City Braces for ‘Economic Implosion’ Amid Expected $15.2M Budget Shortfall
The Budget Advisory Committee and City Council were both recently presented with the bleak economic realities the city is facing. Emeryville, like many cities, has seen a sharp decline in revenues caused by the pandemic-induced economic shutdown. Revenues used to support city services like police, fire, public works, recreational programs and capital improvement projects.
City Manager Christine Daniel led off the meeting with her own dire assessment. “The pandemic has created an economic shock and unfortunately The City of Emeryville’s primary revenue sources are most vulnerable to the type of economic shock we are experiencing,” Daniel explained. Daniel pointed out our city’s reliance on more volatile revenue streams like Sales Tax, Hotel Occupancy Tax, Business License Tax and a Card Room tax that have all plummeted.
City Finance Director Susan Hsieh reviewed the outlook in the above presentation deck that showed a nearly $7M expected shortfall for this budget cycle and a projected $8M for FY 20-21. These shortfalls represent 15% and 19% respectively of the city’s total budget and comparable to the annual budget of our entire Police Department.
“The COVID-19 pandemic created an economic implosion and caused volatility in the stock market,” Hsieh explained “The U.S. unemployment rate jumped to 14.7% in April from 4.4% in March.”
“The pandemic has created an economic shock and unfortunately The City of Emeryville’s primary revenue sources are most vulnerable to the type of economic shock we are experiencing,”
The good news is Emeryville has a significant set-aside intended for times like these mostly from a property transfer tax. Emeryville received an over $2 million sum from the recent sale of the Courtyards at 65th complex.
In addition to the revenue losses, the city will still be on the hook to offset significant losses to employee pensions caused by the stock market drop. The pandemic-induced collapse vaporized an estimated 1 trillion in value for an investment loss of about 21% in the U.S. “This meltdown has exposed the fragility of public pension systems in the United States,” The Washington Post recently published.
Staff Recommends Budget Balancing Strategies, Hiring Freeze
This staff report recommended several short-term, “bridging strategies” to help cover these shortfalls including tapping into one-time transfer tax revenues and drawing down funds from the pension reserve. No mention of staff layoffs were discussed at this time but a hiring freeze for six vacant staff positions were among the suggested remedies.
These strategies are short-term and intended to provide time for the Council and City Committees to assess the timing and strength of an economic recovery. “This puts us on the clock,” commented Councilmember John Bauters who pondered a ‘U’, ‘V’ or ‘W’ shaped recovery.
Alameda County Supervisor suggests Smaller Cities may need to “merge” with neighbors
Small cities like Emeryville are not currently eligible for federal aid and would rely on money filtered down through the county.
The downturn is expected to be such a bloodbath for local economies that Alameda County supervisor Scott Haggerty suggested at an April 9 ABAG meeting that smaller cities under 75K consider merging with a neighboring city to consolidate resources. “If these cities are not going to survive and go bankrupt, maybe we need to look at other ways.”
“If these cities are not going to survive and go bankrupt, maybe we need to look at other ways.”
Other cities in the area including neighboring Oakland and Berkeley are exploring furloughs, hiring freezes, service reductions, deferring capital improvement projects, cutting programs and layoffs. Property taxes are considered to be a more stable source of revenue for cities and less prone to economic volatility like what we’re currently experiencing.
The Budget Committee will be holding a special meeting to further evaluate the options and make recommendations. Council will be required to take action at the June 2nd meeting and likely make quarterly budget adjustments as things unfold.
Read the entire staff report on Emeryville.org
State also Bracing for Deep Cuts
CA Gov. Gavin Newsom unveiled his revised state budget proposal last week with deep cuts in education and health care funding. The $203.3 billion budget is nearly $20 billion less than Newsom’s initial budget proposal in January and includes about $6 billion in eliminated plans to expand programs like Medi-Cal, prompted by a roughly 25 percent drop in sales, personal income and corporate tax revenue.
According to Newsom, the state is saddled with a projected $54.3 billion budget deficit that it must balance over the next year while confronting an ever-mounting loss of tax revenue and an unemployment rate that state officials expect to peak at more than 24.5 percent.
Newsom said the state plans to use about $4.4 billion in discretionary funding from the federal Coronavirus Aid, Relief and Economic Security (CARES) Act to maintain education spending at current levels with adjustments for factors like inflation.
Newsom’s proposal calls for the state to pull from multiple funding reserves and surpluses to partially pay down the deficit, including using the entirety of the state’s $16.2 billion funding reserve over the next three years, using $7.8 billion during the 2020-2021 fiscal year, $5.4 billion the following year and the remaining $2.9 billion the year after that.
Federal Relief for State & Local Governments in the works?
At the federal level, congress has identified the dire need of relief for localities and is assembling legislative packages to address this. The Democratic-backed HEROES Act would provide funding for a wide range of groups, a new round of stimulus checks as well as funding for state and local governments.
The Democratic controlled House of Representatives narrowly passed the act on May 15 by a 208 to 199 vote. The legislation is unlikely to pass in the Republican-controlled Senate, however, and the White House issued a statement opposing the legislation.
Newson expressed his support for the act in a formal statement noting “The COVID-19 global pandemic has caused a national recession, and cities and states across the country cannot weather this storm alone. Even states like California that boasted record reserves after years of prudent spending decisions are facing deep revenue shortfalls that put core government services at risk.”