ST. HELENA — Three lessons came out of St. Helena’s newly updated long-term financial outlook: First, projections are rosy unless there’s a recession.
Second, a recession is inevitable and will probably happen soon.
And third, with or without a recession, the city budget could be hit hard by its aging public buildings and the potential need to staff a full-time fire department.
Finance Director April Mitts revealed the city’s latest long-term financial forecast to the St. Helena Asset Planning Engagement (SHAPE) Committee on Feb. 28. It looked at the impact on the General Fund under four scenarios: with or without a modest-sized hotel and with or without a recession.
The baseline projection, with no hotel and no recession, is based on revenue growth over the last 10 years and expenditure growth over the last three years. It shows General Fund revenues growing from $13.2 million to $17.5 million in fiscal year 2023 and to $22.3 million in fiscal year 2028, with a $3.4 million surplus. Over that same period, reserves climb from 27 percent to 130 percent.
Factoring in a hotel generating $600,000 a year in transient occupancy taxes, the picture gets even brighter, with a $4.2 million surplus and a 155 percent reserve by 2028.
However, a recession would have a severe impact. Without new hotel revenue, a recession in the 2020-21 and 21-22 fiscal years would cause four consecutive years of budget deficits as high as $1.6 million. Even after revenue overtakes expenses in fiscal year 2025, surpluses would grow to only $500,000 by 2028.
Reserves would dip below the council goal of 25 percent, falling to 12 percent in fiscal year 2024 before gradually recovering to 19 percent four years later.
A hotel would blunt the impact of a recession. There would still be four consecutive years of budget deficits, but they would each be less than $1 million. Reserves would dip to only 20 percent before recovering.
Members of the SHAPE Committee and city officials agreed that the “recession” scenarios are much more realistic than the “baseline” projections.
Mitts said recessions typically occur every 10 years, and the last one started in 2008. A recession that analysts were predicting last year never materialized, and the latest forecasts predict a recession around fiscal year 2021, she said.
“Recessions will happen,” Mitts said. “We just don’t know how deep it’s going to be.”
The recession in the city’s forecast is based on the financial impact of the 2008 recession, Mitts said.
City Manager Mark Prestwich continued to use the word “stabilizing” to describe the city’s General Fund. He acknowledged that a recession is likely to occur within the next 10 years, and said the city has to keep in mind several important risk factors.
In addition to economic volatility, St. Helena could face the same financial challenges other cities are susceptible to: unexpectedly high pension and health care costs, negotiated raises for city staff, unanticipated one-time expenses resulting from natural disasters or legislative changes, and the state potentially “borrowing” local tax dollars to cover its own shortfalls, which last happened in 2009.
However, Prestwich emphasized two risk factors that are specific to St. Helena, involving the fire department and city buildings.
First, the city gets by with a part-time fire department that costs only $966,000, with firefighters paid on an hourly, per-call basis.
It could cost more than $2 million to staff a full-time fire department if the current model ever becomes unsustainable, Prestwich said.
Finding enough firefighters to respond to daytime calls is already an ongoing challenge, he said.
“What we’re hoping to do is ensure (the department’s) sustainability,” he said. “It’s one of the things that we’re working with the department on this year.”
The other big asterisk in the city’s financial projections involves the city’s aging buildings. A facilities study performed by the consultant EMG identified significant maintenance needs at each building. The city hasn’t kept up on maintenance or established a building replacement fund, so repairs have to be funded by the city’s operational budgets.
The SHAPE Committee is evaluating the city’s options and will make recommendations to the City Council within the next few months. Those recommendations could involve cash outlays or taking on new debt.
The City Council will review the financial forecast at its next meeting at 6 p.m. Tuesday, March 13, at Vintage Hall.