Recommended FY 2022-2024 Operating Budget and CIP

City of Morgan Hill Fiscal Years 2022-2023 and 2023-2024 Operating and CIP Budgets

City Council Rich Constantine, Mayor District A: Gino Borgioli District B: Yvonne Martinez Beltran District C: Rene Spring District D: John K. McKay

Other Elected Official Caitlin Robinett Jachimowicz, City Treasurer

Leadership Team Christina Turner, City Manager Donald Larkin, City Attorney Edith Ramirez, Assistant City Manager for Development Services Shane Palsgrove, Chief of Police Chris Ghione, Public Services Director Spring Andrews, Information Technology Director Michelle Bigelow, City Clerk/Public Information Officer Jennifer Carman, Development Services Director Rebecca Garcia, Housing Director Michael Horta, Human Resources Director George Huang, Fire Chief Matt Mahood, Economic Development Director Dat Nguyen, Finance Director Jennifer Ponce, Emergency Services Coordinator

Budget Team Monica Delgado, Budget Manager

Hilary Holeman, Administrative Analyst Judy Viegas, Financial and Policy Analyst Barbara Voss, Financial 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, 2020. 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 2020-2021 to the City of Morgan Hill on January 31, 2021. 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

Recommended Budget Transmittal

9

Recommended Budget Message

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General Information 31 About the City ...................................................................................................................................... 32 Budget Overview ................................................................................................................................. 35 Planning Documents........................................................................................................................... 39 Fiscal Policies........................................................................................................................................ 42 Description of Funds .......................................................................................................................... 54 Glossary of Budget, Financial Terms, and Acronyms................................................................... 60 Resolution Adopting the City Budget .............................................................................................. 70 Appropriations Limit Calculation ..................................................................................................... 7 2 73 Combined Statement of Revenues, Expenditures and Changes in Fund Balance ................... 74 Fund Balance Projections................................................................................................................... 76 General Fund Balance Charts............................................................................................................ 82 Summary of Resources ....................................................................................................................... 83 Major Revenue Assumptions............................................................................................................. 84 Summary of Revenues and Transfers In ......................................................................................... 87 Expenditure Chart ............................................................................................................................... 90 Summary of Expenditures and Transfers Out ............................................................................... 91 Interfund Transfers ............................................................................................................................. 94 Internal Service Charges ..................................................................................................................... 96 Comparison of Municipalities .......................................................................................................... 98 99 Citywide Organization Chart ........................................................................................................... 100 Personnel Summary by Programs ................................................................................................... 101 Personnel Summary by Fund Type ................................................................................................ 103 Personnel Summary by Department .............................................................................................. 104 Personnel Summary by Position ..................................................................................................... 105 Personnel Detail by Program........................................................................................................... 107 History of FTE Count ...................................................................................................................... 114 History of PERS Rate Employer Contribution............................................................................ 115 History of Health Benefit Costs...................................................................................................... 116 Budget Summary Personnel

City Council

117

City Manager

123

City Attorney

129

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Table of Contents

Administrative Services 135 Human Resources.............................................................................................................................. 138 Council Services and Records Management ................................................................................ 142 Elections.............................................................................................................................................. 146 Finance ................................................................................................................................................ 148 Utility Billing....................................................................................................................................... 151 158 Building Maintenance Community and Cultural Center............................................................. 161 Building Maintenance Aquatics Center.......................................................................................... 163 Building Maintenance Centennial Recreation Center.................................................................. 165 Downtown Maintenance .................................................................................................................. 167 Street Maintenance ............................................................................................................................ 169 Parks and Open Space Maintenance .............................................................................................. 172 Lighting and Landscape District ..................................................................................................... 174 Community Facilities District .......................................................................................................... 177 Environmental Services 179 Stormwater Pollution Prevention ................................................................................................... 183 Countywide Solid Waste Services ................................................................................................... 188 Water Conservation........................................................................................................................... 190 Engineering Services 193 Infrastructure Planning, Operational Support, and Traffic Congestion Management .......... 194 Land Development Engineering..................................................................................................... 197 Capital Project Implementation ...................................................................................................... 201 Utilities 205 Wastewater Operations..................................................................................................................... 206 Water Operations............................................................................................................................... 211 Recreation and Community Services 215 Membership and Program Services ................................................................................................ 216 Facility Rentals ................................................................................................................................... 220 Innovative Transit ............................................................................................................................. 223 Community Services.......................................................................................................................... 225 235 Police Administration ....................................................................................................................... 238 Police Field Operations .................................................................................................................... 243 Police Support Services .................................................................................................................... 247 Office of Emergency Services ......................................................................................................... 250 Police Special Operations................................................................................................................. 253 Police Dispatch S ervices ................................................................................................................... 257 Public Services 153 Maintenance Services Fire 229 Police

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Development Services 261 Code Compliance .............................................................................................................................. 265 Economic Development .................................................................................................................. 268 Planning............................................................................................................................................... 274 Building................................................................................................................................................ 277 Long Range Planning ........................................................................................................................ 280 Housing Programs ............................................................................................................................. 285 293 Cable Services..................................................................................................................................... 294 Employee Assistance......................................................................................................................... 296 Information Services ......................................................................................................................... 298 GIS ....................................................................................................................................................... 302 Communications and Engagement................................................................................................. 306 Building Maintenance - Police Station ........................................................................................... 312 Building Maintenance - Civic Center Campus.............................................................................. 313 Building Maintenance - Corporation Yard.................................................................................... 314 Unemployment Insurance................................................................................................................ 315 Workers’ Compensation ................................................................................................................... 317 Equipment Replacement .................................................................................................................. 320 Employee Benefits Fund.................................................................................................................. 322 General Liability Insurance .............................................................................................................. 324 327 City Council 2022-2023 Priorities, Goals, and Strategies ........................................................... 328 General Fund Six-Year Projections ................................................................................................ 332 Public Employees Retirement System (PERS) ............................................................................. 335 ISF/Miscellaneous Programs Special Analysis

Capital Improvement Program

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Budget Document Guide

This budget document contains the City of Morgan Hill’s Recommended Budget for Fiscal Years 2022-23 and 2023-24. 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, 2021, and estimated ending fund balance on June 30, 2022, plus projected revenues, expenditures, transfers in, transfers out and projected ending fund balances at June 30, 2023 and June 30, 2024. Summaries are prepared for Revenues and Expenditures for all funds. These summaries include prior year’s actual, FY 2021 -22 amended and year-end projections, and FY 2022-23 and 2023-24 recommended budget figures.

The Personnel section shows Personnel levels by program (division). 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: APRIL 29, 2022

Subject: FISCAL YEARS 2022-2024 BUDGET TRANSMITTAL

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

The Recommended Budget that is being submitted today reflects the City’s financial condition which improved markedly from the very dire outlook forecasted in the last budget. The fast recovery from the impact of the COVID- 19 pandemic and continued strong growth of the City’s existing tax base have afforded the City to not only maintain its existing services levels but to enhance City services that are considered priorities by the Council and the Community. With all of the economic booms we have experienced in the past year, comes the uncertainties that could easily alter the economic growth trajectory of our forecast and assumptions. At the top of the list is inflation, which is currently at a four-decade high. The higher inflation can be attributed to the strong consumer demand, supply chain issues, and the war on Ukraine by Russia resulting in higher energy and commodity prices. This high inflation is impacting the City’s growth in tax revenue, which otherwise could have gone towards enhancing the City’s services even further. As most of the City’s major tax revenue categories continue to improve, Recreation Services and Transient Occupancy Tax (TOT), two of the City’s General Fund major revenue sources, do not anticipate to fully recover until Fiscal Year (FY) 24-25. This, coupled with the higher cost to provide services and the loss of revenue from the City’s Residential Development Control System (RDCS) due to Senate Bill 330 (SB 330), which went into effect January 1, 2020, has limited the City’s ability to fully address the General Fund’s unfunded needs. The City will continue to work with the Community to look for ways to address the remaining General Fund’s unfunded needs. With that said, the Recommended Operating Budget includes service enhancements for certain areas that have been identified as priorities by the Council, totaling about $4.7 million for the next two years for all funds, including approximately $0.8 million to replace outdated Computer-Aided Dispatch/Records Management System for the Police Department and new Breathing Apparatus and Defibrillators for the Fire Department in the current year budget. Most of the proposed enhancements, 73% of the total or $3.5 million, are aimed to address the ongoing priority of “Enhancing Public Safety,” including additional staffing and equipment for the Police Department and to begin funding for staffing the City’s Third Fire Station. About $0.7 million or 15% of the total is to further the ongoing priority of “Fostering a Positive Organizational Culture,” including adjustments for certain classifications to keep the City competitive with surrounding jurisdictions, as well as creating new classifications such as a new Utility Worker classification to address retention and recruitment issues that have been impacting the City. Included in the proposed list of enhancements is additional funding of about $80,000 annually (from $120,000 to $200,000) for

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Community Promotions to support community organizations through fee waivers, event sponsorships, and program support.

The table below summarizes the Enhancements for All Funds by priorities in the Recommended Operating Budget:

SUMMARY OF SERVICE ENHANCEMENTS FOR ALL FUNDS BY TYPE

PRIORITIES ($ million)

2022

2023

2024

Total

Enhancing Public Safety

$

0.75

$

1.29 0.07

$

1.41 0.07

$

3.45 0.14

Maintaining and Enhancing Infrastructure Protecting the Environment and Preserving Open Space and Agricultural Land Supporting our Youth, Seniors, and Entire Community Fostering a Positive Organizational Culture

-

-

0.14

0.15

0.29

- -

0.08 0.34 1.92

0.08 0.35 2.06

0.16 0.69 4.73

TOTAL (All Funds)

$

0.75

$

$

$

The total Recommended Budget is $204.2 million in FY 22-23 and $167.7 million in FY 23-24. FY 22-23 budget includes $52.5 million for General Fund expenditures, $58.5 million for CIP, and $93.2 million for non-General Fund expenditures. For FY 23-24, the Recommended Budget includes $54.1 million for General Fund expenditures, $39.8 million for CIP, and $73.8 million for non-General Fund expenditures. The budget documents are the product of many teammates working in a collaborative manner to strive to attain the Council’s and Community’s priorities in a cost -effective manner while maintaining the City’s goal of fiscal sustainability. 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.

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 29, 2022

Subject: Recommended Fiscal Years 2022-23 (FY 22-23) and 2023-24 (FY 23-24) Operating and Fiscal Years 2022-23 through 2027-28 Capital Improvement Program Budgets

Honorable Mayor and City Council Members,

On behalf of our Morgan Hill teammates, it is my privilege to present to you and the Community the Recommended Fiscal Years 2022-23 and 2023-24 Operating and Fiscal Years 2022-23 through 2027-28 Capital Improvement Program (CIP) Budgets. The budget documents are the product of many teammates working in a collaborative manner to align resources 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 commenced in January with the City Council adopting their 2022 priorities, goals, and strategies for the organization and community. The Council’s ongoing priorities include:

◦

Enhancing Public Safety

◦ Protecting the Environment and Preserving Open Space and Agricultural Land ◦ Maintaining and Enhancing Infrastructure ◦ Supporting Our Youth, Seniors, and Entire Community ◦ Fostering a Positive Organizational Culture ◦ Preserving and Cultivating Public Trust ◦ Preserving Our Community History ◦ Enhancing Diversity and Inclusiveness ◦ Advancing Regional Initiatives

BUDGET MESSAGE 11

In addition to the City Council’s ongoing priorities, five specific strategic priorities were recognized by the City Council that will require significant resources:

◦ ◦

Fiscal Sustainability

Affordable Housing and Homlessness

◦ Community Outreach, Engagement, and Messaging ◦ Economic Development ◦ Transportation

We continue to educate and engage the Community regarding City services, funding, and priorities. Over the past two years, the City has held various townhall meetings with the intent to engage, build trust, and educate the Community on the services the City provides and how those services are funded as well as keeping the Community abreast of legislation and bills that may have an impact on the Community. City staff have engaged the Community on various topics including budget, economic development, housing, infrastructure, water conservation, redistricting, and public safety. As the City’s financial condition continues to improve, the proposed budget strives to attain the Council’s and Community’s priorities in a cost - effective manner while maintaining the City’s goal of fiscal sustainability. The total Recommended Budget is $204.2 million in FY 22-23 and $167.7 million in FY 23-24. FY 22-23 budget includes $52.5 million for General Fund expenditures, $58.5 million for CIP, and $93.2 million for non-General Fund expenditures. For FY 23-24, the recommended budget includes $54.1 million for General Fund expenditures, $39.8 million for CIP, and $73.8 million for non- General Fund expenditures. Details of each Division’s budget, project description and funding requirements can be found in the accompanying operating departments and Capital Improvement Program sections of this document.

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While the City’s financial condition improved markedly from the very dire outlook forecast last budget cycle, certain areas such as Recreation Services and Transient Occupancy Tax (TOT) remain severely impacted by the pandemic. The overall improvement is mainly due to certain major revenue categories which either did not experience the major adverse impact anticipated from the pandemic, such as property tax, or which rebounded more quickly than projected, such as sales tax revenue. This may be credited to the extraordinary fiscal and monetary responses to the pandemic by the U.S. government and the Federal Reserve. The U.S. government responded to the crisis by enacting several policies to provide fiscal stimulus to the economy and relief to those affected by this global disaster. The Federal Reserve also took a series of substantial monetary stimulus measures to complement the fiscal stimulus. The stimulus measures taken by the Federal Reserve include lowering its benchmark interest rate to 0.00% - 0.25%, directly buying assets like the U.S. Treasuries and mortgage-backed securities. In addition to direct asset purchases, the Federal Reserve also set up several new lending programs to support businesses. Throughout the pandemic, the U.S. government passed several stimulus and relief packages, two of which provided direct fiscal funding to the City. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020, appropriated $2.3 trillion for many different efforts including $150 billion in grants to state and local governments. The City received approximately $0.6 million of State pass-through funding in FY 20-21. The American Rescue Plan Act (ARPA), which President Biden signed into law on March 11, 2021, appropriated $1.9 trillion of stimulus and relief proposals with $350 billion of the total funding going to state and local governments. The City has been allocated approximately $11.0 million, to be received over two tranches, with the first tranche of about $5.5 million received in July 2021 and which was recognized as revenue in FY 20-21. The second tranche is expected to be disbursed in July 2022. The U.S. economy contracted at a record average annualized rate of 19.2% from its peak in the fourth quarter of 2019 through the second quarter of 2020. The pace of recovery from the pandemic downturn, the deepest going back to 1947, was equally stunning. The gross domestic product (GDP) rebounded at a historic average rate of 18.3% between the second and fourth quarter of 2020. The U.S. economy topped pre-pandemic level with GDP surging at a 6.7% pace for the second quarter in 2021. In the last three months of 2021, the U.S. economy expanded an annualized rate of 6.9%. While growth has likely peaked in the final months of 2021, economists continue to forecast the U.S. growth rate to be higher than average for this year and next. According to Beacon Economics, the U.S. real GDP growth is expected to be at about 6.0% for FY 21-22 and the unemployment rate to be lowered to 4.4% by June 2022. Morgan Hill is expected

BUDGET MESSAGE 13

to continue to benefit from the strong economy with relatively low unemployment and high-paying jobs, resulting in high property tax growth and associated revenues. Morgan Hill’s peak unemployment rate during the pandemic was in April 2020 at 13.6%, and currently stands at 3.5% as of February 2022, better than the state-wide unemployment rate of 5.3% but higher than the County of Santa Clara rate of 3.0%. The fiscal and monetary responses to the pandemic by the U.S. government and the Federal Reserve might have averted the U.S. economy from the catastrophic downturn, but the subsequent consequences, chief among them is inflation, might be playing before us. The latest inflation rate in the U.S. accelerated to 8.5% in March of 2022, the highest since December of 1981. The high inflation can be attributed to strong consumer demand, supply chain issues, and the war on Ukraine by Russia resulting in higher energy and commodity prices. This high inflation is taking a large portion from the City’s growth in tax revenue, which otherwise could have gone toward enhancing the City’s services further. To combat this inflation, the Federal Reserve recalibrated its monetary policy by increasing its benchmark interest rate by 0.25% at its last meeting with further and more aggressive hikes to follow, including ending its asset-purchase program that has provided liquidity to the bond markets. As the Federal Reserve shifts its stance to combat the inflation, economists have warned that the Federal Reserve’s aggressive efforts could tip the economy into recession or worse, the U.S. economy risks a stagflation disaster with inflation remaining elevated and no growth in the economy.

14 BUDGET MESSAGE

The chart below shows the Consumer Price Index for All Urban Consumers (CPI-U) since March 1982 to March of 2022:

Historical CPI

350.0

9.0%

8.0%

300.0

7.0%

Hundreds

250.0

6.0%

5.0%

200.0

4.0%

150.0

3.0%

2.0%

100.0

1.0%

50.0

0.0%

0.0

-1.0%

Index 1982

Annual % Change

Source: U.S. Bureau of Labor Statistics

With that said, the fast recovery from the impact of the COVID-19 pandemic and continued strong growth of the City’s existing tax base have afforded the City not only to maintain its current service levels but to enhance services in some areas. The Recommended Operating Budget includes service enhancements for certain areas that have been identified as priorities by the Council, totaling about $4.7 million for the next two years for all funds, including approximately $0.8 million to replace outdated Computer-Aided Dispatch/Records Management System for the Police Department and new Breathing Apparatus and Defibrillators for the Fire Department in the current year budget. Most of the proposed enhancements, 73% of the total or $3.5 million, are aimed to address the ongoing priority of “Enhancing Public Safety”, including additional staffing and equipment for the Police Department and to begin funding for staffing the City’s Third Fire Station. About $0.7 million or 15% of the total is to further the ongoing priority of “Fostering a Positive Organizational Culture”, including adjustments for certain classifications to keep the City competitive with surrounding jurisdictions, as well as creating new classifications such as a new Utility Worker classification to address retention and recruitment issues that have been impacting the City. Included in the proposed list of enhancements is additional funding of about $80,000 annually (from $120,000 to $200,000) for Community Promotions to support community organizations through fee waivers, event sponsorships, and program support.

BUDGET MESSAGE 15

The table below itemizes the Enhancements for All Funds by priorities included in the Recommended Operating Budget: :

LIST OF SERVICE ENHANCEMENTS FOR ALL FUNDS BY TYPE

PRIORITIES

2022

2023

2024

TOTAL

Enhancing Public Safety 1.0 FTE Public Safety Dispatcher partially offset from reduction in OT Reclassify Senior Police Records Specialist to Supervisor

$

-

$

85,000

$

87,550

$

172,550

6,750

6,953

13,703 124,845

Add 0.5 FTE Records Specialist

61,500

63,345

Add 1.0 FTE Community Services Officer partially offset from reduction of PT Add 1.0 FTE Multi-Services Officer

85,000 142,600 63,000 107,000 75,000

87,550 146,878

172,550 289,478 63,000 160,000 135,000

New Vehicle for new MSO

Axon Bundle

53,000 60,000

Additional Flock Cameras

Computer-Aided Dispatch/Records Management System Additional Squad and Third Fire Station Breathing appratus and defibrilators New 1.0 FTE Code Compliance Officer

400,000

400,000

519,691

750,675

1,270,366

350,000

350,000 294,100

144,877

149,223

Maintaining and Enhancing Infrastructure VTA Lot Maintenance

20,000

20,000

40,000

Infrastructure Planning and Traffic Congestion Management

50,000

50,000

100,000

Protecting the Environment and Preserving Open Space and Agricultural Land Add 1.0 FTE Environmental Programs Coordinator 142,300 152,600

294,900

Supporting our Youth, Seniors, and Entire Community Community Promotions

80,000

80,000

160,000

Fostering a Positive Organizational Culture

Reclassify certain classifications/ positions to be more equitable and to remain competitive

336,630

350,610

687,240

TOTAL (All Funds)

$

750,000

1,919,348 $

2,058,384 $

$

4,727,732

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General Fund

The General Fund (GF) is the City's most visible fund because it accounts for City services that residents relate to including police, fire, recreation services, street maintenance, park maintenance, municipal governance, and administrative services. In the Recommended FY 22-24 Biennial Budget, approximately 76% of General Fund revenue is 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. Property Tax Property tax revenue for FY 22-23 and FY 23-24 is $17.4 million and $18.0 million, respectively. While the pandemic is still having some negative impacts to the City’s major revenue categories, so far property tax seems to have escaped the financial hit from the pandemic albeit demonstrating a slower growth rate. On July 1, 2021, the County of Santa Clara Assessor’s Office released the assessment roll close for FY 21-22. The assessment roll for the County grew 4.6% for FY 21-22 versus 6.87% for the prior year. This “slower” growth still exceeds expectations mainly due to strong residential growth as well as limited impact to the commercial properties from the pandemic. The City of Morgan Hill’s assessment roll for FY 21 -22 grew 5.75% versus 6.12% for the prior year. Though showing lower growth than the prior year, the City’s growth is the 2nd highest in the County, behind only Mountain View of 8.06% which is mainly due to the construction of Google’s new campus in Bayview, and it is also much better than budget predictions of no growth for the year. The City’s total net assessed value for FY 21 -22 is about $11.5 billion, increased by about $625 million from the prior year total net assessed value of about $10.9 billion. The chart below compares the City’s total net assessed value of residential and non -residential properties to the County-wide for FY 20-21. The percentage of the net assessed value of non residential properties in Morgan Hill has been consistently below the County of Santa Clara average. General Fund Revenue

BUDGET MESSAGE 17

Assessed Value by Type

18%

27%

82%

73%

Morgan Hill

County-wide

Residential

Non-residential

Source: County of Santa Clara

For FY 22-23, staff anticipates a property tax growth rate of about 7% and returning to a more normal growth rate of about 4% starting in FY 23-24. This normal growth rate includes the limit on the increase of property tax by Proposition 13, which is the lower of 2% or the California Consumer Price Index (CPI), as well as property transfers and new housing units adding to the assessment value. Sales Tax The sales tax revenue for the FY 22-23 budget is expected to remain flat compared to FY 21-22 level as most, if not all, pent-up demand has been resolved, fuel prices stabilize, and continued supply chain and raw material interruptions could disrupt some sales, especially with the auto sector which makes up about 23% of the City’s sales tax revenue. The chart below illustrates the City’s projected sales tax revenue by major industry group for FY 22 -23. Total amount of sales tax revenue, before any tax rebates, in FY 22-23 is projected to be about $12.5 million. Sales tax revenue generated from most industry groups, except Restaurants, State and County Pools, and Autos and Transportation is projected to decrease from the current FY 21-22 amounts.

18 BUDGET MESSAGE

Projected FY 22-23 Sales Tax by Industry Group (Amount in Millions)

Building and Construction; $1.2 ; 9%

Foods and Drugs; $0.5 ; 4%

Autos and Transportation; $2.9 ; 23%

Business and Industry; $1.1 ; 9%

Restaurants and Hotels; $1.5 ; 12%

Fuels and Service Stations; $1.3 ; 11%

State and County Pools; $2.6 ; 20%

General and Consumer Goods; $1.5 ; 12%

Source: HdL

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.

BUDGET MESSAGE 19

Allocation of Sales Tax Rate (Current Sales Tax Rate 9.125%)

VTA 2016 Measure B 0.50%

County Measure A 0.125%

VTA 2008 Measure B 0.125%

Caltrain Measure RR 0.125%

VTA 2000 Measure A 0.50%

1976 Transit 0.50%

Local Transportation Fund 0.25%

City of MH 1.0%

State 6.0%

14% County

3% Other

45% School K-12

16% ERAF

6% Comm. Col lege

10% Ci ty of MH

6% Special District

On the per capita basis, Morgan Hill has the lowest discretionary revenue per capita. Discretionary tax revenue includes Property tax, Sales Tax, Transient Occupancy Tax (TOT), Business License Tax, and Utility Users Tax (not applicable in Morgan Hill). Seven of the 15 cities in the County of Santa Clara collect Utility User Tax. The chart below shows the actual Per Capita Discretionary Tax Revenue for Morgan Hill compared to other cities in the County for FY 20-21.

Per Capita Discretionary Tax Revenue

$1,000 $1,200 $1,400 $1,600 $1,800 $2,000

$- $200 $400 $600 $800

* Includes FY 21-22 property tax from the Santa Clara County Fire District ** FY 18-19 data

20 BUDGET MESSAGE

Recreation Revenue Recreation services revenue, the City’s third largest revenue source of the General Fund, has been the hardest hit categories due to the closure of facilities during the shelter-in-place orders as well as the prolonged in-door mask mandate. Staff has implemented steps to lessen the impacts to the City’s fiscal sustainability in general and recreation services. Steps have included the implementation of virtual recreation programs and classes, and working with the YMCA to amend the contract during the pandemic from a fixed cost plus profit sharing to reimbursement of actual cost of a reduced workforce plus small overhead. In addition, staff has deferred the hiring of Council approved additional full-time personnel until staff has seen a consistent increase in registration and services. Recreation services projected revenue for FY 22-23 and FY 23-24 is $6.1 million and $6.8 million, respectively. Staff does not expect recreation services revenue to return to the pre-pandemic levels until FY 24-25. Transient Occupancy Tax As for the City’s Transient Occupancy Tax (TOT), or hotel tax, based on the current occupancy estimates and the projection of occupancy and daily rates to remain below pre-pandemic levels for months to come, the City’s hotel tax collection will remain low compared to pre -pandemic levels. It is estimated that current year hotel tax revenue will come in at a reduced budget amount of $2.2 million. The estimates for FY 22-23 and FY 23-24 are $2.6 million and $2.8 million, respectively. The cumulative impact for the four fiscal years is approximately $4.8 million. Like recreation services revenue, staff does not expect TOT to return to the pre-pandemic levels until FY 24-25.

The table below summarizes the actual and projected revenue loss by major revenue categories through FY 22-23 from the Covid-19 pandemic:

Covid-19 Pandemic Financial Impact - Revenue Loss by Type

Revenue Type (Amount in Millions)

Actual FY 19-20

Actual FY 20-21

Estimated FY 21-22

Forecast FY 22-23

Total

Property Tax

$

(0.1) (0.6) (2.0) (0.8) (0.9) (4.4)

$

- -

$

- -

$

-

$

(0.1) (0.6)

Sales tax

Recreation

(4.6) (1.8) (0.9) (7.3)

(3.4) (1.3) (0.5) (5.2)

(2.4) (0.9)

(12.4)

Hotel Tax (TOT)

(4.8) (2.3)

Development Services

Total

$

$

$

$

(3.3)

$

(20.2)

General Fund – Expenditures

The General Fund expenditures budget is $52.5 million and $54.1 million for FY 22-23 and FY 23 24, respectively. FY 22-23 recommended salaries and benefits increase by 11% or $2.8 million from the FY 21-22 Amended Budget primarily due to the additional staffing to enhance public safety,

BUDGET MESSAGE 21

scheduled pay increases per the City’s Memorandums of Understanding (MOU) with the three bargaining groups, as well as increases in health benefits and pension costs. For FY 23-24, salaries and benefits increase by 4%, or $1.1 million, compared to the FY 22-23 Recommended amount, primarily due to the aforementioned reasons. The non-personnel budget for the General Fund in the Recommended Biennial Budget increased 3%, or $0.6 million, for FY 22-23 compared to the FY 21-22 Amended Budget mainly due to the cost inflation factor. The non-personnel budget for FY 23-24 increased by 2%, or $0.6 million, mainly due to the cost inflation factor, including expected increases in CalFire contract from the general salary and benefits increases. The City is fortunate that its General Fund Reserves have accumulated to a healthy level despite the negative financial impacts caused by the Covid-19 pandemic. This is a result of prior City Council actions including the implementation of various cost containment strategies, better than expected revenue growth, and one-time fiscal stimulus received from the federal government to assist state and local governments with the impact from the revenue loss caused by the pandemic. However, the projected higher cost to provide City services as a result of high inflation factor as well as staffing the Third Fire Station and additional staffing for Police will undoubtedly use up a large portion of general fund reserves. As currently projected, the General Fund reserve is expected to dip below the long-term goal of 25% of revenues in the final year of the six-year forecast, FY 27 -28. As adopted by the City Council, General Fund reserves shall never be depleted below a minimum level of 15% of revenues which shall be maintained as an ongoing reserve for emergencies. If reserves do, or are projected to fall below the 25 percent long-term goal at any time, then policy action must be taken no later than the next budget cycle. During FY 22-23 and 23-24, the City may need to develop strategies to address shortfalls projected in the final year of the Forecast. The Forecast is not a budget and does not include any proposed balancing solutions. 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% of all employee salaries will be paid by employees, to cover a portion of the increase in PERS employer costs. General Fund Reserves

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The chart below shows the General Fund Reserves Forecast as of this Recommended Budget compared to the forecast at the City Council Goal Setting Workshop in January 2022:

General Fund Reserves Forecast

60%

52%

47%

50%

53%

44%

51%

50%

42%

46%

40%

39%

30%

32%

26%

20%

20%

10%

0%

20-21 Actual

21-22 Amended

22-23 Rec

23-24 Rec

24-25 Forecast

25-26 Forecast

26-27 Forecast

27-28 Forecast

GF Six Year Forecast at Goal Setting

GF Six Year Forecast

Fund Balance Minimum Level 15% of Revenues

Fund Balance Goal 25% of Revenues

Development Services Fund

The Covid-19 global pandemic has had an adverse impact on development services related revenue. However, the impact was mostly due to the restrictions imposed by the public safety health order that was subsequently lifted. Development activities resumed in earnest to meet the growing demand. However, with costs continuing to outgrow the revenue, staff engaged a consultant to conduct an updated fee study of Planning and Land Development Engineering to update the fees which were last updated in 2017. The updated fees were approved by the Council and went into effect in March 2022. The fund is budgeted with revenue of $6.2 million and $6.3 million for FY 22-23 and FY 23-24, respectively. Even with updated fees, the fund is still anticipated to have an on-going annual deficit mainly because of certain activities that are not meant to be full cost recovery such as public counter/general information services, strategic initiatives, and special projects, as well as other

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subsidized services. These activities need to be supplemented by other funding sources, mainly the General Fund. The Recommended Budget reflects the support provided by the General Fund to the Development Services Fund by a reduced General Administrative charge back of approximately $0.4 million annually. This is in addition to an interfund loan of approximately $1.0 million in the current year. It is worth noting that the interfund loan of approximately $2.9 million was envisioned in the FY 20-21 and FY 21-22 budget. However, with higher revenue collection coupled with conservative spending, this fund did not need an interfund loan from the General Fund until now. The Water and Wastewater Utilities are enterprise funds that derive all of their operating revenue from customer charges. As a result of the January 2016 comprehensive rate studies, followed by the 2019 wastewater rate update, 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 current water rate adjustment is proceeding through the Proposition 218 process with the anticipation of Council approval of the new rates on June 1, 2022. The rate adjustments provide proper reserve levels in accordance with Council policy, continue meeting legally required debt coverage, and ensure sufficient funds are available for capital projects. The City’s Water revenue is forecast to increase from $15.2 million projected for current FY 21 -22 to $17.6 million in FY 22-23 and $19.8 million in FY 23-24. As mentioned previously, the City is currently going through the Proposition 218 process to increase the water rates for the next five years. The projected revenues for the Recommended Biennial Budget reflect the increase in water rates to meet the minimum reserve levels set by the Council, ensure sufficient funds are available for the much needed capital projects, keep pace with the expenditures, and to ensure the City’s water system integrity and reliability. On May 1, 2019, the Council approved the wastewater rate update which includes a five-year annual rates adjustment plan to address the significant shortage in funding for the legally required repairs and improvements to the existing system. With the approved rates plan, the wastewater fund operationally is forecasted to be able to maintain appropriate reserve levels, including rate stabilization and system replacement fund reserves, and fund much needed capital projects associated with the repair of the aging system. Other capital projects such as a second Relief Trunk Line to the Treatment Plant and Treatment Plant expansion are included in the six-year CIP and are expected to be funded by impact fees and through bonds funding. Capital Improvement Program (CIP) Water and Wastewater Funds Water Fund Wastewater Fund

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