The purpose of this report is to request that the City Council adopt a resolution declaring the existence of a fiscal emergency in the City of Union City. This action is proposed on the basis of the City’s current and projected General Fund budget deficits, which are significant in size and expected to last over a multi-year period. Corrective measures taken today will aid in the long term solutions that will ultimately help the City to maintain our high quality of services. The proposed resolution is consistent with the City’s revenue generation strategy that was presented to the City Council in June 2017. The resolution is also an essential procedure in the successful implementation of the strategy over the next year.  

In June 2017, the City Council adopted the biennial budget for FY’s 2017/18 and 2018/19 which contained projected structural deficits in the General Fund of $3.0 million and $3.9 million respectively.  These deficits represent 5.7% and 7.4% of all General Fund revenues for FY’s 2017/18 and 2018/19.

These significant deficits are temporarily being funded by transfers from the PARS 115 Pension Trust fund which has a balance before transfer of $12 million dollars.  This is not a sustainable practice, as the Pension Trust funds are needed to pay off the City's large unfunded pension liability. 

Also contained in the budgets are self-imposed budget cuts to the General Fund of $1.3 million (2.0%) and $1.9 million (3.5%) for FY’s 2017/18 and 2018/19.  These cuts are across all departments and impact a variety of City services.

Actions taken in 2017 by CalPERS to reduce the assumed rate of return from 7.5% to 7.0% further impacted this current biennial budget and future budgets. This rate drop dramatically amplifies an already problematic rising CalPERS burden on the City and its resources.

At the end of Fiscal Year 2016/17, the City had an unassigned fund balance of $12.1 million. This represents 21.5% of the 2017/18 anticipated General Fund expenditures which is slightly above the 20% recommendation of the Government Finance Officers Association and current Council budget policy.

As can be seen from the chart above, the City is anticipating a $2.2 million deficit for Fiscal Year 2017/18 and 3.7 million deficit for Fiscal Year 2018/19.  This is improved from the adopted biennial budget primarily due to stronger sales tax revenue and a one-time increase in residual distribution from the former Redevelopment Agency. While this improvement is positive news, it falls short of the improvement needed to close the deficit gap.

In addition, the most recent revenue and expenditure projections through Fiscal Year 2021/22 (above) show an additional three-year cumulative deficit spending of $12.9 million, which will drive the unassigned fund balance to a negative $(786,000). Staff estimates that when the City approaches $5.0 million in reserves it will be necessary to utilize tax anticipation borrowing to fund current operations. This will only serve to further burden the City will additional interest costs, and reinforces the fiscal emergency the City will find itself in, absent corrective measures. 

Increasing Burden by CalPERS 

As mentioned above and contained in the foregoing chart, pension costs are placing a significant burden on City resources. Unfortunately, there is little the City can do to control these costs as CalPERS sets the policies that impact the rates paid by the City.  Based on the most recent projections provided by CalPERS and as shown in figure one below, City wide annual pension costs are anticipated to rise $5.03 million above current costs by 2027. This represents a cumulative additional cost of $28.9 million dollars over the nine year period from 2018 through 2027.  The General Fund will shoulder the burden for 75% or $21.7 million of this increased cost. A survey of other Alameda County cities is showing a similar trend of pension costs increases ranging from 40% - 71% over the next 5 years; the Union City increase is 46%.

The expenditure estimates above are based on a variety of assumptions regarding salaries and benefits, services and supplies, capital outlay, debt and transfers out.  Revenue projections are derived from known revenue sources today coupled with growth projections based on the most recent available data. What is not known at this time (and therefore, not included above) is whether certain new revenue possibilities will come to fruition.

The City's Revenue Generation Strategy

The City Council approved a revenue generation strategy for 2018 that will, if successfully implemented, stabilize the City’s General Fund budget. This strategy involves placing three ballot measures before the voters in 2018: a June, 2018 Cannabis Gross Receipts Tax (up to 10%), a November, 2018 Charter City Ordinance, and a November, 2018 Charter Measure for an Enhanced Real Estate Transfer Tax (up to $10/1000).

Approval of both proposed revenue ballot measures is projected to generate $4-6 million per year starting in Fiscal Year 2019-20, and will be subject to some fluctuations due to market conditions.  An infusion of this amount of new revenue will stabilize the GF budget in FY2019-20 and eliminate GF budget deficits through FY 2021-22.

Proposition 218, California Constitution Article XIII C, sec. 2(b) requires a proposed general tax to be submitted to the voters at a general municipal election for members of the governing body of the City, except in cases of emergency declared by a unanimous vote of the governing body.  Based on the facts shown above, a fiscal emergency exists in the City and a declaration of fiscal emergency would allow the City of Union City to bring a tax measure before the public in a June election to immediately address the fiscal emergency.

Given the current deficit trend and absent additional resources, the City will be facing significant cuts in all City services in order to maintain fiscal viability. The declaration of a fiscal emergency is the first step in moving forward with presenting the citizens of Union City the opportunity to maintain the current level of expected services. 

There is no fiscal impact at this time from this action.  Unanimous approval of the proposed resolution will, however, allow the City's proposed 2018 revenue strategy to move forward, and assist in the stabilization of the City's GF budget for years to come.