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March 4, 2009 > Union City not immune from economic woe

Union City not immune from economic woe

By Simon Wong

Following the loss of the 911 Emergency Communication fee in September 2008 and resultant budget cuts on September 23 and on October 14, 2008, Union City's financial position at the end of the second quarter of fiscal year (FY) 2008-09 is stable. As of December 31, 2008, the City's forecasted income and budgeted spending are within target.

However, this belies a deteriorating economic situation, both nationally and locally, and the City Council might have to implement further cuts in FY 2009-10 to offset declining revenues and to avoid potential cash flow problems.

The City's General Fund revenues are down 0.10 percent over the same period compared with last year (FY 2007-8). Whilst this may seem small, it is indicative of the general impact that the poor economy has had, and will continue to have, on the City's main sources of revenue. Property and Sales Taxes are of particular concern.

Property tax collections are 5.6 percent greater than at the same time in FY 2007-08 but are forecast to fall to 4 percent by the end of the current fiscal year, according to the County Assessor's Office. Original spending estimates were based on 5 percent growth. This equates to a shortfall of $180,000. Given the continuing weakness in the housing market, it is likely that even the County Assessor's estimate is optimistic. Delinquent property taxes are paid to the City once the foreclosed property has been sold. Non-payment of property taxes creates a cash flow problem rather than a revenue problem. Property taxes account for almost half of the General Fund's revenues.

There has been a 3.42 percent year-on-year increase in sales taxes. Overall, this revenue stream is tentatively projected to meet initial budget estimates of about $6.16 million but the City will not have a figure for Christmas sales tax receipts until the third quarter. Importantly, the festive season generates the largest amount of sales tax than any other period during the year. Growth of sales tax collections has been revised downwards to 8.77 percent for the current fiscal year due to audit adjustments but continuing weakness of the economy means that sales tax revenue is likely to be lower than originally forecast.

An increase in Disposal Franchise Fees and the servicing of new homes resulted in a 2.42 percent rise in Franchise Fees revenue. Collections by the end of the current fiscal year are expected to total $3.61 million which is slightly higher than original estimates.

The current credit crunch and weak housing market and less construction have led to falls in Current Service Charges revenue (9.78 percent decline) and Building & Miscellaneous Permits revenue (20.69 percent decline) compared to the same time in FY 2007-08. The City expects this trend to continue with revenue projections for the entire year amounting to $2.87 million and $1.81 million, respectively, for each income stream.

Although spending is expected to be within budget at the end of the current fiscal year it is projected to exceed revenues by 6.2 percent. Consequently, the General Fund balance will be $635,800 less than planned as of June 30, 2009. This is in addition to the loss of the 911 fee. There are adequate reserve funds to cover the shortfall at the end of this fiscal year assuming that revised forecasts are realistic and accurate and spending is within budget.

"This is a very precarious year. I would say that Union City is in a better position than most other cities. We shall draw down an additional $600,000 from the Reserve Fund which, fortunately, increased by $400,000 last year; in essence $200,000" summed up Richard Digre, Administrative Services Director.

"I'd like to remind the Council that when we lost the 911 fee, we made adjustments in this fiscal year [FY 2008-09] for that. Next year, we shall have to make those same adjustments again. That, coupled with the fact that our expenditures will exceed our revenues this year, means we shall have significant cuts next year. Even though we might appear to be in a good position at the end of the second quarter [of FY 2008-09], please be mindful of what lies ahead," added City Manager Larry Cheeves.

Whilst no action is required at this stage, City staff will continue to monitor revenues and expenditures and inform the Council of any material developments.

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