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Santa Clara Budget Deficit Carries Forward

Here’s a way to understand Santa Clara’s $19.6 million general fund structural deficit. Suppose you have a checking account that covers overdrafts. If you overdraw your account, that shortfall will persist until you deposit enough into the account to cover both your expenses and the shortfall.

That’s Santa Clara’s problem. Not enough is coming in to cover ongoing expenses and the deficit triggered by the COVID pandemic. So, the red ink just keeps moving ahead from year to year.

“It’s a structural problem where expenses and revenues don’t line up with our expenses on an ongoing basis,” said Santa Clara Finance Director Kenn Lee. “When we layer on some of the projected costs from some of the labor agreements that are underway, that deficit becomes $27 million.”

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The small General Fund surpluses forecast for future years won’t close the gap. Santa Clara has balanced the books for the last three years by some cost reductions but principally by using reserves — one-time money.

To close the gap this year, Santa Clara will use $13 million of the Budget Stabilization Reserve (BSR) and $10 million of its land sale reserves. Currently, the BSR is at $53.6 million and will drop to $40.4 million in 2023 — enough to cover two months’ payroll.

In the following year, the Council faces a hard choice. One option is draining the BSR — leaving Santa Clara without any resources in an emergency and damaging Santa Clara’s AA+ credit rating. Santa Clara’s bond rating — which determines how much interest the City must pay on its bonds — could take a hit “if it is believed that the City is experiencing a sustained structural imbalance without a plan in place to reasonably restore balance,” said Lee.

The other option, Lee explained, is adopting a plan that relies on about $7 million in increased hotel and business tax revenue, increased fees, cutting 75 non-safety positions at City Hall (15% of non-safety payroll), continuing the hiring freeze and filling the remaining gap from reserves. Barring a miracle, this would be the status quo for the next four years until revenues make up the $30 – $40 million cumulative losses during the COVID years.

“We may have to cut the work force 10% just to balance the budget,” City Manager Rajeev Batra told the Council at the June 7 council meeting. “It has happened in the past [2008-09] and we may have to do it again.”

Salary reductions may also be on the table, he said. Salary cuts and furloughs can only be negotiated by the Council and City unions.

Public Safety Hasn’t Been Cut and Won’t Be

What hasn’t happened are any cuts to public safety, despite Mayor Lisa Gillmor’s and Council Member Kathy Watanabe’s frequent misstatements to the contrary. On both June 7 and June 22, Gillmor wrongly asserted that the D.A.R.E. program in schools had been cut by their Council opponents. This is untrue, as the staff report explained:

“The School Service Unit and the D.A.R.E. program were not reduced or eliminated by the City Council as part of the budget process,” said the report.

The D.A.R.E. program was suspended during COVID because school wasn’t in session and the police had higher priority needs, such as mental health response and patrol. The D.A.R.E. positions are in the budget and the PD is recruiting to fill them.

In fact, there were no cuts to the police department. 20 new employees have come on board as of the end of June and three new officers will be on the job early in the fall. The department continues to recruit to fill another eight open jobs.

In addition, the Council added $1 million for the El Camino Real Specific Area Plan that has been in the works since 2017; $200,000 for systems that will enable the City to standardize developers’ traffic demand plans (TDMs) and monitor developers’ performance; and $300,000 for the Downtown Precise Plan.

For more about the Santa Clara budget deficit and how the City found itself deep in a deficit hole visit this post on the City’s $42M case of COVID.

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