City facing $2.6 million budget shortfall

City departments asked to collectively cut $1.5 million from next year's budget

The Sebastopol City Council’s budget committee has been working since mid-March to address a projected $2.6 million budget shortfall in next year’s budget.

The committee—which consists of Councilmembers Diana Rich and Stephen Zollman, City Manager Larry McLaughlin, Assistant City Manager Mary Gourley and Administrative Services Director Ana Kwong—has asked all city departments to cut their budgets for next year by a collective $1.5 million.

The $1.5 million Memo

On April 5, the Budget Committee sent a memo to all city department heads, informing them what their share of that $1.5 million cut would be.

The memo read as follows:

“The Budget Committee determined that each department should go back to their budget to find a collective savings of at least $1.5M. This is far short of the $2.6M needed to bring our projected expenditures into line with our projected revenue, but it’s the minimum amount needed for the City’s fiscal health. The cost savings will run from $14,000 for the smallest on up to $685,600 for the largest department. The reductions are based on the percentage of the total budget that each department represents. As an example, if a department’s expenditure request for 23-24 represents 10% of the total, then the department will be asked to absorb 10% of the $1.5M in reductions that are needed.”

Here’s the breakdown:

If department heads don’t make the cuts themselves, the memo said the Budget Committee would be forced to make the proposed cuts themselves.

According to the memo, “If the $1.5M in cuts is not achieved through this process, the Budget Committee will make additional cuts to reach the $1.5M goal. Our hope is that this won’t be necessary, but with the dire state of our budgetary situation, we’ll do what’s necessary for the fiscal health of the City.”

Bridging the gap

If the city is successful at cutting $1.5 million from next year’s budget, that will still leave a gap of $1.1 million  left to bridge.

Which begs the question: why not try to cut the whole $2.6 million?

“To try and cut the whole $2.6 million would have a devastating effect on services for our community,” Councilmember Diana Rich said. “From our perspective, $2.6 million in a revenue stream of approximately 10 million—that's a quarter of our money…and that would mean dire, dire impacts on services to our community.”

Instead, Rich said they are considering dipping into the city’s reserves to make up the $1.1 million and close the gap. That would still leave the city with a reserve of roughly 15%.

How did this happen?

According to almost everyone involved, the problem isn’t excessive spending, it’s deficient revenue.

“The actual cause, in a general sense, is the revenues are down significantly from what was expected,” City Manager Larry McLaughlin said. “In almost every category under revenue, the proposed budget—that is, what is expected—is less than what it was last year.”

In a presentation to the budget committee early in the process, Administrative Services Director Ana Kwong explained why that was. One of the main culprits is the disappearance of federal COVID funds, known as ARPA (American Rescue Plan Act). ARPA funds buoyed the current year’s budget by almost $900,000. That one-time money will no longer be available next year. In addition, an anonymous donor donated $425,000 to the city for the police department. That was also a one-time donation. (That donor also gave $425,000 to the Sebastopol Firefighter’s Foundation, a private organization that supports the Sebastopol Fire Department. But that doesn’t show up on the city’s books.) Sales taxes inched upward this year—up from $4.8 million to $4.9 million—but they’re expected to be lower next year due to a predicted recession.

Councilmember Steven Zollman said the city’s looming budget deficit is actually a continuation of a longterm trend.

“We've had a structural deficit for at least three, maybe four years,” Zollman said. “And we simply are not bringing in enough money to meet the growing expenditures of each of the departments. It might not have seemed as critical as it is now because the last couple of years during the pandemic we reaped one-time influxes from different resources, whether they be federal, state, etc. Well, now that's all disappearing, and we're facing tough economic times as a whole.”

Rich said that because the city runs so lean, there’s not a lot of room for cutting.

“This isn't a situation where we have a budget where there's a lot of fat, a lot of extra. We instead have a budget that's been working on a very, very slender margin for a number of years. And we thought it was going to improve after the pandemic. But we're realizing there's some longterm limitations that we have to deal with,” Rich said.

Watch the budget talks in real time

For the first time this year, the Budget Committee meetings are being held in public. If you’ve missed the meetings thus far, there are two important recap meetings coming up on Wednesday, May 3 and Wednesday, May 10. You can watch them in real time via Zoom or on video afterwards here.