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HomeMy WebLinkAbout2023-12-05 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 12 Regular Meeting December 5, 2023 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room and by virtual teleconference at 5:30 PM. Present In Person: Burt, Lythcott-Haims, Stone Present Remotely: None Absent: None Call to Order Chair Burt called the meeting to order. Assistant City Clerk Vinh Nguyen called roll and declared three were present. Public Comment There were no requests to speak. Action Items 1. Review and Recommend the City Council Accept the FY 2025-2034 Long Range Financial Forecast and FY 2025 Annual Budget Development Guidelines Budget Manager Harper noted that this marked the start of the Annual Budget process for the development of the FY 2025 budget. He displayed slides with an overview of the economy, which had remained resilient over the past few quarters; however, inflation continued to remain high. Current projections estimated a period of economic stagnation over the next several quarters followed by a return to normalized growth trends. Deficits were projected in the near term. Revenue for business tax and gas equity transfer had been incorporated in the 10-year outlook. Expense projections were based on current approved service levels with estimated cost increases for salaries, benefits, contracts, and other non-salary expenditure categories. He provided details related funds in the Uncertainty Reserve. He explained that BSR was recommended at the 20% level. Based on current projections, major tax revenue was trending higher than budget, and there was a surplus of approximately $3.4M anticipated in FY 2024. Expenses were tracking at budgeted levels and, as part of the midyear, staff would return to review budget changes as needed for revenues and expenses. He furnished a slide related to the economy, which showed strong performance. This slide showed graphs related to GDP and SUMMARY MINUTES Page 2 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 CPI. Projections indicated a return to lower GDP or stagnation over several quarters before returning to a growth period. The CPI graph went back to 2021 and the current national inflation was about 3.2%, and the Federal Reserve’s target level was about 2% inflation. He provided a slide highlighting the base case forecast for 2025 through 2034, which he discussed. Expenses were forecasted to exceed revenues through FY 2029; however, the gap was shrinking each year. He discussed the one-time gap for FY 2025 being zero when using the uncertainty Reserve; however, additional services or programs could cause the gap to increase. Staff would continue to work with Council to explore some one-time funding solutions to bridge gaps as more information was available. Assistant City Manager Kiely Nose added that the slide for the base case forecast was important and was a continuation of the work done by the Committee in May. She noted that a deficit had been forecasted then, and funds were set aside to support that deficit, and it was planned to use that funding to solve the imbalance. Council Member Lythcott-Haims asked if the entirety of the Uncertainty Reserve would be used. Assistant City Manager Nose answered that it was not entirely depleted. Budget Manager Harper stated there was about a $6M deficit, so if $10.1M were put toward that, there would be about $4.1M and then any uses for deferred midyear items would reduce it more. Assistant City Manager Nose detailed that of the $4.1M, $1M was set aside to be dealt at midyear in 2024, so $3M would remain in the uncertainty reserve. The $3M could be used to offset 2026’s $5M, which would be a policy call. The long range was intended to show one-time monies not being used to solve issues, and the variances from estimates were used to adjust the financial picture on an annual basis, which would be policy calls in the budget process. Chair Burt added that $3.4M projected for this year was above previous. The Uncertainty Reserve increasing by $3.4M would depend on actions taken at the midyear budget. Assistant City Manager Nose confirmed that was correct. Budget Manager Harper shared slides detailing the major tax revenues, which were approximately 60% of the General Fund resources. He stated that most tax revenue categories had returned to pre-pandemic levels as of the FY 2024 budget with the exception of the Documentary Transfer Tax (DTT) and General Fund Transient Occupancy Tax (TOT). He discussed the DTT being a volatile revenue source. Overall the TOT had returned to pre- pandemic levels; however, based on the split of the funding, more was projected to go toward capital infrastructure than the General Fund. He explained why revenue from property, sales, and utility users’ taxes were anticipated to exceed the budget in 2024. Additional information SUMMARY MINUTES Page 3 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 for revenues by category could be found on Packet Pages 10 and 11 and additional discussion in Attachment C on Page 31. Assistant City Manager Nose added that the table had not been adjusted for inflation. If adjusted, she did not think it could be said that all revenues were at pre-pandemic levels. Chair Burt suggested using the term pre-pandemic dollar amounts to provide clarification. Budget Manager Harper stated that, on the expense side, costs for current service levels had been assumed with increases for salaries and benefits, which he detailed. Reserve had also been included for potential changes in future labor costs. He explained that the budget included vacancy savings. He noted that the forecast increased the vacancy estimate from the previously assumed rate. In past practice, vacancy assumptions were lower than the actual vacancy rate to allow departmental use of savings for other staffing strategies. Chair Burt asked for comments related to the trend since looking at the budget in May, as Council had been struggling to determine what might be a modestly conservative vacancy rate. Budget Manager Harper was not sure of the trend. They typically used a 3% vacancy rate, and it had been increased to 5%. Chair Burt noted it was at 13.5%, which did not mean 8.5% would be available. He asked for an update of where it was on the expense side compared to the assumptions made when the budget recommendations were adopted in May. It sounded to him that the vacancy rate was higher than what had been assumed previously. Assistant City Manager Nose suggested there be a broader discussion at the end of the presentation. Budget Manager Harper expressed that cost for large contracts were in line with contract terms and then increased by a standard 4% CPI annually, and other non-salary expenditures were increased by a general 4% CPI with estimates replaced as part of the budget process by the actual requested increases from departments. Additional information for expenses by category could be found on Packet Page 13 with additional discussion in Attachment D on Page 40. Along with the expense estimates in the forecast, there were several assumptions not included, which were typically referred to as known unknowns, which he outlined. The items were listed starting on Page 15 of the Memo. He provided information rated to the limited term programs, and details related to when the programs would end were in the Memo. Budget Manager Jessie Deschamps discussed the alternative scenarios, the budget guidelines, and the HSRAP funding referral. She provided slides related to the alternative scenarios to the base case. She noted that the alternatives were modeled separately to show individual impacts; however, aspects of both could occur simultaneously. She provided details concerning the SUMMARY MINUTES Page 4 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 scenarios related to revenue and expenses. Attachment A included the FY 2025 budget development guidelines, and she highlighted a few related to developing a balanced budget, examining uses of surplus funds, reviewing allocations for Council priorities, exploring alternative service delivery, expanding or adding new revenue sources, and continuing to proactively fund long-term liabilities. Attachment E included a response to the Council referral. As part of the review, staff confirmed that previous allocations had not been approved to be tied to the General Fund Budget, but allocations had been updated based on CPI or direct allocation as funding was available. She outlined historical average funding and allocations for HSRAP. She noted that adjusting for certain programs increased the percentage for human services funding. She noted that it would require an additional $800K annually to reach the equivalent of 1% of the General Fund Budget in the base case and forecast years. The forecast recognized revenue trends consistent with economic stagnation followed by growth and was consistent with a two-balancing strategy initiated in FY 2024. It invested in key priorities and urgent needs, recognized that alternative scenarios may increase projected shortfalls, and identified the Uncertainty Reserve and one-time surpluses as necessary. The next steps in the budget process included a full review of the long-range financial forecast (LRFF) with Council in January; midyear review in February, which would include additional investments in key resources and review of objectives that were deferred by Council during adoption of the FY 2024 budget; and in May, the FY 2025 proposed process would begin. She outlined and supplied a slide with the recommended action. Public Comment There were no requests to speak. Council Member Lythcott-Haims appreciated Chair Burt’s question about vacancy rate. She inquired how the projected vacancy rate was reflected in the revenue or savings on expenses. Assistant City Manager Nose answered, related to the vacancy rate, that staff would not be able to provide satisfying information to the Committee at this meeting. They did not have all the details in terms of the numbers being requested. She noted that it was an area of follow-up, and it would be presented to the Full Council in January. As part of midyear, staff would be prepared for a more thorough conversation. She thought it could be discussed at a macrolevel at this meeting. She believed there was a vacancy rate in the General Fund of about 13%. The FY 2024 adopted budget assumed about a 3% vacancy factor, so she thought the Committee was looking for a projection of the gap with the current volume of vacancies, and staff could return with more information. The Q1 financial status forecast had not been issued. They expected that to be an information item to Council in January, which would inform midyear. Chair Burt thought 5% had been assumed in the budget. Assistant City Manager Nose clarified that 5% had been assumed in 2023. She discussed that the long range should remove day-to-day variances and consider current information to help SUMMARY MINUTES Page 5 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 make policy decisions from a financial planning perspective. In the annual budget process, the real numbers would come into play, which would allow for adjustments, spending, and allocations. Council Member Lythcott-Haims wanted to know what percentage of the General Fund was salary and benefits, and she asked if the $3.4M projection of surplus was based on vacancies and if there would be a bigger surplus if there was not a lot of hiring done. Budget Manager Harper replied that salary and benefits were about 60% of the General Fund budget, and there was a 13% vacancy. Assistant City Manager Nose stated that the $3.4M projection of surplus was revenue and primarily on the source side, and she detailed what it was based on. She specified why there would not be a bigger surplus. Vice Mayor Stone was surprised about the TOT and the return. He questioned what was leading the change in it being at a pre-pandemic dollar amount and if it was expected to continue and grow. Chair Burt indicated that a good part of it was a new supply of hotels. He discussed occupancy rates. Budget Manager Harper mentioned that Attachment C outlined hotel revenues. Vice Mayor Stone noted that there had been previous discussion regarding advertising to increase vacancies. He queried what the process would be for staff returning to the Committee with information related to the temporary programs. He wanted a long-term view and strategy to seek grants, etc., to continue successful temporary programs, such as Link. Council Member Lythcott-Haims noted that fleet electrification, etc., was not included in the forecast, and she questioned how such issues had previously been handled. Assistant City Manager Nose indicated they were highlighted in the Staff Report. The forecast was intended to reflect actions Council had authorized, which would allow for informed decisions. The intention of the LRFF was to show what it would look like if everything were to stay status quo based on current authorizations. They were not in the report to show they would be cut. They were listed so Council and the Committee would be aware that there needed to be an action to continue the services, which included a financial impact. Staff continued to seek grant opportunities, and if materialized, it would be brought forward. From a planning perspective, without a grant in hand, it was not included in the forecast. Staff would continue to seek funding for these areas. SUMMARY MINUTES Page 6 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 Vice Mayor Stone asked if there was a way to know if programs would have to be discontinued based on the implications of certain decisions, why the SUMC funding only went through 2027, and how a process would be developed to discuss ongoing City priorities with Council with the considered assumptions not being included in the forecast. He was struggling with strategizing and prioritizing without knowing cost estimates. City Manager Ed Shikada responded, regarding implications of certain decisions, that only items consistent with the forecast and direction received would be put on consent. He noted that it was included in the way the agendas were moved forward. What was before the Committee reflected prudent financial planning and decision making. An example of strategic decisions were assumptions for labor agreements, grants, etc. Budget Manager Harper expressed that the SUMC funding was for PERT, and he believed it only went through 2027 because the funding would be depleted. Chair Burt voiced, regarding strategizing and prioritizing, that the LRFF had a range of explicit numbers each year going out a number of years and that there needed to be humility in reviewing it. He thought the report indicated certain things would happen, and he believed qualifiers should be put in the language because there were uncertainties on a variety of levels. He noted that forecasts always showed long-term deficits, and he thought this forecast was showing less long-term deficit than the City had had in several years. Vice Mayor Stone asked if there was an historic margin of error within the projections. Assistant City Manager Nose answered the budget can swing millions in any given year, and different Councils had made different policy choices. When staff did the pandemic budget, they provided Council with three forecasts to be chosen from for planning. Variability was expected. There had been an audit, which she did not have at this meeting, but it identified areas for additional detail, but it overall upheld the process and acknowledged there would always be variability. She pointed out that the forecast was not showing 10 years of deficits. There were more aggressive estimates, but she credited current and past Council members working hard to be able to have such a forecast. Vice Mayor Stone asked Assistant City Manager Nose to return with the audit at a later date. Council Member Lythcott-Haims inquired if the tier-2 allocation was forecasted. Assistant City Manager Nose replied that the tier-2 allocation was not forecasted. Budget Manager Harper commented that the money added last year for tier-2 items was included because the programs were continuing, but on the known unknown list was a lot of what had been deferred. If Council wanted to add those, a funding decision would need to be made. SUMMARY MINUTES Page 7 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 Assistant City Manager Nose added that Council and staff were often considering the newest initiative and dealing with development of the policies and limitations of the programs. In the $275M General Fund budget were core things, and the City would be remiss if they were to be removed. She noted that there was probably about $3M in the Uncertainty Reserve and maybe $3M in excess revenue, depending on the needs at midyear, which she thought was a good indicator as to the amount of funds the Committee and Council would have for one-time funding in the upcoming year. Some of the one-time funds could be allocated to cover the 2026 forecasted deficit or allocate to projects or priorities, which were policy decisions to be embarked on moving into the budget process. Chair Burt queried if base assumptions going forward would be adjusted for projected surplus revenue. He discussed the possible reasons for the DTT being conservative. He questioned if the assessor had provided any information concerning the commercial property tax or if any adjustments had been made to the assumptions to be more conservative. He asked if there was a 5- or 10-year averaging of the unbudgeted, unprojected grants and if over time it would give a better sense based on the average. He specified why it could be a useful information. Budget Manager Harper confirmed that base assumptions would be adjusted for projected surplus revenue. Assistant City Manager Nose noted that the property tax consultant helped inform the property tax estimates. They did not have details from the county in terms of the actual adjustments they might make. However, they advised staff to be cautious in the level of growth on the commercial side, which had been factored in. They had seen an increase in the number of downward assessments in the property tax from a data perspective. [Inaudible] where there had been a challenge or the assessor had proactively reduced the assessed value based on market or challenges. Staff did not have averaging of unbudgeted, unprojected grants. She specified that oftentimes when a grant was received it was appropriated with the corresponding expense. City Manager Shikada thought staff could obtain information related to averaging of unbudgeted, unprojected grants in preparation for the Full Council discussion. He recalled that grantsmanship had been ramped up significantly over the last three or so years, and the grants received for grade separations in the last year or so would make the information appear very spikey. It may be difficult to break it down by one-time capital project grants versus program grants, but maybe they could categorize it. Chair Burt inquired, with respect to the budgeted uses of the business tax, how the approximately $6M had been built into the projections for transportation and affordable housing. SUMMARY MINUTES Page 8 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 Budget Manager Harper responded that the revenue for transportation had been programmed to offset costs for the grade separation projects in the Capital Fund. Chair Burt thought the negotiations with VTA allowed the use of Measure B dollars for the design and next steps on grade separation. Budget Manager Harper responded that it had been programmed to use that funding for those projects. If there was other funding that could be swapped out for it, it could be used, but he had not heard that as an available option. Assistant City Manager Nose added that Measure B funding was being separated out by the crossings and was where staff had started to identify Measure B funds coming into play beyond the planning phase. Chair Burt explained why it was positive to hear that it had been budgeted as such. He thought there should be a future discussion as to what portion of the $3M should be set aside for a future, even bondable revenue stream for an additional local share and what portion should be for other transportation projects or services. He queried how the business tax allocation was used for affordable housing. Budget Manager Harper voiced that the affordable housing had not been fully allocated. The business tax was not fully coming in at $3M per piece until calendar year 2025. The funding had been allocated for eligible expenses. Chair Burt stated it was good that it was budgeted but not allocated for a specific purpose. He requested an explanation of how items on the Consent Calendar seemed to be costing more than projected but were still within the budget. City Manager Shikada indicated that would not be the case if appropriations were exceeded, and a specific action requiring additional funding would typically require two-thirds approval by Council. Assistant City Manager Nose discussed what staff would do to make adjustments and what would be done if a contract came in above what had been budgeted, which included absorbing extra with vacancy savings, for example. If the appropriation needed to be increased, staff would bring forward an amendment to the budget, which would require a two-thirds vote. Budget amendments were put on consent but only if they were within the course of the normal business, which she explained. If it was an ongoing new cost, new priority, it would be put on action for Council discussion. Things that would materially change the forecast would not be put on consent, but instead it would be an action item, as it would typically be a policy change. Chair Burt requested that be explained to Council. SUMMARY MINUTES Page 9 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 Council Member Lythcott-Haims asked what the contract limit amount was that could be brought forward on consent. She felt it would be great to know in an annual cycle how much of the City’s expenditures were coming through on consent. City Manager Shikada answered there was not a specific contract limit amount. Chair Burt remarked that consent items did not come out of the blue. They were part of the set of operations and the budget and were the fulfillment of what had been adopted in a budget. City Attorney Molly Stump added that the procedures and protocols provided specifics related to the consent calendar. Items were on consent because they were routine business previously approved by Council. Chair Burt was interested in seeing how this LRFF compared to a series of years over time, which he thought would be useful for Council to understand it in context. Related to the TOT, he discussed a history of marketing programs for the business community, and he thought marketing should be revisited. He suggested reinvesting business taxes paid back into the business community for transportation to serve greater portions of the business community by supplying transit passes for modest and lower income employees. He stated that small businesses had indicated TDM had a positive impact on employee retention. He thought investing in that should be considered because there would be economic development benefits and benefits to the community as a whole. He suggested a visitors bureau and making a contribution to the hotel community to manage the oversight of it, which would be a public/private partnership. He discussed projections and the national and the Silicon Valley business environments and it looking as though there may not be a recession. He commented on the tech economy having a mild recession. City Manager Shikada stated that addressing marketing programs, a visitors bureau, and reinvesting in the business community could be included in the midyear budget discussion. Council Member Lythcott-Haims assumed the unfunded pension liability would achieve the 90% paydown two years sooner than previously expected. She asked what would be done differently when 90% was reached. Assistant City Manager Nose would have to confirm if the unfunded pension liability would achieve the 90% paydown two years sooner than previously expected. She did not think anything would be done differently when 90% was reached. The measures being done were to help ensure there would be no spike or volatility in a LRFF on an annual basis. Chair Burt inquired if there would be a decline in the needed investment. He hoped when 90% was reached that more dollars would be available for capital investment and services as opposed to pensions. SUMMARY MINUTES Page 10 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 Assistant City Manager Nose commented that the pending funding policy had been expanded to be a long-term liability policy, and it encompassed OPEB, retiree medical, and proactive pension funding. In theory, reaching 90% would mean moving to a more normal cost level. She stated that things would remain status quo because it was already included in all the forecasts. Council Member Lythcott-Haims referenced Packet Page 44 and stated that it implied that within the context of the 10-year plan, the City would find that it has completed the work quite well. Chair Burt stated that Council Member Lythcott-Haims was correct. The projection did not factor in accelerating the process by having essentially budget surpluses at the end of the year that would be divided between allocating to capital and allocating to this. He stated that likely that date would be beat. Council Member Lythcott-Haims inquired if more should be allocated to HSRAP or if it should be fixed to a percentage of the General Fund. Vice Mayor Stone liked the consistency of looking forward to the 31% marker. Going to 1% concerned him given the projections, but he was interested in a policy fixing it to a percentage of the General Fund. Chair Burt asked if 0.8 was based upon the difference of 0.83% and 1%. Budget Manager Harper referenced the table for FY 2025, and stated that about $2.1M was projected for total human services funding. To get to 1% of the $282M budget, about $800K would need to be added to it, so the total funding would be at about $2.9M. Vice Mayor Stone suggested increasing it to 0.5% of the budget as a compromise. Chair Burt assumed that would be about $600K, and he indicated it would be a referral from this Committee to Council for policy discussion. He noted that the Finance Committee would not typically meet in January, but if a policy change moved forward, it would allow a carryover of existing committee compositions until new committees were appointed. There could be a January meeting for a deeper discussion. He did not know if a referral would be made for midyear, so maybe it did not need to be that soon. If it were to be a recommendation for the FY 2025 budget, the Committee needed to have that discussion early enough so staff could incorporate that input into their budget planning. He asked staff for thoughts on the process. Assistant City Manager Nose responded that the natural point would be to make a recommendation at the Committee and then take it to the Full Council for the long-range discussion. She did not think staff could meet that time line. If the Committee were to review it in February and then get formal Council direction by early March, that would be the absolute last date staff would be able to enter it into the budget. She remarked that it had been SUMMARY MINUTES Page 11 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 discussed in 2016 with strong opposition. She stated it would constrain planning on an annual basis that may not be anticipated until it was too late. Regarding policies, she explained that HSRAP was considered when reviewing allocation of surpluses, for example, which provided flexibility. Chair Burt stated that supplemental HSRAP funding had been given previously, and an annual number had gone to HRC. He asked if that number had been adjusted for inflation. Assistant City Manager Nose answered that inflation was adjusted for every year. There was a set number, but to make it a policy that it be a percentage of the General Fund could have implications, which could lead to a labor-intensive activity of normalizing and adjusting. The General Fund could change any given year because of one-time monies, grants, etc. She noted that her comments were connected to the prior Committee conversation. Chair Burt expressed there needed to be a deeper discussion regarding a fixed percentage if it was to be increased and that there needed to be continuity in funding. He remarked that HSRAP funding did not typically vary year to year other than an increase last year, which was on a one-time basis. Chair Burt commented on the cons of not fixing a percentage. He thought there was an important policy decision to be made. Council Member Lythcott-Haims thought Avenidas and PACCC (Palo Alto Community Childcare) were in very different circumstances than all the others under HSRAP and that all the others were not being funded at the level they had requested. She noted that historically more of the General Fund had gone to HSRAP. She discussed the pros for pegging HSRAP to the General Fund. She supported there being further discussion. Discussion ensued related to further discussing the issue, and the Committee decided to make it a continued referral. Vice Mayor Stone agreed with Chair Burt and Council Member Lythcott-Haims’ comments. MOTION: Council Member Lythcott-Haims moved, seconded by Vice Mayor Stone to recommend that the City Council accept the Fiscal 2025-2034 Long Range Financial Forecast Base Case and the FY 2025 Budget Development Guidelines (Attachment A) and direct staff to use this forecast as the starting point for the initiation of the FY 2025 budget process. MOTION PASSED: 3-0 2. Information Item: Calendar Year (CY) 2023 Finance Committee Referrals Status Assistant City Manager Kiely Nose declared that staff did not have a presentation. This was an annual report to provide the Committee with the status of outstanding referrals. Many were SUMMARY MINUTES Page 12 of 12 Finance Committee Meeting Summary Minutes: 12/05/2023 complete and some in progress or pending future actions. HSRAP would be edited to be continued in February. Vice Mayor Stone queried if there was a typo of it being complete and if it was instead intended to be in progress. Assistant City Manager Nose replied it was not a typo in the sense that staff brought the conversation back to the Committee. Usually the Committee would make a final decision, so staff probably should have said pending the Committee’s recommendation. Chair Burt noted that there was an issue of the ticketing process as well as the pricing related to JMZ. He asked for the status. Assistant City Manager Nose stated that CSD had a consultant under contract. They had been actively doing interviews of stakeholders for JMZ, and they expected the report in the new calendar year. It would then be brought back for the Committee’s review. New funding had been provided for a new ticketing system. She needed to find out if that procurement had been done. Future Meetings and Agendas Chair Burt declared that a January meeting had not been scheduled. HSRAP funding would potentially be in February. Assistant City Manager Kiely Nose stated that in February preliminary utility rate forecasts would typically be discussed. The Utilities team was working on those, but it would depend on the timing with the UAC review as well. Adjournment: The meeting was adjourned at 7:15 P.M.