to reach $82.5 million by 2031 and account for 22 percent of Santa Clara’s general fund spending. The City has $21.6 million in pension reserves, against a roughly $440 million unfunded pension liability.
The next part of our budget series, Faster Time-to-Revenue for New Development, But Popular Events Still Off the Calendar: Santa Clara’s 2021/2022 – 2022/2023 Budget, digs into what the proposed budget means in terms of resident services and City strategic objectives.
*If a budget shortfall is made up with one-time funding — e.g. grants — the deficit carries over to the next year because that money won’t be there going forward. If the shortfall is made up by actions that permanently reduce expenses — e.g. cutting staff — the ‘ongoing’ correction carries forward. California cities must balance their budgets.
**Ironically, the further cost-cutting roughly equals money that’s being set aside this year “to cover legal actions” like the voting rights lawsuit the City lost twice.