Modesto's new budget reflects a conservative approach — including increasing reserves — as the city prepares for pension costs that are expected to more than double in a decade before leveling off.
The budget includes a reorganization of the Parks, Recreation and Neighborhoods Department that officials say could result in a better experience for those who use city parks, and a new revenue source: taxes from marijuana businesses.
The City Council gave its second and final approval Tuesday to Modesto's $383.5 million operating budget for the 2018-19 fiscal year, which starts July 1. But much of the focus is on the $129.5 million general fund, which makes up a third of the operating budget.
That's because the council has wide discretion in how it spends general fund dollars, and public safety accounts for about three-quarters of its spending.
Modesto will use roughly $3.2 million from its fleet replacement and workers compensation funds to help balance the general fund. It has been a common practice for the city to use money from other funds to balance the general fund, but interim City Manager Joe Lopez has said this is the last time the city can do this.
He also has called this a very tight budget and has told council members the city will be taking a hard look on how to balance the 2019-20 budget and that work will start immediately.
Modesto and other public agencies across the state that belong to the California Public Employees' Retirement System are facing significantly higher pension costs as CalPERS requires them to pay more to shore up its pension funds.
Budget Manager Steve Christensen said Modesto is paying $23.7 million in its current budget, which ends June 30, with $17.1 million from the general fund. He said Modesto expects to pay CalPERs $29 million in its 2018-19 budget, with $20.5 million from the general fund.
A city report in January forecast Modesto will pay CalPERS $54.6 million in its 2028-29 budget. Modesto has been working with its labor groups and exploring ways to lessen the impact of rising pension costs.
"For the foreseeable future," Mayor Ted Brandvold wrote in his budget message, "it appears that the City's Operating Budget will be adversely impacted by higher payments from the City to CalPERS. ... Because of this, instead of new spending proposals, my recommendation for this year's fiscal priorities ... is to increase our budget reserve."
The previous council under Mayor Garrad Marsh and the current council under Brandvold have increased general fund reserves, starting with setting aside $3 million four years ago.
Modesto now has $18.3 million in reserves after the council on June 5 added $2.5 million. This puts the reserves within about $600,000 of Modesto's having two months of operating expenses set aside. The Government Finance Officers Association recommends that as the minimum.
The city is "making great strides at getting to the GFOA level," Christensen said. "That's been a conscious effort by the council."
The new budget includes reorganizing the Parks, Recreation and Neighborhoods Department and giving it its first, permanent director in several years, with Community and Economic Development Department business manager Laurie Smith taking the job.
The reorganization comes after the city several years ago — under another reorganization — moved many of parks, recreation and neighborhoods' operations to other city departments. And now many of those operations are coming back.
"After evaluating the effects, we believe delivering services may be more efficient with this new organization," city spokesman Thomas Reeves said in an email. "We constantly strive to identify efficiencies, and monitor the organizations to make sure we are getting the most out of the services we provide."
The new budget includes $1.5 million in marijuana taxes, which is an estimate of a half year's taxes based on these businesses getting started by the end of the year. Reeves said the city is sorting through marijuana business applications now and expects to be done by fall.