October 19, 2006

City Council doles out $34 million budget surplus, provides arts subsidy

By Carol Rosen
Staff Writer

The City Council spent hours Tuesday discussing a number of items, including the 2005-06 Annual S.J. Report, what to do with a $34 million budget surplus, a program to bail out the San Jose S.J. Repertory Theater and the council provided unanimous approval to award the contract for design and construction of an improvement program for the Mineta San Jose Airport.

The main feature of the nearly seven-hour session was the annual S.J. Report compiled by the city manager’s office.

Budget Director Larry Lisenbee told council members that the surplus came through the elimination of 88 positions and the fifth year of the city’s hiring freeze. In addition, he said the cost position management plans saved $6 million in the general fund and cost controls for discretionary expenditures—including overtime, marketing and technology purchases—were maintained.

For the second time since 2000-01, the general fund balance has improved and ended with a surplus. It exceeded the budget estimate with a $19.6 million balance or 2.6 percent surplus. Most of the other budget funds ended with balances at or above estimated levels with only six appropriations actually exceeding the budget.

City revenues were within 0.3 percent or $3.2 million of the budget estimate with expenditures within 3.7 percent or $28.9 million.

City Manager Les White determined that $6.4 million would go into the 2007-08-deficit reserve and $13.1 million would be used for a number of adjustments including $5 million for partial funding to clean up Watson Park and $4 million for an arts stabilization fund.

White divided up the remaining $4.13 million to fund additional fuel, provide retail tenant improvements for the new city hall (including a Starbucks), a CPA sound system, migration of old city hall IT systems, property sales-economic uncertainty reserve, singleton landfill-flaring system and other adjustments.

Still fiscally challenged
White also pointed out that the city is still faced with fiscal challenges including infrastructure needs that as yet are not met; police staffing and restoration of critical city core services; operating and maintaining capital projects and rising employee benefit costs including workman’s comp. He noted that 70 percent of the city budget has a connection to labor costs.

While some council members suggested deferring the surplus funds vote for a week, others disagreed. District 8’s Dave Cortese suggested that council members wait a week and assemble a list of cuts that haven’t been restored and check out under or non-funded items. White questioned if such a process could be completed in one week.

Some council members, led by District 6’s Ken Yeager, suggested that instead of starting an arts stabilization fund, that San Jose residents want to see their community centers maintained. White reminded them that $8 million had been found in the parks budget and could be used to hire maintenance people while the city works out its re-use plan.

After much discussion, the measure—without the Arts Stabilization Fund included—was passed unanimously. The Arts Fund was deferred until the discussion on the S.J. Repertory Theater’s bail out program.

Line of credit
Council members agreed unanimously to bail out the S.J. REP, but the vote came late and after a long discussion. They voted to approve a $2 million line of credit that will be paid back over 10 years—the first five years only interest payments with years six through 10 paying off the principle.

Members expressed concerns that despite a number of strict terms and conditions that must be followed to the letter, the S.J. Rep’s financial history is poor at best. One public speaker said that it’s one thing to bail out the Hayes’ Mansion—the building and its grounds are an asset—but there are no physical assets to sell off if the S.J. Rep defaults.

White and his staff confirmed several times that the conditions of the credit line are quite strict. First there will be a monthly review of expenditures. If those are off by 10 percent or more, they have to be fixed before more money is dispensed. “The key is that we have a team regularly watching the S.J. Rep. We will be more systematic in reviewing them and hopefully the audience will stay involved,” White said.

In addition, the S.J. Rep has to submit a business plan to the city by the end of December. It also must raise a like amount in contributions from its supporters.

Burden on finance department
District 9 Councilmember Judy Chirco said she’s concerned by the burden this puts on the finance department. “We’ll be using lots of city resources, we need to track the costs,” she said.

White noted that the council will be “kept appraised. We will keep the council aware of the situation and explain what’s being done to improve it. We will be monitoring the conditions.” However, he also said he had not considered the time and energy donated by city staff to the S.J. Rep.

“If the S.J. Rep isn’t making its commitments early in the game, then we don’t have to allow them to continue drawing on the line of credit. If their process isn’t working, then we have the ability to stop them from drawing down the money,” added Williams.

Vice Mayor Cindy Chavez questioned the strategy between the S.J. Rep. and Team San Jose as well as a potential merger between the S.J. Rep and the American Musical Theater, which also is having financial problems. Staff explained that no agreements are formalized yet. However, Nick Nichols from the S.J. Rep said the two theater groups are meeting regularly and have already identified savings of $250,000 to $300,000 in combining scenery and costumes.

“We have identified areas where we can combine and within two weeks we will go before the boards for approval, but it probably will be January before we start integrating,” Nichols said.

Chavez continued to stress her concern that the S.J. Rep will begin spending the credit line and be unable to return the money. However, Gerald Silva, city auditor, emphasized that there are conditions imposed on the S.J. Rep wherein they have to have revisions of their business model and document contributions or the money will not be forthcoming.

She and District 5’s Nora Campos suggested that Team San Jose should take over the building and lease it to the S.J. Rep as its tenant.

“Over the next two to three months, the S.J. Rep has basic core things to do to turn [their financial problems] around, basic performance issues,” added White.

Finally, the council members voted on the $4 million Arts Stabilization Fund, which passed by a 9-1 vote. The lone dissenter was Mayor Ron Gonzales, who claimed he didn’t think it was a proper way to fund the arts. “I think it’s a significant departure from a policy that has served us well,” he said.