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x'11 AHAy(`\ City Manager's Budget Message INTRODUCTION maintaining robust contributions to reserves; however, this economic downturn is unprecedented and reduced contributions are being recommended short of cuts to programs and services. This is only a short term strategy and cannot be sustained in the long -term. If local revenues do not experience a substantial recovery over the next few years then it will be necessary to revisit our baseline expenditures, including a review of both staffing and programs. The Water and Sewer utility operations are sound financially today; however, the City has not had an increase in these utility rates since 2001. Staff is currently studying the need for future rate increases and will present the results of the studies to the City Council in the fall for implementation in January 2010. In order to balance the proposed Water operations budget in both years of this two -year budget, the annual transfer from the Water Operations and Maintenance Fund to the Water Repair and Replacement Fund was reduced from $1.6 million to $800,000. The rate studies will recommend that these transfers be restored to their former levels in order to properly maintain the water system infrastructure. At the special election held on May 19, 2009, voters failed to approve the proposal from the Governor and the Legislature for six budget balancing initiatives and a constitutional amendment to enact a rainy day budget stabilization fund, Propositions 1A through 1E. Included in the May Revise issued by the Governor on May 14, 2009, were a series of proposals including borrowing from local governments to address a projected $21.3 billion State budget deficit should the election fail. For Pleasanton, this would equate to a $4.5 to $4.7 million reduction in property tax revenue from the operating budget and the potential for an additional $640,000 from Prop 42 transportation sales tax funding used for the street resurfacing program in the capital budget. This is in addition to the cumulative $90 million (and counting) in property tax losses to Pleasanton from ongoing and continuing ERAF shifts of revenue from cities to schools, thereby reducing the States' K -12 funding responsibilities. The additional State raid on local revenues is permitted under a constitutional amendment approved by voters in 2004. This amendment allows the State to "borrow" twice from cities, counties and special taxing districts within a 10 year period, but must be repaid with interest before a second takeaway could occur. Fortunately, we have planned for this contingency and during FY 2008 -09 increased the Temporary Recession Reserve that now has a balance of $10.9 million. It is recommended that we utilize the Temporary Recession Reserve to offset this additional State "borrowing" and once it is repaid then either replenish the Temporary Recession Reserve or increase funding for the Capital Improvement Program (CIP). CITY COUNCIL PRIORITIES Before shifting focus to the budget's revenue and expenditure highlights, it is important to note that the Pleasanton City Council adopted its annual work plan for fiscal years 2009 10/2010 -11. The work plan, which is delineated by eleven broad categories and individual projects, was developed in close cooperation with the Mayor and City Council, and the City Manager. Collectively, these categories are intended to inform the community of the Council's shared vision and to provide the City Manager with the policy direction needed to allocate City resources, including preparation of the annual budget. Below are highlights of how