Novato budget consultant offers ominous 5-year outlook

Novato will have annual deficits of about $3 million if it does not find new revenue sources, a financial consultant told city officials.

The City Council received the grim news at its meeting on July 9, when the consultant, Andy Heath, presented a five-year projection of the city’s finances.

According to his report, the city is on track for a $3.3 million general fund deficit in the 2025-26 fiscal year. In following years, the projected deficit is $3.4 million, $3.4 million, $3.7 million and $3.5 million.

Heath described the deficit pattern as “systemic.” He said general fund reserves would be exhausted by the end of the 2026-27 fiscal year.

“This is not practical,” he said.

The city closed the 2023-24 fiscal year last month with a $53.4 million budget, $49.7 million in revenue and a $3.3 million deficit.

The 2024-25 budget, approved two weeks ago, has a $4.3 million deficit. The budget includes about $54.5 million in expenses and projected general fund revenues of just under $50.3 million.

The city has had a budget deceit for the last five fiscal years.

In the 2020-21 budget, the deficit was $2.5 million. In following years, the deficits have been $207,000, $1.7 million, $3.3 million and $4.3 million.

“Governments need to identify long-term financial trends,” Heath said. “The primary purpose for the long-term financial plan or financial forecast of this nature … is to focus on long-term objectives, promote financial literacy, achieve organizational alignment and, further, it can help determine long-term debt capacity.”

City Manager Amy Cunningham noted the projection model would be a key piece of information during labor negotiations in the coming year.

“This isn’t the last time you’re going to be seeing Andy,” said Cunningham. “We have a lot of big plans for him.”

Heath said there are details that might affect the exactitude of the results. He said the number of employees, wage increases and other factors could increase or decrease the severity of the deficit.

Heath said a significant cost driver for the city is salaries, which account for about 70% of expenditures. He added that there are about 1,500 individual expenditure line items on the city’s books across 85 departments and divisions.

“That’s a lot for a city of this size,” he said.

The news comes as the city is exploring a November ballot initiative to increase its 8.5% sales tax by three-quarters of a cent. The value is the lowest of all municipalities in Marin, and the city receives only 1.25%.

Taxes account for about $40 million, or 81%, of Novato’s revenue. Property taxes amount to $19.4 million and sales taxes about $16.2 million.

The city has used its emergency disaster response fund to cover the shortfall in the general fund. 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.

“I think a lot of us are numb from the information, but it’s information we have to have,” said Councilmember Susan Wernick. “We have a big problem in front of us and we have to be able to come up with some kind of solution.”

Mayor Mark Milberg said “multiple shots on goal” — or a range of options — would help the city balance the budget.

“I still believe Novato is the best city in Marin,” he said. “We have so much potential to get this city to where I feel all of us want it to be.”