Recommended FY 2022-2024 Operating Budget and CIP

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totaling about $4.7 million for the next two years for all funds, including approximately $0.8 million to replace outdated Computer-Aided Dispatch/Records Management System for the Police Department and new Breathing Apparatus and Defibrillators for the Fire Department in the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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