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August 26, 2009 > City addresses impact of state budget appropriations

City addresses impact of state budget appropriations

By Simon Wong

The state of California's decision to declare a fiscal emergency as part of its strategy to balance its budget paved the way to borrow $1.7M of Milpitas' Proposition 1A (2004) property taxes of $1.7M and $11.8M from the Redevelopment Agency this fiscal year (FY 2009-10).

The property-tax loan must be repaid within three years, with interest, before Sacramento can borrow 8 percent of the City's Prop.1A funds for a second time. This amounts to two loans in a decade.

Council voted unanimously (5-0) for the second of the following three options to offset the $1.7M borrowing.

First, cover the budget shortfall by borrowing from the General Fund undesignated reserve and reimburse the account when the State repays the loan. The estimated balance on this account is $14.7M as of June 30, 2009. The $13M residual balance equates to 19 percent of planned spending. This satisfies the requirement that reserves should contain a minimum of 15 percent of budgeted expenditures.

Second, internally borrow from the 2 percent Transient Occupancy Tax Fund which has $5.9M of available funds as of June 30, 2009. These monies are usually earmarked for library and performance arts.
Third, close the budget gap by borrowing $1M from the 2 percent Transient Occupancy Tax Fund and $0.7M from the Public Art Fund which contains $847,000 as of June 30, 2009.

Council and RDA also agreed to add an expenditure line item to the RDA budget to reflect the Education Revenue Augmentation Fund (ERAF) shift of $11.8M required by the State. This will reduce the RDA's undesignated reserve to $23.2M in FY 2009-10. The one-time take does not impact the housing portion of the RDA.

Councilman Armando Gomez sought clarification on the impact of the state budget, next fiscal year.

"We know for certain the State will take about $2.4M from the RDA. That's part of the agreed budget package and is in addition to the $11.8M take this fiscal year," stated Finance Director Emma Karlen. "At this point, we don't know what other actions the State might take. We're also looking at a structural deficit of $6M-$8M annually for the General Fund."

"The State Supreme Court ruled on a RDA ERAF shift about five months ago. This is a similar take," said City Manager Tom Williams.

"The California Redevelopment Association's lawyers have advised that the State has attempted to make findings that would avoid the problems uncovered by the Court five months ago. It's hard to tell if the State will be successful or not. The CRA believes it has a good chance of success but only time will tell, explained City Attorney Mike Ogaz.

"With the last ERAF shift, we withheld payment to the State five months ago based on the Court's decision. We don't have that opportunity this time. The State has indicated that if we don't make the payment, they will issue an order to cease our redevelopment activity. We must pay and if legal action is successful, we would be reimbursed the $11.8M," added Williams. "Right now, we must earmark that sum for the ERAF shift."

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