DISCUSSION
Our initial assessment on damage caused by the COVID-19 pandemic is $12.5 million as of April 16, 2020. Over 94% of the total damage is due to estimated loss of sales tax and transient occupancy tax revenues. The estimated loss on sales tax is $5.1 million for the current fiscal year. This amount was derived by comparing projections performed by HdL, the City’s sales tax consultant, in February 2020 to HdL’s updated estimate on April 6, 2020. Loss of Transient Occupancy Tax (TOT) revenue of $6.3 million was estimated through end of May 2020, based on actuals for the same months from last year.
As of April 16, 2020, the City has incurred $712,000 in direct costs associated with the pandemic since the declaration of local emergency on March 16, 2020. This amount includes purchase orders issued and credit card purchases for personal protective equipment (PPE), emergency services, sanitary supplies for disinfection and decontamination, and equipment to facilitate telecommuting, as well as salaries and overtime incurred by City staff responding to the pandemic. Our emergency operations center team is tracking and documenting all of these costs in order to apply for potential reimbursement of direct COVID-19 costs to the City.
The significant revenue shortfall will have a direct impact on the City’s General Fund, as sales tax and TOT revenues account for nearly 50% of total General Fund’s revenue. As of April 16, 2020, staff estimates FY2019-20 will end with a modest surplus of $3.2 million. In early February, before the pandemic, we estimated a surplus of nearly $18.0 million, based on July 2019 through January 2020 operating results. The decrease of $14.8 million in surplus was primarily due to the anticipated reduction in sales tax revenue of $5.1 million, and TOT revenue of $8.7 million. Other revenues from business tax and parking citations are also anticipated to see a decline in excess of $300,000.
The table below shows General Fund revenue and expenditure by major category for fiscal years 2019-20 and 2020-21. Revenue amounts for FY2019-20 are the adopted budget estimates. The expenditure budget includes any additional appropriations made since July 1, 2019 and carryover from the previous year. The revised estimates for year-end FY 2019-20 are as of April 16, 2020. Actual amounts for the previous fiscal year are also presented for comparison purpose.
For Fiscal Year 2020-21, we anticipate a budget deficit in the amount of $5.4 million. Our adopted FY2020-21 budget showed an anticipated surplus of $4.5 million. Due to the estimated decrease in sales tax and TOT revenues of $3.6 million and $6.0 million respectively, the revised projection shows a total $5.4 million deficit. The revenue estimated for sales tax and TOT are very preliminary, since for the short term, there is no indicator for when the State will end the stay-at-home order, nor how the record high unemployment will impact consumer behavior. The long-term impact on the economy is another major factor to be evaluated as we move forward.
In light of the projected revenue shortfall and budget deficit, a series of cost containment measures were implemented on April 3, 2020. These measures include:
- Place a hiring freeze on all vacancies (with exception for sworn public safety, critical emergency dispatch, and certain enterprise-funded positions);
- Pause on personnel recruitment activities, including an immediate 30-day delay and assessment of part-time recruitment;
- Suspend all non-essential training and conferences;
- Defer non-essential equipment and capital purchases;
- Reassess personnel equipment needs, i.e. cellphone, uniform, take-home vehicles etc.; and
- Reassess business processes and eliminate low-value tasks.
We will continue to advise the Council as new information is made available. Further updates to this report will be agendized at the May 12 and May 26 Council meetings, in preparation for the June 2, 2020 budget study session. These updates will include recommendations on balancing the FY 2020-21 budget. As Councilmembers are aware, we are currently in Year 1 of the two-year biennial budget. Approval of the Year 2 Continuation Budget will need to occur no later than June 23, 2020.