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Scope of the Problem Defining the scope of the issue and building agreement around that is imperative to actually coming up with a solution that solves the issue. Defaulting to the position that the economy is suffering so government should suffer as well seems reasonable on a superficial level, but isn't a very cerebral approach to creating a financial path forward. Initial estimates indicate that fiscal year 2008 will end with a budget surplus of approximately $162,000. This amount includes the $128,000 reduction in market value homestead credit (MVHC) aid. And is a direct result of the City's management team monitoring their budgets effectively. The loss in aid for 2009 between LGA and MVHC will equate to approximately $380,000. While the partial lost aid in 2008 was $128,000 due to variances in the MVHC funding formula it isn't as simple as doubling the figure to establish a total amount of MVHC to be lost. In light of this, the City will lose approximately that much in 2010 and 2011 as well. I would suggest to the Council that our target is $380,000 to $410,000 for each of the fiscal years 2009, 2010 and 2011. If other revenues or expenses change such as building permit revenue, we can adjust accordingly and therefore staff as always will continue to monitor and review the City's financial position regularly. Target of $380,000 to $410,000 for 2009, 2010 and 2011 Options for Budoet Contingency Fund Balance There are some solutions that are obvious and should be discussed upfront. Assuming that Council doesn't have concerns about services (kinds and levels), an analysis of the fund balance provides and easy solution. Currently the City is $880,000 over its fund balance target. The Council could decide that the fund balance could cover the loss of state aid in 2009 and 2010. 2011 would require cuts or reductions in expenses or new revenue to fill the loss in state aid. Compensation Council inquired what the savings would be if steps and colas were rolled back to the beginning of the year. For non-union staff, the City would save $138,000 in compensation, $7,800 in FICA and $8,000 in PERA expenses if COLAs and steps were rolled back. Rolling back only steps would save about $20,500 in compensation related costs. While this is an option, Council is encouraged to consider the problems caused by giving some staff increases (union employees) and other staff (non-union employees) cuts. In my opinion this would be the wrong message to send to staff. If Council felt that compensation freezes were a necessary part of the multi-year solution, then I would recommend waiting until C:\Documents and Settings\kbruno\Local Settings\Temporary Internet Fi1es\OLK58\Budge[ Memo March 2 2009.doc