City of Morgan Hill Fiscal Years 2020- 2022 Recommended Operating and CIP Budgets

and City Manager services. General Fund – Expenditures

The General Fund expense budget is $46.2 million and $47.7 million for FY 2020-21 and FY 2021- 22, respectively. FY 2020-21 salaries and benefits increased by 6 percent or $1.3 million from the FY 2019-20 Amended Budget primarily due to the transfer of the Park Maintenance division to the General Fund and scheduled pay increases per the City’s Memorandums of Understanding (MOU) with the three bargaining groups, health benefits, and pension increases. For FY 2021-22, salaries and benefits increase 5 percent or $1.3 million compared to the FY 2020-21 Recommended amount, primarily due to the aforementioned reasons. The non-personnel budget for the General Fund in the Recommended Biennial Budget increased 6 percent or $0.7 million for FY 2020-21 compared to the FY 2019-20 Amended Budget mainly due to the transfer of the Park Maintenance division. The non-personnel budget for FY 2021-22 increased by 4 percent or $0.5 million mainly due to the cost inflation factor, including CalFire contract. In the past, Morgan Hill primarily funded its park maintenance activities from the City’s Park Maintenance Fund (302) with some support from the General Fund. The revenue for this fund is derived from the Residential Development Control System (RDCS) process and represents voluntary contributions made by developers to compete in the housing allocation process. With the passage of the Housing Crisis Act of 2019 (SB 330) which suspended the voter approved RDCS, it also took away the major source of revenue that funded the City’s park maintenance. The lack of funding necessitates the division be transferred and funded by the General Fund moving forward. The remaining fund balance in Fund 302 will be transferred into the General Fund by set annual amounts, until the fund balance is depleted. General Fund Reserves The City is fortunate that its General Fund Reserves have accumulated to a healthy level. This is a result of prior City Council actions and better than expected revenue growth in the past few years. However, the projected drastically reduced revenues in the next few years will undoubtedly use up a large portion of general fund reserves. As currently projected, the general fund reserve is expected to dip below the 25 percent reserve level policy set by the Council in the second year of the Recommended biennial budget, FY 2021-22. It is worth noting that the projected General Fund Reserve level includes the continuing policy of employees sharing in the employer share of the PERS cost increases. It is assumed that this increase will continue, and approximately 6.12 percent of Safety employee salaries and 5.3 percent of Miscellaneous employee salaries will be paid by employees, to cover their portion of the shared increase in PERS employer costs in FY 2021-22.

RECOMMENDED BUDGET MESSAGE 17