FY 2018-19 and 2019-20 Adopted Operating and CIP Budget

Fiscal Years 2018-19 through 2019-20 Adopted Operating and CIP Budget

morganhill.ca.gov/budget

City of Morgan Hill Fiscal Years 2018-2019 and 2019-2020 Operating and CIP Budget

City Council Steve Tate, Mayor Rich Constantine, Mayor Pro Tem

Larry Carr, Council Member Rene Spring, Council Member Caitlin Robinett Jachimowicz, Council Member

Other Elected Officials David Clink, City Treasurer Irma Torrez, City Clerk

Leadership Team Christina Turner, City Manager Donald Larkin, City Attorney

Leslie Little, Assistant City Manager for Development Services Cindy Murphy, Assistant City Manager for Administrative Services Chris Ghione, Interim Deputy City Manager for Community Services and Engineering and Utilities

Jennifer Carman, Development Services Director Michelle Katsuyoshi, Human Resources Director Dat Nguyen, Finance Director Edith Ramirez, Economic Development Director David Swing, Chief of Police Maureen Tobin, Communications and Engagement Manager Derek Witmer, Fire Chief

Budget Team Monica Delgado, Budget Manager Hilary Holeman, Administrative Analyst Harjot Sangha, Accounting Manager Judy Viegas, Administrative Analyst Barbara Voss, Fiscal and Policy Analyst

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The Government Finance Officers Association of the United States and Canada (GFOA) presented a Distinguished Budget Presentation Award to the City of Morgan Hill, California for its biennial budget for the fiscal year beginning July 1, 2016. In order to receive this award, a governmental unit must publish a budget document that meets program criteria as a policy document, an operations guide, a financial plan, and a communication tool.

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The California Society of Municipal Finance Officers (CSMFO) presented a Certificate of Award for Excellence in Operating Budget for Fiscal Year 2016-2017 to the City of Morgan Hill on January 31, 2017. As a recipient of this award, the City has met the criteria established to achieve the Operating Budget—Excellence Award for budget development and presentation.

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Table of Contents

Adopted Budget Transmittal

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Recommended Budget Message

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General Information 33 About the City ....................................................................................................................................34 Budget Overview................................................................................................................................37 Planning Documents .........................................................................................................................41 Fiscal Policies ......................................................................................................................................44 Description of Funds.........................................................................................................................56 Glossary of Budget, Financial Terms, and Acronyms ..................................................................62 Resolution Adopting the City Budget .............................................................................................71 Appropriations Limit Calculation ....................................................................................................73 75 Combined Statement of Revenues, Expenditures and Changes in Fund Balance ...................76 Fund Balance Projections..................................................................................................................78 General Fund Balance Charts...........................................................................................................84 Summary of Resources ......................................................................................................................85 Major Revenue Assumptions............................................................................................................86 Summary of Revenues & Transfers In............................................................................................89 Expenditure Charts ............................................................................................................................92 Summary of Expenditures & Transfers Out ..................................................................................94 Interfund Transfers ............................................................................................................................97 Internal Service Charges....................................................................................................................99 Comparison of Municipalities ...................................................................................................... 101 103 Citywide Organization Chart ..........................................................................................................104 Personnel Summary by Programs ..................................................................................................105 Personnel Summary by Fund Type ...............................................................................................107 Personnel Summary by Department .............................................................................................108 Personnel Summary by Position ....................................................................................................109 Personnel Detail by Program..........................................................................................................111 History of FTE Count.....................................................................................................................119 History of PERS Rate Employer Contribution ...........................................................................120 History of Health Benefit Costs.....................................................................................................121 Budget Summary Personnel

City Council

123

City Manager

129

City Attorney

135

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Table of Contents

Administrative Services 141 Human Resources ............................................................................................................................144 Council Services and Records Management ...............................................................................148 Elections ............................................................................................................................................151 Finance...............................................................................................................................................153 Utility Billing .....................................................................................................................................156 159 Membership and Program Services ...............................................................................................164 Facility Services.................................................................................................................................169 Community Services ........................................................................................................................172 Cable Services ...................................................................................................................................175 Downtown Maintenance .................................................................................................................177 Environmental Programs ................................................................................................................179 Street Maintenance ...........................................................................................................................181 Lighting and Landscape District ....................................................................................................184 Community Facilities District.........................................................................................................187 Stormwater Pollution Prevention ..................................................................................................189 Park Maintenance .............................................................................................................................192 Agriculture Preservation and Open Space....................................................................................195 Water Conservation .........................................................................................................................197 207 Police Administration ......................................................................................................................209 Police Field Operations ...................................................................................................................213 Police Support Services ...................................................................................................................217 Office of Emergency Services ........................................................................................................220 Police Special Operations................................................................................................................223 Police Dispatch services ..................................................................................................................227 231 Code Compliance .............................................................................................................................235 Economic Development .................................................................................................................237 Planning .............................................................................................................................................241 Building ..............................................................................................................................................244 Land Development Engineering....................................................................................................247 Long Range Planning.......................................................................................................................250 Housing Programs............................................................................................................................254 Successor Agency .............................................................................................................................261 Community Services Fire 201 Police Development Services

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Table of Contents

Engineering and Utilities 265 Congestion Management.................................................................................................................268 Wastewater Operations ...................................................................................................................270 Water Operations .............................................................................................................................274 CIP Project Implementation...........................................................................................................278 283 Employee Assistance .......................................................................................................................284 Information Services........................................................................................................................286 GIS .....................................................................................................................................................289 Communications and Engagement................................................................................................292 Building Maintenance - Community and Cultural Center..........................................................295 Building Maintenance - Aquatics Center ......................................................................................297 Building Maintenance - Centennial Recreation Center...............................................................299 Building Maintenance - Police Station ..........................................................................................302 Building Maintenance - Civic Center Campus .............................................................................304 Building Maintenance - Corporation Yard ...................................................................................306 Unemployment Insurance...............................................................................................................308 Workers’ Compensation..................................................................................................................310 Equipment Replacement .................................................................................................................313 Employee Benefits Fund.................................................................................................................315 General Liability Insurance .............................................................................................................317 321 City Council 2018 Priorities, Goals, and Strategies .....................................................................322 General Fund Ten-Year Projections .............................................................................................324 Public Employees Retirement System (PERS) ............................................................................327 ISF/Miscellaneous Programs Special Analysis

Capital Improvement Program

Infrastructure Update Report April 2018

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Budget Document Guide

This budget document contains the City of Morgan Hill’s adopted budget for fiscal years 2018-19 and 2019-20. The biennial budget process commences in January with the City Council adopting its priorities, goals, and strategies for the organization and community. This priority based budget strategy ensures that the Council’s priorities are the guiding principles for developing the biennial operating and capital improvement budgets. Included are budgets for the City’s General Fund, Special Revenue, Capital Project, Debt Service, Enterprise, Internal Services, and Agency Funds. A complete copy of the Six-Year Capital Improvement Program (CIP) is also included. The Budget Message includes the City Manager’s letter of transmittal which focuses on the local economy, the budget as a plan for service delivery, and the goals of the team for implementation of service delivery. The General Information section contains a brief history of the City of Morgan Hill and an overview of the budget, including a budget timeline, a description of the legal level of control for budget appropriations, the basis of accounting and budgeting and budget administrative policies. A description of debt obligations, legal debt limits, planning documents, fiscal policies, funds and a glossary of terms are also included in this section as well a copy of the resolutions adopting the budget (with the GANN appropriation limit calculations). The Budget Summary section contains a summary of all budgeted funds. Each fund shows the actual beginning fund balances at July 1, 2017, and estimated ending fund balance on June 30, 2018, plus projected revenues, expenditures, transfers in, transfers out and projected ending fund balances at June 30, 2019 and June 30, 2020. Summaries are prepared for Revenues and Expenditures for all funds. These summaries include prior year’s actual, FY 2017-18 amended and year-end projections, and FY 2018-19 and 2019-20 adopted budget figures.

The Personnel section shows Personnel levels by program (department). A Citywide organization chart is provided in this section and in each departmental section where applicable.

Departmental budget sections also include a description of the department’s activities, current year accomplishments, goals for the coming fiscal year and financial comments. The sections for each department contain historical information on personnel and expenditures.

Included in the Special Analysis section are various reports regarding important issues facing the City of Morgan Hill.

A complete copy of the Six-Year Capital Improvement Program (CIP) is included under the heading of Capital Improvement Program . The six-year document represents a plan of improvements, a detailed description of each project and the available funding sources.

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City Manager’s Office 17575 Peak Avenue Morgan Hill, CA 95037 TEL: 408.779.7271 Fax: 408.779.1592 www.morganhilll.ca.gov

Date: July 1, 2018

Subject: Fiscal Year (FY) 2018-19 and 2019-20 Adopted Budget Transmittal

Honorable Mayor, Councilmembers, Community of Morgan Hill, and City Teammates,

On behalf of the Morgan Hill City Council, it is a privilege to present the Adopted FY 18-19 and FY 19-20 Biennial Operating Budget and FY 18-19 through FY 23-24 Capital Improvement Program Budget (CIP).

The total FY 18-19 and FY 19-20 budgets are $157.2 million and $135.5 million, respectively.

Since the City Manager’s recommended budget release on April 27, 2018, several changes have been made through the Council Workshop and Public Hearing discussion and direction from the City Council prior to adoption on June 6, 2018. These changes include:

Operating Budget •

Included an ongoing expense of $176,000 for the hiring of one School Resources Officer (SRO); offset by $60,000 in revenue from the Morgan Hill Unified School District for FY 19- 20 • Included a one-time expense of $78,000 in FY 19-20 for the purchase and build out of a police vehicle and other start-up costs for the additional Police Officer in FY 19-20. The expense will be funded by the General Fund initially but will be reimbursed by the Police Impact Fee Fund once the Police Impact Fee Fund has a sufficient balance. • Included an ongoing additional expense of $57,500 in janitorial services, which results in an increase in various operating departments to pay the additional internal service charge • Included an ongoing additional expense of $700 for Community Promotions funding as approved at the May 16, 2018 City Council meeting • Included $33,315 in FY 18-19 for new Fire Emergency Medical Services (EMS) mandates (one- time and 100% reimbursable) for hardware and services that support Comprehensive EMS Patient Care Data System implementation • Included $15,000 in FY 18-19 for a new mandate requiring the use of video laryngoscopes in the field by EMS First Responders with a $4,000 offsetting reimbursement (one-time) • Included $7,200 for the newly created Airline Noise Roundtable (ongoing) • Removed the Monterey Road Underpass Enhancement ($45,000 one-time and $5,000 annually). Staff will return to the City Council after further researching options for improvements and potential funding sources.

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• Using the savings from the Monterey Road Underpass Enhancement, included $10,000 for the South Valley Civic Theater to allow for scholarships for participation by all (one-time) and up to $25,000 for the Grange for the installation of a HVAC system (one-time). In exchange, the Grange has agreed to offer the City use of the facility and extend the term of the existing agreement for use of the Grange parking lot.

Capital Improvement Program • Reduced FY 18-19 gas tax revenues by $151,817 for recently received estimates

The budget documents are the product of many teammates working in a collaborative manner to align resources and service level enhancements that are consistent with the City Council’s and community’s priorities, while continuing to maintain fiscal responsibility. In implementing the Council’s budget, our team strives to advance our organizational values of teamwork, customer service, innovation, meeting challenges, and professional development. I want to acknowledge and thank all of them for their efforts to improve the community we serve. It is an honor to work with such a dedicated, community-focused team of professionals. The FY 18-19 and 19-20 Adopted Budgets represent the continued commitment of the City Council and all City teammates to preserve and improve the unique qualities of Morgan Hill. The budget provides guidance by which we move forward to enhance services and ensure long-term fiscal sustainability. As we continue to work on key initiatives, there are many signs that the Morgan Hill community will thrive. At the same time, the Council and community must continue to find ways to ensure that the community’s quality of life priorities are sustained so Morgan Hill remains a highly desirable place to live, work, play, and do business.

Sincerely,

Christina Turner City Manager

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City Manager’s Office 17575 Peak Avenue Morgan Hill, CA 95037 TEL: 408.779.7271 Fax: 408.779.1592 www.morganhilll.ca.gov

April 27, 2018

Subject: Recommended Fiscal Years 2018-19 and 2019-20 Operating and Fiscal Years 2018- 19 through 2023-24 Capital Improvement Program Budget

Honorable Mayor and City Council Members,

On behalf of my Morgan Hill teammates, it is a privilege to present to you and the community the Recommended Fiscal Years 2018-19 and 2019-20 Operating and Fiscal Years 2018-19 through 2023-24 Capital Improvement Program (CIP) Budget.

The budget documents are the product of many teammates working in a collaborative manner to align resources and propose service level enhancements that are consistent with the City Council’s and community’s priorities, while continuing to maintain fiscal responsibility. In implementing the Council’s budget, our team strives to advance our organizational values of teamwork, customer service, innovation, meeting challenges, and professional development. I want to acknowledge and thank all of them for their efforts to improve the community we serve. It is an honor to work with such a dedicated, community-focused team of professionals.

City Council Priorities and Goals

The budget process commences in January with the City Council adopting its priorities, goals, and strategies for the organization and community. The Council’s ongoing priorities include: • Enhancing Public Safety • Protecting the Environment • Maintaining Fiscal Responsibility • Supporting Our Youth, Seniors, and Entire Community • Fostering a Positive Organizational Culture • Preserving and Cultivating Public Trust • Preserving Our Cultural Heritage • Enhancing Diversity and Inclusiveness

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In addition to the City Council’s priorities, five specific strategic priorities for 2018 were recognized by the Council that will require significant resources: • Community Engagement and Messaging • Economic Development and Telecommunications • Financial Stewardship • Infrastructure • Regional Initiatives To assess the community’s priorities, in 2016 we engaged the community and residents identified the following quality of life service priorities: • Rapid response to 9-1-1 emergencies • Maintaining the number of police officers on neighborhood patrols • Maintaining crime prevention and investigation programs • Maintaining fire protection • Maintaining city streets and roads, and repairing potholes • Maintaining the long-term financial stability of the City The Council’s and community’s priorities are the guiding principles for developing the biennial operating budget and CIP with the goal of enhancing City services. The proposed budget strives to achieve this goal in a cost-effective manner with long-term financial sustainability as the main focus. This includes ensuring that revenues and expenditures remain in balance for ongoing expenditures and one-time expenditures are proposed as resources allow. The proposed budget also continues to take incremental steps to address the backlog of unfunded or deferred infrastructure and maintenance needs, as has been identified and presented to Council. With the Council’s and community’s priorities in mind, each operating department proposed enhancements, otherwise known as “decision packages”, which they believed would advance the priorities. The decision packages were categorized as ongoing (e.g., personnel) or one-time investments (e.g., capital improvement project) and evaluated to determine which would best meet the community’s needs within the City’s financial resources. Highlights of the resulting recommendations follow with more detailed explanations in the respective department narratives. We are fortunate that the City is currently in a period of steady revenue growth. Based on our latest forecast, we expect revenue growth to continue, but a slowdown in the economy is projected to occur during the 10-year forecast period. The City continues to benefit from the strong economy and high demand for development services, resulting in significant property tax growth. This includes growth in property taxes resulting from new development being added to the tax roll, In this upcoming budget cycle, we will continue to engage the community on its priorities and the best mechanism for funding those priorities.

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as well as increases in assessed value from changes in ownership. Other revenue sources are also being fueled by the growing economy and unemployment continues to be very low.

The proposed biennial budget continues to recommend aligning new ongoing service enhancements with ongoing funds for support. In addition, the budget recommends that one-time funds be strategically invested to meet one-time needs, such as addressing a portion of the City’s needed but unfunded infrastructure and maintenance needs, setting aside or prefunding obligations, and investing in technology to efficiently and effectively deliver a high level of service to the community. The proposed biennial budget assumes only the initial implementation of the Master Plan recommendations for public safety, and partially funding for streets, parks, buildings and facilities replacement. A new revenue source is required to help fund these needs and priorities of the community.

The biennial budget consists of two separate budgets that Council will consider for adoption. Prior to the completion of FY 18-19, Council will be provided an update on revenue assumptions, fund balances, and possible amendments to the FY 19-20 (or second year) budget.

The following outlines the decision packages that have been included in the proposed budget. It is important to realize that these are funded through a variety of sources and not just solely by the General Fund.

Enhancing Public Safety •

One new Traffic Officer in the Police Department will enable the Department to address the issues of increased traffic in our community and the rising number of traffic collisions - $200,000 (ongoing) • Purchase new Automated License Plate Reader (ALPR) to replace an older inoperable ALPR - $21,400 (one-time) • Funding for an Analytical and Spatial Crime and Statistics Dashboard to provide all Police Department teammates with a wide range of statistics at a glance - $15,000 one-time with ongoing maintenance of $10,000 • Increase funding for all officers and dispatchers training, including Suicide Prevention training – $64,400 for the first year and $30,000 on-going • Additional funding for the on-going costs associated with the sheltering of cats at the San Martin Animal Shelter to allow for unlimited services - $19,000 (ongoing) • Purchase equipment for Fire’s reserve engine for turn-key ready status - $167,000 (one-time) • Purchase electronic medicine dispensary and tracking equipment with double secure narcotic storage for inventory control and prevention of stealing or misusing - $41,000 (one-time)

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• Purchase of two advanced life support monitors and additional automated external defibrillators (AED) to increase capacity for Fire - $50,000 for FY 18-19 and $40,000 for FY 19 -20 • Purchase of three life size American Heart Association advanced cardiac and pediatric and infant mannequins; one adult, one child, and one infant, equipped with electronic feedback and testing capabilities for use in training on basic life support and advanced life support treatments and procedures - $25,000 (one-time) • Reroof, repair stucco, and paint exterior of the El Toro Station to ensure safety as their useful life has been exceeded - $180,000 (one-time)

Maintaining Fiscal Responsibility •

Continue to address the City's unfunded Other Post Employment Benefits (OPEB) liability by increasing contribution to the irrevocable trust so that the unfunded liability decreases over time - $100,000 annually

Supporting Youth, Seniors, and Entire Community • Contribute to the “Focus” Safe Parking Program project in collaboration with the County of Santa Clara, Morgan Hill Unified School District, Gilroy Compassion Center, and local faith- based community to provide respite and resources for local unsheltered families or persons living in cars or RVs - $30,000 (ongoing) • Contribute funding to the hiring of a dedicated South County Case Manager who will act as a “Housing Navigator” to serve as the main point of contact for individuals who have been targeted for housing interventions, but have not yet been accepted by a housing program - $50,000 (one-time) • Enhancing YMCA Partnership with additional group exercise classes, community building activities, upgrade card swipers to scanners, and adjust enrollment and daily fees - $61,000 each for the next two years Preserving and Cultivating Public Trust • Upgrade Building Manager position to Building Official to commensurate the current responsibility and activity - $20,000 (ongoing) • Replace the Fire/Building Inspector with Supervising Building Inspector to reflect the workload and responsibility - $10,000 (ongoing) • Increase funding for training for Development Services teammates and Planning Commissioners for professional development - $10,000 (ongoing)

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Economic Development and Telecommunications • Upgrade the Economic Development Coordinator to Economic Development Manager to lead key projects and programs that advance economic development, including Telecommunications - $11,000 (ongoing) • Implement Senate Bill 743, shifting from Level of Service (LOS) to Vehicle Miles Traveled (VMT) Standards as the measure of transportation impacts - $200,000 (one-time) • Enhance Monterey Road Underpass with landscaping - $45,000 (one-time and $5,000 ongoing) • Increase Economic Development Fellowship program funding to bring in high caliber temporary staff to assist in the implementation the Economic Blueprint - $20,000 (ongoing)

Fostering a Positive Organizational Culture •

Implement hourly wage increase to City temporary part-time positions to align with YMCA to maintain morale and equity and to continue to attract and retain a quality workforce - $53,000 (ongoing)

Infrastructure •

Increase the General Fund investment for street improvement projects - $750,000 for FY 19- 20 (Note that this decision package also addresses the Council’s ongoing priority of Maintaining Fiscal Responsibility) • Increase the General Fund investment for park maintenance to partially offset the loss of the Residential Development Control System (RDCS) funding - $150,000 ongoing (Note that this decision package also addresses the Council’s ongoing priority of Maintaining Fiscal Responsibility) • Increase funding to Building Replacement Fund for all City buildings and facilities to address unanticipated repairs and safeguard City’s assets - $250,000 ongoing (Note that this decision package also addresses the Council’s ongoing priority of Maintaining Fiscal Responsibility) • Purchase of a Hydro-Excavator Truck to safely locate and unearth underground utility lines, cables, and pipes allowing utility teammates to respond and repair water leaks more quickly – ($450,000 one-time and $50,000 ongoing)

Regional Initiatives • Hire an environmental review consultant to help City respond to the High Speed Rail’s Environmental Impact Report (EIR) - $100,000 (one-time)

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Budget Overview

The total Recommended Budget is $157.0 million in FY 18-19 and $135.1 million in FY 19-20, as shown below.

FY 2018-19

FY 2019-20

$157.0 million

$135.1 million

CAPITAL IMPROVEMENT PROGRAM $50.0 million

CAPITAL IMPROVEMENT PROGRAM $30.5 million

OPERATIONS $107.0 million

OPERATIONS $104.6 million

General Fund The General Fund (GF) is the City's most visible fund because it accounts for many City services that residents relate to including police, fire, recreation, street maintenance, municipal governance, and administrative services. In the Recommended FY 18-20 Biennial Budget, approximately 79% of General Fund revenue will be derived from four main sources: 1) Property Tax; 2) Sales Tax; 3) Recreation Revenue; and 4) Transient Occupancy Tax (TOT). The remaining revenue is generated by other charges for services, grants, and transfers from other funds.

General Fund Revenue Property Tax

Property tax revenue for FY 18-19 and FY 19-20 is $11.9 million and $12.0 million, respectively. Based on the most recent information provided by the County of Santa Clara, Property Tax is projected to increase by 4.1% in FY 18-19 and 5.2% in FY 19-20, when compared to the FY 17-18 mid-cycle revised estimate. Subsequent years are estimated to increase by 4%. The City’s property tax revenue will increase as newly built housing units are added to the Assessor’s roll, Proposition 8 temporary reductions granted by the County Assessor’s Office during the Great Recession are gradually restored, and property values increase.

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Sales Tax Sales tax revenue for FY 18-19 and FY 19-20 is $9.6 million and $10.1 million, respectively. FY 18- 19 revenue estimates are approximately 5% higher than the mid-cycle revised estimates as consumer confidence remains high. FY 19-20, sales tax revenue is expected to increase by 5% compared to FY 18-19, largely due to continued moderate economic growth forecasted for the region as well as new business growth. Based on the most recent information provided by the City’s sales tax consultant, Avenue Insights and Analytics, Sales Tax is projected to increase approximately 2% in subsequent years.

From a property and sales tax perspective, it is important to understand that the City only receives a small portion of the total taxes paid by residents, businesses, and visitors as depicted in the following images.

Allocation of Sales Tax Rate (CurrentSalesTax Rate 9%)

VTA 2016 Measure B 0.50%

VTA 2008 Measure B 0.125%

VTA 2000 Measure A 0.50%

County Measure A 0.125%

1976 Transit 0.50%

Local Transportation Fund 0.25%

City of MH 1.0%

State 6.0%

Recreation Revenue Recreation revenue budgeted for FY 18-19 and FY 19-20 is $7.4 million and $7.6 million, respectively. Recreation revenue from memberships, program registrations, and facility rentals continue to maintain their high levels. To ensure that the City has the resources to operate and maintain its recreation facilities, the City's membership rate strategy was to increase rates once every three years, most recently in January 2018. Due to the larger than anticipated drop in membership after the most recent increase, it is proposed that beginning January 2020, rates be increased every year by smaller increments. This would soften the impacts to members with the intent of decreasing the number of cancellations and increasing revenues year over year as the rate increases compound.

RECOMMENDED BUDGET MESSAGE 17

Transient Occupancy Tax TOT revenue for FY 18-19 and FY 19-20 is estimated at $2.8 million and $3.1 million, respectively. The City has experienced a historic high level of revenue from TOT due to a strong economy, the regional use of the City's Outdoor Sports Center and Aquatics Center, and a burgeoning tourism economy in the past few years. However, it appears this revenue category has plateaued and remained flat since FY 16-17. It is estimated that flattening will continue with any increase mainly from the anticipated opening of the 60-room boutique hotel in Downtown in FY 19-20. General Fund - Discretionary Expenditures From a spending perspective, the Council has discretion on how to spend approximately $29.1 million of the $40.1 million in General Fund revenue. This is because over $11.0 million in General Fund revenue is related to a specific service and can only be used to provide that service (e.g., recreation services). The Biennial Budget recommends that the Council allocate its discretionary funds as depicted in the following chart. As demonstrated, public safety continues to be the number one priority as 76% will be used for Police and Fire services. The remaining 24% of discretionary revenue is appropriated to pay for Economic Development, Finance, Human Resources, City Clerk, Recreation Services, Environmental Services, Streets, Parks, Public Facilities, Downtown Maintenance, City Attorney, and City Manager services.

Economic Development 3%

Recreation & Community Services 3%

Other * 5%

P ublic Safety 76%

Administration 7%

Street Maintenance 3%

Pavement Rehab CIP 3%

*Other includes: Downtown Maintenance, Park Maintenance, OPEB, Environmental Programs

General Fund – Expenditures The General Fund expense budget is $41.9 million and $42.5 million for FY 18-19 and FY 19-20, respectively. FY 18-19 salaries and benefits increased by 4% or $0.8 million from FY 17-18 year- end projection primarily due to scheduled pay increases per the City’s memorandums of understanding (MOU) with our three bargaining groups, pension increases, additional funding of

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one full-time equivalent (FTE), and non-benefitted part-time positions including meeting the State minimum wage increase requirement. For FY 19-20, salaries and benefits increased 4% or $0.9 million compared to the FY 18-19 recommended amount primarily due to the aforementioned reasons, but without the new FTE. The non-personnel budget for the General Fund in the Recommended Biennial Budget decreased 3% or $0.6 million for FY 18-19 compared to the FY 17 -18 year end projection mainly due to the absence of one-time funding items. The non-personnel budget for FY 19-20 decreased by just 2% or $0.3 million from FY 18-19 also mainly due to one- time funding items, partially offset by an overall cost inflation factor. General Fund Reserves As the General Fund Reserves have accumulated to a healthy level as a result of prior Council actions and better than expected revenue growth in the past few years, it is prudent to continue the Council’s tradition of using excess reserves to invest in the community. The FY 18-20 Biennial Budget recommends the use of General Fund reserves to increase the FY 19-20 General Fund investment for street improvement projects from $250,000 to $1,000,000 consistent with FY 18-19 funding. In addition, to ensure the future financial stability of the City operations, the Budget calls for a continued expedited repayment schedule of Silicon Valley Regional Interoperability Authority (SVRIA) costs for the infrastructure, consoles, and radios for the Fire and Police Departments. The initial cost of approximately $1,300,000, was funded by an advance from the Equipment Replacement fund. The costs should be fully repaid by FY 19-20. Increased funding to the OPEB Trust by an additional $100,000 annually is included in the Recommended Biennial Budget. With the proposed funding schedule, the City is estimated to have fully funded the OPEB liability in the 10-year forecast. Furthermore, the Recommended Biennial Budget includes additional funding of approximately $250,000 annually to the Building Replacement Fund for all City buildings and facilities to address unanticipated repairs and safeguard the City’s assets, and additional funding of $150,000 annually to the Park Maintenance Fund to partially address the expected reduction in Measure S voluntary payments from developers. With the aforementioned use of resources, the General Fund Reserve is projected to remain above Council’s reserve policy during the next nine years, but is projected to dip below the reserve policy in FY 27-28. 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 14% of Safety employee salaries and 7% of Miscellaneous employee salaries will be paid by employees by FY 24-25, to cover their portion of the shared increase in PERS costs.

RECOMMENDED BUDGET MESSAGE 19

The expenditures in the Recommended Biennial Budget are forecasted to exceed the projected revenues by $1.6 million in FY 18-19 and $0.8 million in FY 19-20 as the City continues to strategically invest accumulated fund balance in the community.

The General Fund’s fund balance is forecasted to decrease from $17.0 million at the conclusion of FY 17-18 to $11.8 million by the end of FY 27-28 primarily due to the aforementioned additional investments in the City’s infrastructure including streets, parks, and buildings, gradually increasing staffing levels in high priority areas, and addressing unfunded “Other Post-Employment Benefits” (OPEB) and California Public Employees' Retirement System (PERS) liabilities. The chart below illustrates the General Fund 10 Year Forecast reserve levels.

See “Funding Gap for Infrastructure and Services” below for a discussion of the City’s additional unfunded costs that are not included in the Recommended Budget.

General Fund 10 Year Forecast

50.0%

45.0%

41%

38%

40.0%

35%

34%

33%

35.0%

32%

31%

29%

30.0%

27%

25%

25.0%

23%

20.0%

15.0%

10.0%

5.0%

0.0%

YEP

Rec

Rec

Forecast

Forecast

Forecast

Forecast

Forecast

Forecast

Forecast

Forecast

17-18

18-19

19-20

20-21

21-22

22-23

23-24

24-25

25-26

26-27

27-28

General Fund 10 Year Forecast

Fund Balance Goal of 25% of Revenues

Fund Balance Minimum Level of 15% of Revenues

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Development Services Fund In late 2015, early 2016, a review of the City’s land development services (planning, building, and engineering) processes and service delivery methods was conducted by Zucker Systems. As part of the recommendations presented in the Zucker report, a restructuring of the former Community Development Department was affirmed by Council in August 2016, and resulted in the creation of the Development Services Department. The Development Services Department is the ultimate body responsible for land development services and review and includes the planning, building, and land development engineering team. Including the land development engineers in a focused development review team is one of the more significant changes and considered an important step in streamlining the process and ensuring internal and external accountability. Staff will provide an update on the implementation of the Zucker study in the coming months. The Development Services Fund is a special revenue fund that is entirely supported by fees paid from developers and residents for planning, building, and land development engineering services. This fund has experienced noticeable fund balance growth during the past several years due to the surge in building activity resulting from the backlog of housing allocations and a slow resurgence of commercial and industrial development. However, the fund has been tapping into its fund balance since FY 15-16. In November 2017, the Council adopted an updated development fee schedule to be phased in over a two year period beginning in January 2018, with the remaining 50% to be implemented the following year. Even with the updated user fees, the fund is projected to continue to have an annual structural deficit of approximately $450,000. This is primarily due to time spent on development activities that recover little to no cost, such as front counter services, responding to public inquiries, tree removal permits, use permits for non-profits or special projects. In addition, personnel costs, overhead, internal service charges, and costs for supplies, outside services, and technology increased at a rate higher than the assumed increase in development revenue. Furthermore, fees are based on average time for processing, the more complicated the case, the more time is spent assisting the applicant in the application process. This extra time is not incorporated into the cost recovery model. The fund is projected to deplete its fund balance and rely on support from another fund by FY 21-22 if all assumptions related to both revenue and expenses, as described below, hold true.

RECOMMENDED BUDGET MESSAGE 21

Community Development 10 Year Forecast

50%

43%

40%

30%

19%

20%

7%

10%

0% -8%

0%

YEP

Rec

Rec

Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast

17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28

-10%

-15%

-22%

-20%

-28%

-30%

-34%

-40%

-40%

-46%

-50%

Fund Balance Goal of 30% of Expenditures

Community Development 10 Year Forecast

The Development Services Fund is an economically sensitive revenue category and is directly linked to private development activity. Based on projections provided by the Development Services Department, construction activity is anticipated to continue at moderate levels for FY 18-19. Revenue is estimated at $4.9 million and $5.3 million for FY 18-19 and 19-20, respectively. The revenue is expected to remain at a stable level of approximately $6.0 million per year, with the CPI escalation in the ten-year forecast. The Development Services Fund expense budget is $5.9 million for FY 18-19 and $6.0 million for FY 19-20, an increase of approximately 7% from the mid-cycle revised estimate. The timing of fee increases, new projects unsupported by fees, continued implementation of Measure S, and the potential impact from the new affordability housing goals will require the City to revisit the fee structure periodically. There is available fund reserve to support the fund’s operating deficits in the two-year window, however, a General Fund support may be required in future years due to the aforementioned reasons. Continued implementation of the Zucker study will help determine whether this will be required.

22 RECOMMENDED BUDGET MESSAGE

Water and Wastewater Funds The Water and Wastewater Utilities are enterprise funds that derive all their operating revenue from customer charges. As a result of the January 2016 rate studies, the Council approved a five- year annual rates adjustment plan to ensure that public safety and health remain a priority, the integrity and reliability of these essential community assets can be maintained, and aging and inefficient infrastructure can be addressed. In addition, the approved rate adjustments provide proper reserve levels in accordance with Council policy and continue meeting legally required debt coverage. However, funding considerations associated with water and wastewater systems remain, in that the recently adopted Master Plans identify significant projects for the system, without a dedicated funding source. The City’s Water revenue is forecasted to steadily increase from $13.0 million in FY 17-18 to $14.6 million in FY 19-20. While the fund is expected to meet the reserve level, there is not available funding projected in the immediate term for significant construction and improvement of the City’s water system infrastructure projects. This requires that the City prioritize capital projects. Wastewater revenue is forecasted to increase from $10.1 million in FY 17-18 to $11.3 million in FY 19-20. The wastewater fund operationally is forecasted to be able to maintain appropriate reserve levels, including rate stabilization and system replacement fund reserves. However, as mentioned above, funding for much needed capital projects, including Infiltration and Inflow projects and a second Relief Trunk Line to the Treatment Plant must be prioritized. To address this funding gap, the cost of a rate study is included in the FY 18-19 recommended budget. The goal is to develop a financial plan and strategy that ensures system reliability and protects public health and safety, while keeping customer rates at a competitive level. Park Maintenance Fund Morgan Hill funds its park maintenance activities from the City’s Park Maintenance Fund. The revenue for this fund is derived from the RDCS process and represents "voluntary" payments that assist developers in gaining points for housing allocations. With the implementation of Measure S, the fund is expected to receive only a fraction of what it received under the previous allocation, if anything at all. When this fund was established more than 10 years ago, the goal was to "endow" park maintenance so that it would not rely on the General Fund. However, to make this a reality, the fund would need to grow to at least $30 million so that the annual interest would cover the cost of park maintenance expenses. Today, this fund has a balance of approximately $4.2 million. Since this laudable goal would take many years to achieve, the Council decided to pay for park maintenance directly from this fund and then augment its funding sources through a $200,000 annual contribution from the General Fund. The Recommended Biennial Budget and subsequent forecast years propose an increase in the transfer by an additional $150,000 annually. Even with the increased contribution from the General Fund, the Fund is expected to run out of money within the ten-year forecast. Additional funding will be recommended for transfer from the General Fund as financial conditions permit.

RECOMMENDED BUDGET MESSAGE 23