Novato passes slimmed-down budget to reduce deficit

Novato city leaders will forge ahead with a scaled-back budget and a decision on whether to place a tax increase on the ballot to help cover a lingering multi-million-dollar deficit.

The City Council voted unanimously on Tuesday to pass the 2024-25 budget — stripped down in recent months to provide basic services and chip away at a $4.3 million deficit. The budget includes about $54.5 million in expenses. Projected general fund revenues are just under $50.3 million.

The new fiscal year, which begins Monday, will be Novato’s fifth consecutive year operating with a deficit.

The city is closing the current fiscal year with a $53.4 million budget, $49.7 million in revenue and a $3.3 million deficit.

City Manager Amy Cunningham said the plan to cover the deficit through the city’s reserve fund would only last through the fiscal year; one-time funds are no longer an option.

Cunningham said existing service levels are not meeting the community’s needs.

“We’ve run out of short-term available budget fixes,” she said. “It’s time to focus on long-term solutions to fix the city’s challenges.”

Specifically, the city has proposed using the emergency disaster response fund to cover the shortfall. The fund’s projected available balance this year is $8.75 million, which would nearly halve the fund to cover the upcoming fiscal year deficit.

At the end of the year, the city would be out of conformance with policy that dictates that the fund have a minimum of 15% of expenses. The fund would be reduced to approximately 9% of expenses.

City staff warned of major modifications for the 2025-26 fiscal year unless changes were made.

“It has not been an easy road with another deficit budget,” said Carla Carvalho-Degraff, the finance director.

The council also approved a $200,000 parking study on Tuesday — a last-minute addition to the budget — to address the city’s needs as new state-mandated development is approved, often without required parking.

The budget also chipped away at the city’s $5.48 million unfunded liability for the city’s pension provider CalPERS — the highest in the last five years and an approximately $917,000, or 21% increase, from the previous year. The value fluctuates based on market conditions impacting the fund’s investments.

Included in the budget is a $1.6 million payment on the pension obligation bond debt. The city owes $1.7 million in pension obligation bonds, according to a staff report.

To help boost revenue, the City Council is weighing an increase in the city sales tax, one of the lowest in Marin. An increase of 0.75% could bring in up to $10 million, the city has estimated.

Cunningham said survey results on the public’s receptivity to a potential tax measure will be presented on July 9. The council is set to decide whether to place a tax measure on the ballot at its meeting on July 23.

Property tax distribution from the county remains one of the city’s biggest obstacles, city leaders said.

“We get 7% of every property tax dollar here,” Mayor Mark Milberg said.

The value is the lowest of all municipalities in Marin. The city also receives only 1.25 percentage points of its 8.5% sales tax.

In total, taxes account for about $40 million, or 81% of revenue. Property taxes amount to $19.4 million in revenue. Sales taxes generate about $16.2 million.

The largest expense to the city is salaries and benefits, which account for $37.4 million of the city’s financial burden, or 69% of its spending. The city has 198 full-time employees, up from 197 last year and 195.5 the year before. The staff peaked in 2019-20 with 208.5 employees. The year after that, there were 188.5 positions on the rolls.

Councilmember Tim O’Connor said eliminating staffing is not a viable option, since it would impact services.

“We have to do better,” he said. “I don’t think this is a one-and-done problem.”

O’Connor said the city should also maximize its earning potential on underutilized properties.

“There is not a single fix, there is no time. We really need to put this conversation forward and figure out how we’re going to put this question to the community,” O’Connor said.

While the deficit has grown, the city has neglected maintenance on city-owned facilities and holdings.

“The lack of investment in our capital is catching up with us,” Cunningham said.

The capital improvement fund includes 56 ongoing projects and three proposed projects. The city has $18.8 million in ongoing project balances carrying over into the next fiscal year and $4.1 million in new funding proposed.

Projects planned include utility undergrounding work for the Novato Boulevard widening project and work on the Grant Avenue bridge.

On July 9, the council will be briefed on a five-year projection of the general fund with refined numbers following completed audits.

“It’s not good news, but I feel that we’re finally getting some of the numbers,” Councilmember Pat Eklund said.

Councilmember Rachel Farac, who was absent for the meeting, said this week that she supported the effort to craft a budget with an eye toward balance in the future.

“We wanted to maintain the service level,” Farac said. “Our priority is long-term fiscal sustainability and health.”