The Town’s claim as to a “balanced budget” is misleading and certainly isn’t a complete disclosure as to what has happened. The Town must present a budget, by law, where the operating expenses must be fully funded. There is no option here. The law requires the “town’s operating uses” must balance with the “town’s sources” of funds. The question however, is how do you do that?
And this is where I part ways with the Town’s characterization of having a “balanced budget”. In fact, the proposed FY 21 general fund budget has a structural deficit of $1,719,561. That’s right – a deficit not a surplus. The $11,905 “surplus” that the Town Manager mentions on page A-1 of the transmittal letter was achieved by 1) using $769,308 (see A-11) from the capital projects reserve in the general fund (this is how the Town “paid” for the recent salary increases and bonus payments) to fund “one-time” initiatives and 2) using a one time “other revenue” source from the pension trust totaling $962,158. You can find that number of page C-23 of the financial summary schedule. The description of this revenue source reads “previously expensed transfers were returned to be included in the general fund”. Got it.
If you subtract these two “funding sources” from the $11,905 “budget surplus”, you find that in fact the Town’s on-going operating expenses are greater than the on-going operating revenues by $1,719,561. And let’s not forget that the Council recently approved $1m in raises and bonuses to the Town’s employees, which is in that operating expense number. When the Town’s recurring revenue sources do not fund the recurring expenditures, the Government Finance Officers Association (GFOA) calls this a “structural deficit”. Simply put, the budget is not financially sustainable for multiple years. GFOA has published a best practice about achieving structurally balanced budgets. We just haven’t adopted the best practice.
The reader should be fully aware of the use of these “one-time” fund sources to “balance” the budget. And I want to point out that there was nothing wrong in doing this since by law the sources and uses must balance. But we do need to be transparent and accurate about how this happens. Also, this “surplus” can be anything the Town wants it to be by simply drawing down more of the general fund reserves!
To draw an analogy in balancing one’s personal budget – if you find your operating expenses are greater than your income and you can’t cut your expenses, you cover this by dipping into your savings account. That is what the Town has done here. But you can only do that for as long as you have savings. This is why we are very concerned about this budget.
And while we are on the subject, the Town of Los Gatos has to be the only city in the US that is actually projecting FY 21 general fund revenues to increase over FY 20 estimates (after adjusting for one time revenues from the sale of property and use of “other sources” of pension trust in FY 20). While I hope that happens, I have no idea what the plan is if we have a $3m revenue shortfall. So, let’s not take a congratulatory lap quite yet. We have some very challenging times ahead for sure.
Now everyone has the rest of the story.
Los Gatos Community Alliance