Tom McGreal | Stratford Court
|Potential lost revenues over a three-month period in a shutdown.
As we shelter in place and take every precaution to protect ourselves from COVID-19, there’s a distinct feeling of being overwhelmed with new global developments each day. Fortunately, Governor Newsom has taken strict measures in California to flatten the curve of spread and prepare the health system for the significant increase in the number of people that will need care.
In this kind of whirlwind environment, it’s hard to step back and get any perspective. We should however, think about the financial implications of the current shutdown, so I reached for my copy of the City’s Fiscal year 2020 Budget. I decided to figure out what the financial impact to the City might look like over the next three months of a shutdown.
The City generates roughly $21 million in General Fund Revenues per year, which represents $5.3 million in Revenues each quarter, if we assume four equal quarters. At the top of the page is a list of potential lost revenues over a three-month period in a shutdown. These are “order of magnitude” numbers not intended to be precisely calculated as they ignore seasonal fluctuations. They also only represent my rough estimates, which assume all Transient Occupancy Tax (hotel tax) would be lost, 85% of Sales Tax and Measure Q Sales Tax would be lost and Service revenues such as Planning fees would be cut by 80% and Parking meter fees would be cut by 60% to name a few of the larger items. Remember, this is a measure of how significant it might look if the next three months find us all hunkered down at home not following normal patterns of activity.
The next and more important question is how will the City deal with this kind of revenue loss. There are four key areas for action that can help.
First, we can tighten the belt on operating expenses deferring all non-essential costs until things normalize. This can provide some relief but not much given the low percentage of discretionary costs.
Second and most importantly, we need to consider deferring certain Capital Improvement Projects and Special Projects, which probably can’t be worked on during a shutdown, but also represent the majority of discretionary spending.
Third, Measure Q sales tax are specifically designated for the Undergrounding and Shores Park projects. Lost Measure Q revenue should mean that those projects can only progress to the extent the Measure Q Reserves are sufficient to cover the costs.
Finally, the City maintains Contingency Reserves for just such unforeseen circumstances. A decision was made during the FY 2020 budget process to increase the Contingency Reserves to 20% or 73 days of operating costs. The Contingency Reserve has been somewhat depleted by the Durante bluff failure, but the mid-year position is still $2.4 million, which represents 15.3% or 56 days of operating costs.
In summary, the combination of actions to reduce costs and use of the Contingency Reserve can cover a three-month loss of revenues. Of course, we may have to brace for some pretty significant changes if this crisis persists for as long as some experts are suggesting. A prolonged health crisis would require a much different approach in terms of the delivery of City services, the resource requirements and a cost management plan that matches ongoing revenues.
Things are moving fast so we’ll have to assess developments as they occur.
Stay safe and healthy.