The Morro Bay City Council will review and approve a balanced Fiscal Year 2021/2022 City Budget later this month, a remarkable achievement considering that the world has been turned upside-down since March 2020 when the coronavirus pandemic caused massive changes to people’s every day lives and businesses and threatened City tax revenues.
Indeed, it’s a almost a miracle — boosted by the generosity of local voters — that the City has gotten through it, let alone be looking at financial recovery that will leave 2020 the Year of COVID, gladly in the rearview mirror.
“This budget is a true reflection of this Council and previous Council’s proactive and conservative approach to the City’s budget and finances over the years,” City Manager Scott Collins wrote in his budget summary letter. “The Council established reserves above the Government Finance Officers Association’s recommended minimum levels. This helped the City weather the unprecedented and unpredictable COVID-19 pandemic and recover from those impacts.”
It was that hefty reserve fund that made all the difference for a City that saw the pandemic response ordered by the Governor severely impact tourism both statewide and locally. At the start of the pandemic in March 2020, restaurants and motels were closed along with all other “non-essential” businesses that included retail gift shops, of which Morro Bay has many.
And while the closures lessened a bit before last summer (and continue to lessen as the pandemic wanes), that didn’t stop visitors from flocking to Morro Bay in droves. This was bolstered by a lingering heat wave and massive wildfires in the Sierras that drove people to the relatively clean air and somewhat cooler temps on the Coast. But there were few aspects of normal life that were not impacted by the pandemic.
“The public health crisis,” Collins said, “upended our economy, school and health care systems, our personal schedules…essentially every aspect of lives. We changed how we interacted with our friends, families, coworkers, and the general public. We kept our distance, wore masks, and sacrificed portions of our freedom. Many Morro Bay businesses closed their doors temporarily and re-opened with entirely new ways of receiving their customers.
It was a monumental shift in our daily lives. Together we took these painful, but necessary steps to help contain the virus and save lives.”
The pandemic triggered the City’s fiscal emergency plans that led to cuts in City staff and voluntary salary cuts by literally every City employee left on the payroll — from the City Manager on down the hierarchy — and other cost cutting measures that left the City on life-support to maintain critical services like police, fire and maintenance.
“I am extremely proud of how our City team stepped up to support the community,” Collins said, “while also contending with the financial fallout from the pandemic. Shortly after the local emergency was declared to fight the pandemic, City Council activated the City’s Short-Term Fiscal Emergency Plan in March 2020. The City took quick and drastic action to readjust revenue projections for the remainder of FY 2019/20 and curtail expenditures to ensure the continued solvency of the General Fund. Given the travel restrictions put in place by the Governor, the City’s consumer driven revenue sources — Transient Occupancy Tax (TOT) and sales tax — were heavily impacted. In order to make up for these rapidly declining revenues, on the expense side, City staff agreed to 5% pay cuts, the Council and Planning Commissioners waived their stipends, the City Attorney and Water Reclamation Facility (WRF) Program Manager reduced their fees, reserves were drawn down in the General Fund and Harbor Fund, training and travel budgets were restricted, capital projects were deferred, vacant positions were frozen and, unfortunately, many members of our City team were let go.”
Most of those over 70 layoffs were part time employees in the Recreation Department, which was essentially closed by the pandemic response, with all City public buildings closed to the public. They — community center, vet’s hall, City Hall and others — remain closed to the public.
Though it’s been nearly 1-1/2 years since the onset of the pandemic in the U.S., the City anticipates more, tough sledding until the pandemic is truly over.
“The FY 2020/21 budget was developed with the same challenging fiscal realities,” Collins said, “and every department and line of service was impacted by these hard decisions. The Council adopted the budget anticipating significantly reduced revenues and expenses and further use of emergency reserves. [The FY 2020/21 adopted budget included a reduction of expenditures of 18% compared to FY 2019/20 and a $1 million drawdown of General Fund reserves].”
The City and the citizens toughed it out through a tough year and appear to be coming out the other end in pretty good shape. Collins said he was amazed at the level of resiliency displayed.
“The past year tested each of our abilities, resolve and commitment to getting the job done,” he said. “That very resiliency that got us through the tough year has allowed us to the turn the corner financially.”
It also hasn’t hurt that the City had a couple of major developments regarding revenues. Last November, voters approved Measure E-20, a 1% local sales tax hike that the City predicts will bring in $2.2 million a year (in a normal economy); and the opening of two marijuana stores — one last October and the other just last month — expected to bring in as much as $475,000 a year through a special 5% tax on cannabis.
Measure E-20’s start was delayed from the normal Jan. 1 to April 1 as another concession to retailers to assist with the pandemic business and work limitations. So put on your shades, the City sees a bright future.
“Whereas last year we planned for drastically reduced revenues and expenses and large drawdowns of our reserves,” Collins said, “we now are rebounding to the point where we can strategically reinstate vacant positions, fund badly needed equipment replacements, reverse staff pay cuts and offer compensation increases, and begin the process of investing in our aging infrastructure.
“The rebound is dramatic, and it is only made possible by the resiliency of our community, City Council, and our City staff.”
FY 2021-22 will be the largest budget in town history. Interim Finance Director, Katie Lichtig’s, draft budget, which was released last week, reported the total budget — including the Water Reclamation Facility project spending — tops $121.7 million, an increase of $52.3 million over FY 2020-21.
Remove the WRF costs from the budget and the total is over $32.8M, and increase of $6.4M or 24% from 2020-21.
The WRF expenditures have been $42.9M in 2020/21 and 2021/22, for a total of $88.9M. The overall WRF project at this conjuncture is over $134M and counting (this figure so far does not include costs for the reclaimed water injection wells nor the tear down of the old treatment plant).
Breaking down the $32.8M overall budget, the general fund expenditures are listed at $14.2M a $1.2M or 9% increase from the previous budget. Most of this comes from increased salaries and increased benefits costs — from the CalPERS retirement costs, “Other Post-Employment Benefits” (OPEB) and health insurance increases, Collins explained.
General Fund revenues are predicted at $14.3M, a 24.5% increase over FY 2020/21. The City also charges its enterprise funds — harbor, water and sewer — for costs to provide things like payroll, legal advice, and administration — bringing the General Fund’s predicted revenues to $15.5M.
Collins said they predict the City quickly returning to normal. “The chief drivers of the rebound are the improved local economy and new sources of revenue,” he said. “With regard to traditional revenue sources, the local lodging industry has nearly fully recovered, bringing much needed increases in TOT revenues. Consumer spending has rebounded as well, improving our sales tax projections.”
The real estate market will also contribute. “The fire hot real estate market has also bumped up projections for property taxes,” Collins said. “Those three revenue sources account for 69% of the total General Fund revenues (including transfers in). Staff forecasts a return to pre-pandemic revenue levels in most those categories for FY 2021/22.”
(Property taxes could continue to rise in the near future, as the City’s General Plan Update contains several possible mid-sized subdivisions and housing projects that could someday be proposed but for now are simply zoned for potential development.)
And then there’s the Federal Government’s COVID relief monies — from the America Rescue Plan Act — totaling over $350 billion to States, Counties, Cities and tribal jurisdictions, of which the City expects to get $990,000 sometime this month with another $990,000 next June (2022). That alone could get the City’s reserves back to where it was.
“These funds,” Collins said, “will help the City both invest in needed equipment and rebuild emergency reserves.”
The City predicts revenues from its main tax sources as — $3.73M in property taxes; TOT at $3.57M; $2.16M in sales and use taxes; $1.3M in vehicle license fees and backfill property taxes; $1.2M in inter-fund transfers; $1.4M in charges for services; $426,000 in cannabis taxes; $600,000 in franchise fees to utilities; $400,000 in business license fees; and $499,000 in “use of money and property.”
As for expenses, employee costs — salaries and benefits — tops $10.48M or some 67.6% of the total; “Services” are at $3.1M; and “Supplies” account for $565,000. The new budget has 7.1% increases in salaries and benefits.
“The increase,” Collins said, “is due restoring the amount equivalent to the 8% to 5% salary concessions from all employees (citywide) through Dec. 31, 2020, except those members of the Morro Bay Firefighters Association (October through December 2020), restoring several defunded positions, restoring part-time hours for recreation programing to resume, and reflecting projected negotiated pay and benefits due to agreements with the City’s bargaining groups.”
The police department continues to have the largest departmental budget at $3.77M for 2021/22, some 26.6% of the general fund. City Administration (City Hall) is second at $3.13M (22.1%); Public Works is third at $2.69M (19%); with the fire department fourth at $2.55M (18%). Community Development is fifth at $1.05M (7.4%); with Recreation sixth at $817,000. City Council is at $159,000 or 1.1% of the budget.
As for employees, the City is increasing its crew from 88.1 “full time equivalent” (FTE) employees for 2020/21 to 98.1 in 2021/22.
The new hires will be one more in the administration — an administrative services analyst position “to support City goals and priorities.” They will not fill the tourism manager job that was lost with the advent of COVID-19 and the cessation of tourism promotions under the Tourism Business Improvement District (TBID). Indeed, the City is backing out of the promotions business all together and TBID is once again forming a non-profit organization to take over management of its nearly $1M a year budget (which has $1.8M is reserves right now).
City Hall also dropped an Account Clerk I spot but added an Office Assistant IV to work the front counter, so City Hall added one net position.
The Recreation Department will add 1.75 FTE people bringing back an admin technician eliminated due to COVID-19 cuts; and adding 1.75 FTE recreation supervisors. Some recreation programs are returning including the summertime Junior Lifeguards.
Community Development Department (planning) adds back one assistant planner position cut due to COVID-19.
The Police Department is bringing back one FTE officer position, the schools resource officer (SRO), which is being funded through the school district. The PD has 21.38 FTE people, with a chief, a commander, four sergeants, one administrative sergeant, four senior officers, five officers, one detective, and the SRO, for a total of 18 sworn police personnel.
The fire department is adding 1.75 positions for a total of 15 FTEs. So the FDs crew now has one chief (an interim position while the City searches for a new full time chief); a division chief/fire marshal; three captains; eight engineers (including one new position); one firefighter and one admin tech.
There are no proposed changes to the Harbor Department’s roster of six FTE. They continue to leave vacant an administrative technician position, unfunded since FY 2019/20.
Three positions were added in the Public Works Department. The Director’s job, which had been vacant for most of 2020, was recently filled and is funded, but they leave the maintenance supervisor job vacant. They restored one engineering technician job along with a maintenance worker II position for a total of 17 FTE in Public Works, up from 14 last year.
In the Utilities Department they created one new job — electrical and instrument technician, needed for the new WRF plant and funded for just half the year.
The City policy on new revenue sources is to treat them as 1-time windfalls for the first 2 years to establish that they will be ongoing. As for the projected $426,000 from the 5% cannabis tax the City expects to get annually, for now they are divvying it up among future needs — vehicle replacement, $50,000; fire department small vehicle fund, $50,000; maintenance vehicles, $100,000; information services internal service funds, $25,000; $78,000 in lump sum payments to employees; and $250,000 to restoring the general fund reserves.
The City Council held budget hearings May 25 and 26 and is scheduled to adopt the budget at its June 22 meeting. Readers who’d like to delve into the cornfield maze of the City’s budget, can download a copy of the draft budget from the City’s website, see: www.morrobayca.gov.
