Council Gets Ahead Of Budget Shortfall
In Which: We talk about the City Budget, Staff introduces 10 levers to fix the problem, And Council reveals what's important to them when it comes to your money.
Councilmembers Put Heads Together On Budget
The City Council met during a Work Session on Tuesday to try to prioritize different ways to balance the budget. The City, like just about every other public agency, approved a deficit budget last June—that means that the City has to dip into its reserve account in order to cover all the costs. Under the guidance of Assistant City Manager Regina Youngblood, the City Council prioritized a menu of options for how to balance the budget.
The Current Budget Overview
The most recent budget review showed that things are actually a bit better than everyone expected. The adopted Fiscal Year 2025 (FY25) budget—which ends in June—was expected to reduce reserves to about $27,600,000. But thanks to the small surplus from 2024—$940,000—and some increased revenue, the City should end FY25 with around $40,600,000.
The extra money came from several sources. Property taxes are expected to go up as some developments come online, the Utility User’s Tax is generating some extra money because electricity rates have gone up so much, and $4,000,000 in one-time ARPA funding was rolled into the General Fund in December. There was also some accounting changes which moved the $8,000,000 loan for the Movie Theater Purchase into the Reserves.
Unfortunately, costs were also up. Just about everyone got a raise last year—from Police to SEIU to HAME to Fire to Executive Team. Even the City Council got a bump in pay. On top of that, the City has had to pay more for CalPERS—that’s the State’s retirement plan that all City employees get. That means that although the City has more in reserves, it also went from overspending $1,800,000 to overspending $3,200,000. If anything, that makes future years look even worse.
This Is All Very Confusing
I know. It’s hard to keep the numbers all straight, so let’s make it simple. Here’s a graph with all the money that the City brings in and where it comes from.
Most of the money comes from Property Tax, Sales Tax, and Utility Users Tax. That’s around 65% of the City’s revenue right there. It gives an idea of what the City does to make money (Hint: it’s taxes).
But what’s it all spent on?
Most of it, like many other Government agencies, is spent on people. Salaries and Benefits make up 80% of the expense. And if you want to see how much is spent in each department… it’s very interesting.
Introducing: The Levers
The City isn’t looking to do anything drastic to balance the budget—it’s not panic time yet—so City Staff laid out 10 different things that can help balance the budget: 5 ways to make money, 5 ways to save money. The important thing to remember is that the deficit is not one-time, so one-time injections of cash won’t help.
That usually means cutting people since they make up the bulk of the cost. But Staff isn’t hot to make big changes. “We do want a careful consideration of how we implement any reduction in expenditures to minimize service impacts,” said Assistant City Manager (ACM) Youngblood. The Council Budget and Finance Committee was excited to sell the remaining 238 properties to plug the gap, but that would still leave the City spending more than it takes in.
Here’s what the City is looking at for balancing the budget
Making Money
Transient Occupancy Tax—the Hotel tax
Increase the Cannabis Tax
Allow and tax Short-term rentals—AirBnB, Vrbo, etc.
Increase Business License Tax—which all businesses pay every year
Use Measure C/K1 Money
Cutting Costs
Evaluate Essential Services—make any needed cuts that aren’t “essential”
Cut General Funds to Capital Costs—big infrastructure projects are mostly paid with other money
Hiring Freeze—from 1 to 3 Months
Reduce Overtime Use
Cancel Unfilled Positions
The Council had some questions about the levers. On the Short-Term Rentals, Councilmember George Syrop confirmed that they were currently banned. He then asked if it was better to have a fee for enforcing the ban or a tax for them. Assistant City Manager Claussen said that legal or illegal, they should be paying their taxes, but it is hard to enforce.
Councilmember Andrews asked if there was a list of programs that are considered essential. Staff said that it would actually be used as a tool for departments to evaluate what is essential leading up to the FY26 budget. She also asked if Staff had considered offloading costs to partner agencies. “The last resort will be an elimination of services,” Assistant City Manager Youngblood said.
Councilmember Bonilla asked if managing overtime would impact emergency services, since they are the most heavy users of overtime in the City. But Ms. Youngblood said that all emergency services have a “minimum standard of service” in their Union Contracts that dictate staffing minimums.
Former Councilmember Gives Opinions
Former City Councilmember Al Mendall gave public comment in person during the meeting—technical difficulties meant that any online commenters weren’t audible to the recording—and had a list of recommendations.
He didn’t like the Movie Theater loan being in the reserve. “The balance of that does not belong in the reserves,” he said, because it’s not liquid cash.
Sell off all the properties to plug the gap—even though it would not solve the deficit, just push it off.
Increase the Transit Occupancy Tax and tax Short-Term Rentals because, “COVID is done,” he said, “time to increase it.”
Don’t use Measure C because it was meant for one-time expenses, not ongoing costs—though one could say the same thing about land sales
Cut positions vacant for 5 years or more
Cut Council discretionary spending. “Put a freeze on your own pet project discretionary spending,” he said, “until the reserve is back above 20%… the real cash reserve.” He pushed Council to “Exercise some discipline on yourselves and tighten your own belts.”
Council was then asked to rank the different strategies in a Mentimeter poll—the code to which was shown to the public, which shows just how few people watch these meetings live. Number 1 is the one they want to pursue first, Number 10 is the one they want to not touch if possible. The rankings were:
Increase Hotel Tax
Tax Short-Term Rentals
Prioritize Core Services (basically tied with 4)
Reduce Discretionary Spending (basically tied with 3)
Increase Cannabis Tax
Hiring Freeze
Reduce Overtime
Reduce Capital Subsidy
Increase Business Tax
Use Measure C/K1
After the poll, Councilmember Roche asked for clarification about why the Movie Theater Loan is in the reserve. Assistant City Manager Claussen explained that liquid cash flow is different than reserve, and only the loan itself is in the reserve, not the property itself. Loans, by the way, get bought and sold constantly, so it would be a lot easier to offload a loan than a whole movie theater. He described the change as following Generally Accepted Accounting Principles (GAAP).
Councilmember Bonilla also chimed in to clarify, “It becomes more and more liquid every time a payment is made.” Staff agreed.
Group Study Time
Council then separated into three groups to rank the 10 levers with a Staff member there to answer questions and run simulations for them. There was an initial promise to show the budget simulation for each group, but they never showed it on the screen. They were in groups for almost an hour, and after coming back together, each group shared out their rankings.
Andrews, Bonilla, and Zermeno
Councilmember Zermeno started out by laying out the guiding values for the group. “Of course our core values,” he said, “are Diversity, Equity, and Inclusion.” Though it was not clear, even after explanations, how much that actually informed the rankings.
Prioritize Core Services
Increase Hotel Tax to 12%
Tax Short-Term Rentals
Hiring Freeze and Examine Vacancies
Reduce Capital Subsidy
Increase Cannabis Tax
Decrease Discretionary Spending
Increase Business License Tax
Reduce Overtime
Use Measure K1
Councilmember Bonilla explained the thought process behind the rankings. “We wanted to minimize any type of service cuts or not have any at all,” he said. “And then, of course, our biggest priority was public safety.” Councilmember Bonilla, given his professional background, frequently thinks about emergencies and natural disasters. At the same time, Councilmember Zermeno has always been a big Police booster. This explains the low ranking of Overtime.
Although Council could raise the Hotel Tax to 14%, this group settled on 12%. “The economic conditions can support that,” Councilmember Bonilla said, “And we also know that we have other hotels that are coming online so we wanted to be sensitive there.” On the Short-Term Rentals, the group was pragmatic. “We know that they’re happening in our community,” Councilmember Bonilla said, “so we might as well tax them.” This could realize revenue of up to $500,000 per year.
They also suggested a full 3 month hiring freeze to realize the full $3,600,000 in savings, so long as it doesn’t impact core services. Despite suggesting reducing spending on capital projects, Councilmember Andrews highlighted how important they are. “Capital projects are very important,” she said, “as they reduce emergencies and keep us ready for emergencies.”
The increase in the Cannabis Tax came with a desire to see what other cities are doing. “We understand that our cannabis tax has met with some challenges,” Councilmember Andrews said, “but we also haven’t realized a lot of the companies that are coming here.” It should be noted that there is only one dispensary in all of Hayward—Cookie’s downtown—and although several industrial businesses have been proposed, it’s unclear how many have actually come online.
Overall, the group wanted to ensure that they cut unnecessary programs before touching police and fire overtime. “We want to again maintain that we are focused,” Councilmember Andrews said, “on prioritizing public safety, core services, and prioritizing our residents.”
Goldstein and Syrop
Councilmember Syrop did most of the talking during his group’s report back. Here was their ranking:
Reduce Discretionary Spending
Increase Hotel Tax to 12%
Hiring Freeze
AND Reduce Overtime (they were sort of a package deal)
Reduce Capital Subsidy
Tax Short-Term Rentals
Increase Business License Tax
Cannabis Tax
Prioritize Core Services
Measure C/K1
Going after discretionary spending first was, Councilmember Syrop said, not about the biggest impact, but easy and consistent with Council’s values. The Hotel tax increase was because most surrounding Cities are near 14%. “We have been very generous,” Councilmember Syrop said.
For the hiring freeze and overtime, they didn’t want the freeze to inadvertently increase the overtime, and also didn’t want to do it evenly across the board. “Not taking a one-size-fits-all approach to this,” Councilmember Syrop said, “but rather being sensitive to what those vacancies are.” He discussed reallocating positions to other departments that need expansion—specifically citing the low staffing at the Library that should be addressed.
For the Short-Term Rentals, Councilmember Syrop said that the City of Sausalito has both a ban and a tax, but he also recognized that Code Enforcement is already understaffed. Councilmember Goldstein suggested a possible approach. “Send them a bill and see whether or not we actually receive some income,” he said.
The Business License Tax increase, the group wanted to be progressive so as to not impact new and small businesses. The Cannabis Tax, they said, needed some nuance. Councilmember Syrop said that advocates say that 7% is already too high and that having it even across all types of businesses makes no sense. “I don’t see the point in spending time increasing a tax,” he said, “if no one’s going to be around to pay it anyways.” Councilmember Goldstein also supported the need for nuance. “We’re not experts on this,” he said.
Roche and Salinas
Councilmember Roche prefaced their ranking by saying that they prioritized revenue over cuts.
Increase Cannabis Tax
Short-Term Rentals
Increase Hotel Tax
Prioritize Core Services
Reduce Overtime
Hiring Freeze
Reduce Discretionary Spending
Reduce Capital Subsidy
Increase Business Tax
Measure C/K1
Councilmember Roche explained that they recommended raising the Cannabis Tax to 10% despite the fact that Hayward hardly has any cannabis businesses to tax. “There’s analysis to be done,” she said. Mayor Salinas has been a hardline advocate for taxing cannabis businesses out of existence, so it’s no surprise that this was at the top of his list—even though it is likely to have almost no impact.
The group was worried about code enforcement with the short-term rentals, presumably while they’re banned. For the Hotel Tax, this group also settled on 12%. Looking at the Core Services, in Councilmember Roche’s mind, was about focus. “That’s what we do as a City,” she said. “That’s our job, I think, as an organization is to provide core services to the City. So we want to do whatever we can not to mess with that.”
The Mayor and Councilmember Roche liked the idea of a vacancy analysis and were open to a full 3 month freeze to realize the most savings. For reducing discretionary spending, they wanted to ensure that training funds were still available to departments.
In summary, Councilmember Roche seemed to think that Hayward is already doing a pretty good job. “Compared to our neighboring Cities,” she said, “Hayward is sort of holding it down. We’re doing okay.” Mayor Salinas’s thoughts were a bit more pointed. “We are keeping our promise with C and K1,” he said. “We’re also pro-business.”
The Mayor then spent some time trying to lift the mood around the budget. “We have taken this seriously,” he said, “historically we have taken this seriously.” He then recalled the last budget problem he was in office for. “We got out from under [the recession] because it was our labor teams that came to use and renegotiated contracts. And they delayed compensation, they gave back in some cases. Council, we gave back… I deeply believe we can get through this. We’ve gotten through it before because we take it seriously.”
The City Manager Ana Alvarez laid out the next steps, which involve a lot of Staff analysis and modeling. “We can have a trade-off conversation,” she said, “that is framed based on your priorities which are very clear tonight.” She also highlighted the need for cooperation to make it through difficult financial times. “To have financial stability and to have a healthy organization really speaks to people’s willingness and cooperation to do the hard work,” she said.