Palo Alto is completely revamping its budgeting process and looking for a new budget manager after a staff error caused the city to outspend revenues by $4.8 million last year -- without knowing it until months later.
At the same time, city officials are grappling with both the recently discovered $4.8 million budget hole and a looming $5.4 million deficit in fiscal year 2010, which ends June 30.
On Tuesday night, members of the City Council's Finance Committee grilled staff on the error and debated how to deal with the spiraling budget picture.
Lalo Perez, director of the city's Administrative Services Department, apologized repeatedly and said he takes "full responsibility" for the oversight, which staff began to discover in early fall, months after the June 30 end of the fiscal year.
The $4.8 million error reportedly resulted from a miscalculation by the former Budget Manager Sharon Bozman, who left the department in the wake of the discovery -- although she was not mentioned by name at the meeting.
The oversight was responsible for more than $2 million of the $4.8 million overage. The city was depending on "salary savings" from vacancies and related reductions in benefits, and those were falling significantly short of projections during the last half of the 2009 fiscal year.
Had that been known during the fiscal year, further spending cutbacks could have been made before the year ended to compensate for the shortfall in salary savings.
The balance of the gap came from several sources and depended on annual reports from the state, not available to the staff until after the fiscal year ended, according to a detailed staff report.
Perez said on the $2 million gap he was relying on monthly summaries from his budget manager and did not recognize the errors in the details until early fall.
"I take full responsibility for this error," Perez told the committee. "It is a major professional disappointment for myself and I certainly recognize the significance of this mistake, especially in this time.
"I think it has become clear, given the current economic conditions, that these levels of review were not adequate."
Perez said the department has subsequently switched to biweekly reports and is now closely monitoring all details. Each department head now also receives a weekly report on vacancies and budget impacts.
City Manager James Keene said that "in the wake of the 2009 problem" the budget manager who made the mistake is no longer with the city. The Administrative Services Department has also been restructured and now includes a new Office of Management and Budget to replace the budget manager position.
Department Assistant Director David Ramberg is now serving as acting budget manager while the department is recruiting a permanent budget management officer.
How to fill the budget hole is still an issue.
Staff is recommending closing the $4.8 million gap by deferring a transfer to the city's Technology Fund -- money the city planned to use to upgrade radio-communications infrastructure and install radio frequency identification (RFID) chips at local libraries to automate check out of items.
Perez said deferring the transfer would force the city to delay replacing some items and restrict the city's options for any new technological initiatives.
Staff proposed to repay the money to the Technology Fund over a short four years, adding extra strain on future budgets that are already projected to have large deficits.
"It's a fund that cannot absorb, waive or forego these transfers," Perez said of the importance of the quick payback. "We need to put the money back or it will jeopardize the technology infrastructure that supports the rest of the organization."
The Finance Committee voted unanimously to accept the staff recommendation, but directed staff to transfer enough to the fund to assure that the city can make necessary technology upgrades this fiscal year.
Committee members asked for a report back by mid-December on how much is really needed this year.
Several council members expressed disappointment and confusion about the huge discrepancy in the 2009 budget.
Councilman Larry Klein said he wished he had been informed sooner about the discrepancy. Vice Mayor Jack Morton warned that the dismal financial picture would ultimately cut into the city's core services.
Staff had alluded to projected budget shortfalls in early October, but waited until the budget reports were audited before presenting the numbers to the council.
"If this had come out in October, it may have had an effect on Measure A (the city's proposed business-license tax) or the council elections," Klein said. "I think we'd all like to have known what the facts were."
Budget officials also warned of greater financial challenges ahead. Palo Alto's sales-tax revenues and hotel-tax revenues have been plummeting, dropping by $9.3 million from fiscal year 2008, according to a recent staff report.
City officials had previously identified a series of "Tier 2" programs or services that could be cut if the city's financial situation deteriorates. These include the city's shuttle service, the Fire Department's disaster-preparedness program and the Police Department's four-officer traffic team and crime-analyst position.
These cuts, however, had not yet been implemented and city officials indicated Tuesday night that they would like to hold more conversations with the community before eliminating any programs.
Perez said staff is recommending closing the 2010 budget gap through one-time adjustments, rather than structural changes. These include transfers from the Budget Stabilization Reserve, salary savings and a $2.7 million withdrawal from the stalled Public Safety Building capital project.
"We did not anticipate a growing deficit of $5.4 million," Perez said. "Given the deficit, it would be unfair to focus on some sectors of city services and not the whole picture."
The $5.4 million is in addition to $10 million already cut during the budget process last spring for this fiscal year.