Recommended FY 2022-2024 Operating Budget and CIP

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