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HomeMy WebLinkAboutStaff Report 143-10TO: ATTN: FROM: DATE: HONORABLE CITY COUNCIL FINANCE COMMITTEE CITY MANAGER February 16, 2010 DEPARTMENT: ADMINISTRATIVE SERVICES CMR: 143:10 SUBJECT: Update to Long Range Financial Forecast, 2010-2020 RECOMNIENDATION Staff recommends that the Finance Committee review and comment on the attached forecast of revenues, expenses, and reserve levels and forward it to the full Council. BACKGROUND Attached to this report is the City's updated General Fund Long Range Financial Forecast (LRFF) for the fiscal years 2010 through 2020. The LRFF identifies key issues that will guide the upcoming 2010-11 budget process and affect the City's future financial condition. In addition, the December 15 report (CNIR 478:09) is attached, containing copies of the September 8, October 5, and December 1,2009 reports to Council. DISCUSSION This Long Range Financial Forecast and analysis demonstrate the irrefutable reality of the City's structural deficit, which will only get worse with each passing year. The City cannot continue to maintain the same portfolio of services at current levels given its shrinking revenue base. As Stephen Levy of the Continuing Study of the California Economy aptly commented regarding municipal finance for California cities "the arithmetic doesn't work. Something's gotta change." Although the worst of the recession may be behind us, the pace, if not the fact, of the recovery is in question, particularly in California. Nationally, economists point to increased Gross Domestic Product, some increase in consumer and business optimism, and increasing manufacturing orders as evidence of a nascent recovery. However, California's unending fiscal quagmire and high unemployment rate continue to negatively impact the City's finances. Until job creation picks up considerably, consumer spending resumes, and property values grow at something like their prior rate of increase, the City's fiscal position will continue to deteriorate. Furthermore, even when that local recovery takes hold, the traditional revenue sources will not sustain the current array of City services, employee salaries and benefits, and extensive infrastructure. Thus the City will need to trim its service offerings, find new sources of revenue, or continue to prune the benefits packages offered to its employees in an equitable manner. CMR:143:1O Page 1 of 4 The Forecast assumes that one-time adjustments are made in FY 2010 to bring this year's deficits to zero, but no structural adjustments are made for the future. Moreover, the Forecast does not fully fund the $510 million infrastructure liability, which if not adequately addressed, will lead to significant long-term damage to the City's physical assets. Therefore this Forecast illustrates the magnitude of the work that remains to balance the General Fund budget. The following table summarizes the base Forecast presented in the report. SUMMARY LONG RANGE FINANCIAL FORECAST MODEL 2010 ($000) FY2OO9 FY 2010 FY 2010 FY2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY2018 FY 2019 FY 2020 Adopted Projected Actual Budget Budget Revenues Taxes $ 69,t02 $ 69,285 $ 66,648 $ 68,806 $ 71,082 $ 73,707 $ 76,635 $ 80,250 $ 64,115 $ 87,781 $ 91,236 $ 93,980 $ 97,245 Total other revenues 43,260 42,546 40,827 42,190 44,301 43,276 44,646 46,288 47,998 49,786 51,616 53,587 55,662 Reimbursements trom Other Funds 11,463 10,643 10,559 10,790 11,158 11,456 11,852 12,329 12,827 13,348 13,892 14,463 15,014 Transfers trom Other Funds 17,614 19,664 20,207 18,709 19,347 19,865 20,550 21,378 22,242 23,145 24,089 25,078 26,034 TOTAL REVENUES 141,459 142,138 138,241 140,495 145,888 148,304 153,683 160,245 167,182 174,060 180,833 187,108 193,955 Expenditures Salaries and Benefits 91,581 92,717 91,787 95,272 101,335 106,128 112,179 117,330 122,647 128,217 134,045 140,163 146,123 Non-Salary Expenditures 33,432 38,344 38,734 38,980 39,918 41,434 42,482 43,726 45,006 46,326 47,686 49,087 50,442 Intrastructure Fund and Capital Projects 14,648 9,900 7,200 10,248 11,480 12,896 13,339 13,810 14,312 14,847 15,417 16,024 16,673 Debt Service, Tech Fund Repayment, Other 1,166 1,128 2,353 2,347 2,197 2,022 796 803 803 804 803 805 285 TOTAL EXPENDITURES 140,827 142,089 140,074 146,846 154,930 162,480 168,795 175,669 182,767 190,194 197,951 206,079 213,524 Drawdown on Budget Stabilization Reserve 1,833 Comprehensive Annual Financial Rpt. Recon. In GRAND NET SURPLUS (GAP) $ 809 $ 49 $ -$ (6,351) $ (9,042) $ (14,176) $(15,113) $ (15,424) $ (15,585) $(16,134) $(17,119) $ (18,970) $(19,569) For FY 2010, the Forecast projects an initial funding gap of $6.3 million. This is an increase of $0.9 million from the $5.4 million gap projected in December 2009, due primarily to a further decline in sales tax revenue. The $6.3 million can be reduced by a net $4.5 million through the following measures: • Salary savings from vacant positions-$1.2 million • Savings from non-salary one-time reductions-$1.8 million • Savings from Public Safety Building funds that were budgeted but not spent-$2.7 million • Repayment of Technology Fund-($1.2 million) These measures leave a net operating gap of $1.8 million in FY 2010, which can be offset by drawing on the General Fund's Budget Stabilization Reserve (BSR), leaving a balance of $22.9 million or 16.4% of total General Fund expenditures. The $1.8 million draw on the BSR includes: (a) the $0.8 million transfer to the Technology Fund at Council's direction in January 2010 (b) the $0.4 million transfer needed to complete the Technology Fund repayment; and (c) $0.6 million needed to close the expected FY 2010 gap. The Forecast does not include benefit savings from a two-tier pension formula of 2.0% at 60 for new employees, expected to be implemented in the spring of 2010. Nor does it include future employee contributions to health care premiums. Palo Alto is far from alone in facing these dilemmas; California cities in general are faced with a CMR:143:10 Page 2 of 4 narrowing revenue base. But in Palo Alto in particular, the departure of auto dealerships, competition from large retailers in neighboring jurisdictions, and lack of space to grow leave the City on shrinking fiscal ground. Even if the Silicon Valley economy does reasonably well over the next two to three years, the City will only partially benefit from that recovery, because of its narrow tax base and the delayed response of the housing market. NEXT STEPS The presentation of this Forecast is the first step of a process of ongoing discussions to formulate plans for balancing the City's budget. The chart below outlines one-time adjustments needed to achieve a balanced budget this fiscal year, as well as the magnitude of structural adjustments that will be required to balance the FY 2011 and FY 2012 budgets. The particulars of those $9.2 million in spending cuts or revenue increases will need to be informed by all stakeholders, including community members, businesses, staff, and others. Funding Gap One-time adjustments Structural adjustments Final 09 CAFR adjustments Bottom line Staff recommends embarking immediately on this multi-step process of reaching sustainable budgets for the future, including a clear timeline for presenting recommendations to Council. RESOURCE IMPACT As with any financial forecast, the fiscal impacts shown are estimates. Estimates of future deficits and surpluses, as well as the estimated costs of future financial challenges, are meant to guide future policy and budget decisions. Staff will introduce the recommended midyear budget adjustments to the Finance Committee on March 2, 2010 and continue the budget reduction proposals with the 2010-11 proposed budget process. POLICY IMPLICATIONS The Long Range Financial Forecast is a tool for Council's use in making policy decisions regarding the allocation of resources. CMR:143:1O Page 3 of 4 ENVIRONMENTAL REVIEW This report does not require California Environmental Quality Act (CEQA) review. PREPARED BY: DEPARTMENTAL HEAD APPROVAL: LALOPEREZ Director, Administrative Services CITY MANAGER APPROVAL: ATTACHMENTS Attachment A: Long Range Financial Forecast Fiscal Years 2010 to 2020 Attachment B: CMR 478:09, "Additional Information Provided in Response to Finance Committee Questions on the 2009 Year-End Close," December 15,2009 143:10 Page 4 LONG RANGE FINANCIAL FORECAST Fiscal Years 2010 to 2020 TABLE OF CONTENTS I. INTRODUCTION 1 II. EXECUTIVE SUMMARY 1 IV. UPDATED MODEL 6 Revenues Expenditures Other Large Expenditures on the Horizon Optimistic and Pessimistic Scenarios 9 10 11 12 III. ECONOMIC OUTLOOK 3 National Economic Outlook Local Economic Outlook Competing Forecasts 3 4 6 V. CONCLUSION AND NEXT STEPS 14 VI. APPENDICES 16 City of Palo Alto 1 2010 I N T R O D U C T I O N City of Palo Alto 1 I. INTRODUCTION The report that follows describes the latest economic outlook, changes in the revenue and expenditure outlook since the adoption of the FY 2010 budget, and implications of those changes. It is intended to be more concise than previous Long Range Financial Forecasts. Staff has reserved for the Appendices a range of background information that will be useful to readers looking for trends that shed light on the City’s current fiscal situation. II. EXECUTIVE SUMMARY Although the worst of the recession may be behind us, the pace, if not the fact, of the recovery is in question, particularly in California. Nationally, economists point to increased Gross Domestic Product, some increase in consumer and business optimism, and increasing manufacturing orders as evidence of a nascent recovery. However, California’s unending fiscal quagmire and high unemployment rate continue to negatively impact the City’s finances. Until job creation picks up considerably, consumer spending resumes, and property values grow at something like their prior rate of increase, the City’s fiscal position will continue to deteriorate. Furthermore, even when that local recovery takes hold, the traditional revenue sources will not sustain the current array of City services, employee salaries and benefits, and extensive infrastructure. As Stephen Levy, senior economist at the Center for the Continuing Study of the California Economy, com- mented during a recent discussion with staff, the tradi- tional revenue sources for local governments are in- creasingly inadequate for sustaining the services those governments offer. “The arithmetic doesn’t work. Something’s gotta change.” Either the City will need to trim its service offerings, find new sources of revenue, or continue to prune the benefits packages offered to its employees in an equitable manner– or, more likely, implement a combination of the three. The U.S. Economy has begun a tentative upturn; the local economy has hit bottom but has yet to show convincing signs of recovery. 2 City of Palo Alto For FY 2010, the updated LRFF analysis projects an initial gap of $6.3 million. This is an increase of $0.9 million from the $5.4 million gap projected in Decem- ber 2009, due primarily to a further de- cline in sales tax revenue. The $6.3 mil- lion can be reduced by a net $4.5 million through the following measures: Salary savings from vacant positions—$1.2 million Savings from non-salary one-time reductions—$1.8 million Savings from Public Safety Building funds that were budgeted but not spent—$2.7 million Repayment of Technology Fund—($1.2 million) These measures leave a net operating gap of $1.8 million in FY 2010, which can be offset by drawing on the General Fund’s Budget Stabilization Reserve (BSR), leaving a balance of $22.9 million, or 16.4% of total Gen- eral Fund expenditures. The $1.8 million draw on the BSR includes: (a) the $0.8 million transfer to the Tech- nology Fund at Council’s direction in January 2010; (b) the $0.4 million transfer needed to complete the Tech- nology Fund repayment; and (c) $0.6 million needed to close the expected FY 2010 gap. In years 2011 to 2020, structural solutions will need to be found to address projected annual funding gaps ranging from $6.4 to $19.6 million. These operating funding gaps include only a partial solution to the esti- Even when the local economic recovery takes hold, the traditional revenue sources for local governments are increasingly inadequate for sustaining services those governments offer. “The arithmetic doesn’t work. Something’s gotta change.” -- Stephen Levy, CCSCE 2010 EXECUTIVE SUMMARY FY 2009 FY 2010 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Actual Adopted Budget Projected Budget Revenues Taxes 69,102$ 69,285$ 66,648$ 68,806$ 71,082$ 73,707$ 76,635$ 80,250$ 84,115$ 87,781$ 91,236$ 93,980$ 97,245$ Total other revenues 43,260 42,546 40,827 42,190 44,301 43,276 44,646 46,288 47,998 49,786 51,616 53,587 55,662 Reimbursements from Other Funds 11,483 10,643 10,559 10,790 11,158 11,456 11,852 12,329 12,827 13,348 13,892 14,463 15,014 Transfers from Other Funds 17,614 19,664 20,207 18,709 19,347 19,865 20,550 21,378 22,242 23,145 24,089 25,078 26,034 TOTAL REVENUES 141,459 142,138 138,241 140,495 145,888 148,304 153,683 160,245 167,182 174,060 180,833 187,108 193,955 Expenditures Salaries and Benefits 91,581 92,717 91,787 95,272 101,335 106,128 112,179 117,330 122,647 128,217 134,045 140,163 146,123 Non-Salary Expenditures 33,432 38,344 38,734 38,980 39,918 41,434 42,482 43,726 45,006 46,326 47,686 49,087 50,442 Infrastructure Fund and Capital Projects 14,648 9,900 7,200 10,248 11,480 12,896 13,339 13,810 14,312 14,847 15,417 16,024 16,673 Debt Service, Tech Fund Repayment, Other 1,166 1,128 2,353 2,347 2,197 2,022 796 803 803 804 803 805 285 TOTAL EXPENDITURES 140,827 142,089 140,074 146,846 154,930 162,480 168,795 175,669 182,767 190,194 197,951 206,079 213,524 Drawdown on Budget Stabilization Reserve - - 1,833 - - - - - - - - - - Comprehensive Annual Financial Rpt. Recon. 177 GRAND NET SURPLUS (GAP)809$ 49$ -$ (6,351)$ (9,042)$ (14,176)$ (15,113)$ (15,424)$ (15,585)$ (16,134)$ (17,119)$ (18,970)$ (19,569)$ SUMMARY LONG RANGE FINANCIAL FORECAST MODEL 2010 ($000) City of Palo Alto 3 mated $510 million infrastructure liability. This liability comprises $302 million in estimated backlogged maintenance of existing infrastructure over twenty years, plus $208 million required to replace or update ex- isting facilities. The Forecast’s planned infrastructure funding is just under 41% of the required funding in the first five years. In light of the magnitude of these projected shortfalls, more comprehensive, structural solu- tions will need to be put into place. The City is far from alone in facing this situation. In a December report by the Public Policy Institute of California, cities statewide were surveyed about their responses to recent fiscal difficulties. As the report described: “The surveys show that even before the state’s budget crisis deepened in 2009-10, many jurisdictions had already imposed a variety of cost-cutting actions associated with managing fiscal stress, including furloughs, layoffs, service cutbacks, and concessions from public employee labor groups. Thus, many are on the brink of having to make cuts that respondents report are likely to cause significant deterioration in services and community conditions. “... cities and counties are caught between a rock and a hard place. As with the state, they have suffered from declining economic conditions that have eroded their revenue bases. But they must also contend with attempts by the state itself to cure its fiscal infirmities with program shifts, cuts, adjustments, and deferments, as well as the devolution of responsibilities down to the local level.” 1 The state’s fiscal mess has a continuing oppressive effect on local economies. Moreover, the effects of the budget cuts being made in education and infrastructure will be felt for decades to come via the degradation of the social and business climate – including the work force job-readiness. California cities in general are faced with a narrowing revenue base. With the departure of auto dealerships, competition from large retailers in neighboring jurisdictions, and lack of space to grow, Palo Alto in particu- lar stands on shrinking fiscal ground. As Stephen Levy suggested, trying to prevent raids by the state is not enough; the City’s revenue base must be broadened. Even though he expects Silicon Valley to do reasonably well over the next two to three years, the City will only partially benefit from that recovery, because of its narrow tax base and the delayed response of the housing market. Therefore, staff needs to continue working with the community, the Council, and its own labor groups on three fronts: curbing benefit costs, pruning City service offerings, and in- creasing revenues. In efforts to generate additional revenues, fees could be raised where cost recovery levels are not being reached and new revenue sources pursued, including those requiring voter approval. Finally, the City must revise its Economic Development strategy and plan. Staff needs to continue working with the community, the Council, and its own labor groups on three fronts: continuing to curb benefit costs, pruning City service offerings, and finding new revenues. Even if the Silicon Valley economy does reasonably well over the next two to three years, the City will only partially benefit from that recovery... UPDATED MODEL 2010 4 City of Palo Alto III. ECONOMIC OUTLOOK Economists and other observers of the local economy see signs of stabilization, but retail spending and new jobs have yet to show much improvement. If the national stage is a sign of things to come, there is some cause for hope, as indicators such as Gross Domestic Product (GDP), manufacturing orders, and jobs created are trending slowly upwards. Economists disagree about what to expect in the coming months for the country as a whole, with several economists predicting a faltering, fragile recovery, and others expecting a more steady recovery. None of the widely reported forecasts have predicted growth beyond the 3.0% range for the coming year. N ATIONAL E CONOMIC O UTLOOK Nationally, the economy is expanding tentatively, although retail sales for calendar year 2009 fell 6.2% compared with 2008 to $4.14 trillion.2 GDP grew at a 2.2 percent annual pace from July to September, while industrial production rose 0.8 percent in November. 3 In January, the Commerce Department’s Census Bureau reported that after strong monthly gains in October and November 2009, December retail sales declined 0.3 percent. Overall, however, fourth quarter sales rose at a 7.0 percent annual rate, after a 6.4 percent gain in the third quarter. So while the trend was “in the right direction, today’s retail sales data show that we have more work to do,” according to U.S. Commerce Secretary Gary Locke. 4 The news in the housing market was mixed at best. Sales of previously occupied homes in the U.S. rose in 2009 for the first time in four years, but prices plunged more than 12% - the sharpest fall since the Depression. According to an economist with Capital Economics, a global economic analysis firm, this “places a large question mark over whether the recovery can be sustained when the extended tax credit expires.” 5 The U.S. unemployment rate reached 10.2% in November, its highest level since 1983. This figure includes only people who have looked for work in the past four weeks. The underemployment rate, which also in- cludes jobless workers who have not recently looked for work as well as part-timers who need full-time work, reached 17.5% in October. And the long-term unemployment rate – individuals unemployed for more than six months – is now 35.6%.6 Not surprisingly, unemployment is of top concern, with many fearing that even as GDP grows, employment will not keep pace. Economists point to a new “normal” among businesses now accustomed to doing more with fewer workers. Fewer jobs will limit consumer spending, which accounts for 70 percent of all economic activity, and slow the recovery. 7 U.S. unemployment is at 10.2%; California unemployment is at 12.4% - its highest level In 69 years. 2010 ECONOMIC OUTLOOK City of Palo Alto 5 S TATE AND L OCAL E CONOMIC O UTLOOK California has lost more jobs than any other state, dropping nearly 618,000 positions between November 2008 and November 2009. 8 California now has about the same number of jobs as it did a decade ago, when there were 3.6 million fewer working-age residents.9 In November 2009 the state jobless rate reached 12.4%, and in December, the state lost another 38,800 jobs. Though the state unemployment rate did not increase in December, San Fran- cisco and San Jose were among the regions where the unemployment rate actually increased for the month by 0.1 to 0.2 percent. 10 A recent article in the San Francisco Chronicle summed up the bleak situation: “December’s [unemployment] figure would have been even higher had not 107,000 Californians quit looking for work last month and thus fallen out of the calculations... The state estimates that 2.254 million people were unemployed in December. In addition, state officials say 1.53 million Californians were forced to work part time in December because they couldn’t find anything full time, and another 903,000 people had stopped look- ing but wanted jobs. These two groups are added to the unemployed to create a broader labor market measure called the underemployment rate. It registered 23.3 percent in December. One of the grimmest facts of the recession… has been the duration of unemployment. In December, 34.9 percent of jobless Californians had been out of work more than 27 weeks, which is longer than the six-month maximum for normal unemployment insurance coverage.” 11 The bleak employment picture depresses retail spending, impact- ing one of the City’s primary revenue sources: sales tax. On the positive side, Bay Area businesses are expressing glimmers of optimism about the future. The Business Confidence Index for the Bay Area improved to a mark of 53 out of 100 in November, up from a reading of 47 in August. An index reading that exceeds 50 signals economic growth, while a reading below 50 signals contraction. “The job cutting is diminishing in the Bay Area,” said Scott Anderson, a Wells senior economist. “But we are forecasting another three to six months of job losses” for the nine-county region. Employers simply aren’t convinced the economy has healed enough to justify a hiring binge – or any hiring.” 12 California has lost more jobs than any other state, dropping nearly 618,000 positions between November 2008 and November 2009. California now has about the same number of jobs as it did a decade ago. Office and R&D Vacancy Rates, 2008 and 2009 City of Palo Alto 0% 2% 4% 6% 8% 10% 12% 14% 16% Q1 ' 0 8 Q2 '0 8 Q3 '08 Q4 ' 0 8 Q1 '0 9 Q2 '09 Q3 ' 0 9 Q4 '0 9 Office R&D Source: Cornish & Carey 2009 Quarterly Report 2010 ECONOMIC OUTLOOK 6 City of Palo Alto Lastly, the Palo Alto real estate market is beginning to show some signs of improvement, with some local real- estate agents reporting brisk sales.13 In the commercial market, vacancy rates appear to at last be declining. If these trends continue, the City should see increased property tax and documentary transfer tax revenue streams in 2011 and beyond. C OMPETING F ORECASTS No one professes that the national recession’s causes have been resolved. As one economist put it, “...the core problems for the economy - bust banks and a massively overleveraged consumer - have not gone away.” 14 The UCLA Anderson Forecast predicted that real GDP would settle into a 2.0 percent rate for 2010, before rising to about 3.0 percent in 2011. It predicted the national unemployment rate would peak at 10.5 percent in the first quarter 2010, and then reach 10.0 percent for the rest of the year. 15 This forecast is matched by a prediction from Goldman Sachs that GDP will grow by 2.1 percent in 2010. The Anderson Forecast predicted that the California economy would grow little or not at all through 2010 – with an average jobless rate of 12% -- but pick up slightly in early 2011. 16 On the more optimistic side, the National Association for Business Economists predicted real GDP growth of 2.9 percent for 2010, and Economist magazine forecast 2.7 percent growth for 2010. 17 Many observers are concerned that as federal stimulus programs term out, the economy will falter once again. For example, “when the [first-time homeowners] tax credit expires this spring and the government phases out programs to keep mortgage rates low, the housing market will have to stand on its own. Many economists doubt it can.” 18 The mixed economic signals described above set the stage for a Long Range Financial Forecast showing very modestly increasing revenues over the next four years. IV. UPDATED MODEL The following tables show updated forecasts of General Fund reve- nues and expenditures from FY 2010 to FY 2020; the percentage changes year-over-year included in the Forecast, and Budget Stabi- lization Reserve balances that result. All three tables should be viewed as a Base Case—what the General Fund looks like if no structural changes are made over the next ten years. For fiscal years 2011 to 2020, structural solutions must be implemented to address shortfalls ranging from $6.4 to $19.6 million. Economists forecast national GDP growth in the 2-3 percent range for 2010, and an unemployment rate settling back to 10% for most of the year. But in California, analysts predicted little or no growth in 2010 and a jobless rate of 12%. 2010 ECONOMIC OUTLOOK City of Palo Alto 7 2010 UPDATED MODEL FY 2009 FY 2010 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Actual Adopted Budget Projected Budget Revenues Sales Taxes 20,089$ 19,650$ 17,190$ 17,868$ 18,577$ 19,335$ 20,175$ 21,067$ 22,014$ 22,784$ 23,467$ 24,137$ 25,056$ Property Taxes 25,432 25,752 25,778 25,907 26,553 27,546 28,852 30,293 31,861 33,410 34,954 35,787 36,822 Utility User Tax 11,030 11,250 11,417 12,513 13,156 13,676 13,973 14,703 15,486 16,328 17,200 18,071 18,966 Transient Occupancy Tax 7,111 7,000 6,639 6,771 6,920 7,118 7,420 7,773 8,161 8,528 8,806 9,057 9,336 Documentary Transfer Tax 3,092 2,800 3,250 3,313 3,394 3,485 3,588 3,693 3,774 3,809 3,788 3,804 3,836 Other Taxes, Fines & Penalties 2,348 2,833 2,374 2,434 2,482 2,547 2,627 2,721 2,819 2,922 3,021 3,124 3,229 Subtotal: Taxes 69,102 69,285 66,648 68,806 71,082 73,707 76,635 80,250 84,115 87,781 91,236 93,980 97,245 Service Fees & Permits 16,210 17,437 15,814 16,575 17,799 18,131 18,660 19,395 20,160 20,956 21,783 22,717 23,688 Joint Service Agreements (Stanford Univers 7,796 7,857 7,632 7,991 8,556 8,923 9,334 9,793 10,276 10,786 11,322 11,889 12,484 Interest Earnings 2,008 1,900 1,662 1,646 1,676 1,724 1,785 1,852 1,923 2,002 2,053 2,095 2,163 Other revenues 17,246 15,352 15,719 15,978 16,270 14,498 14,867 15,248 15,639 16,042 16,458 16,886 17,327 Reimbursements from Other Funds 11,483 10,643 10,559 10,790 11,158 11,456 11,852 12,329 12,827 13,348 13,892 14,463 15,014 Total Revenues Before Transfers 123,845 122,474 118,034 121,786 126,541 128,439 133,133 138,867 144,940 150,915 156,744 162,030 167,921 Transfers from Other Funds 17,614 19,664 20,207 18,709 19,347 19,865 20,550 21,378 22,242 23,145 24,089 25,078 26,034 TOTAL REVENUES 141,459 142,138 138,241 140,495 145,888 148,304 153,683 160,245 167,182 174,060 180,833 187,108 193,955 Expenditures Base Salaries 62,104 63,512 63,669 64,164 66,233 67,470 69,437 72,174 75,020 77,978 81,054 84,251 87,575 Salary & Benefit Reductions to be Negotiated (1)(3,000) PAPOA Salary Increase Deferral (2)(759) Savings from SEIU (1,222) (1,222) (1,246) (1,271) (1,310) (1,362) (1,416) (1,473) (1,532) (1,593) (1,657) Savings from Mgmt./Prof. (806) (806) (822) (839) (864) (898) (934) (972) (1,010) (1,051) (1,093) Benefits 29,477 32,205 32,205 33,373 36,396 38,270 40,259 42,375 44,613 46,980 49,475 52,125 54,918 Other Activities Additional Retirement Contribution Increase (3)1,031 2,774 4,963 5,389 5,756 6,140 6,542 6,963 6,963 Retiree Medical Cost Increase 735 735 735 735 735 735 735 735 735 735 Salary & Benefit Reductions to be Negotiated - (972) (991) (1,011) (1,042) (1,083) (1,127) (1,172) (1,219) (1,267) (1,318) Vacant Positions Salary Savings (1,300) Subtotal: Salaries and Benefits 91,581 92,717 91,787 95,272 101,335 106,128 112,179 117,330 122,647 128,217 134,045 140,163 146,123 Contract Services 10,100 9,076 9,562 9,804 9,951 10,120 10,373 10,684 11,005 11,335 11,675 12,025 12,386 Supplies & Materials 3,023 3,547 3,391 3,480 3,532 3,592 3,682 3,793 3,906 4,023 4,144 4,269 4,397 General Expense 9,008 10,193 10,285 9,870 10,121 10,385 10,681 11,002 11,330 11,670 12,020 12,381 12,665 Rents, Leases, & Equipment 1,014 1,212 1,180 1,213 1,231 1,252 1,283 1,322 1,362 1,402 1,445 1,488 1,532 Allocated Expenses 10,287 14,316 14,316 14,613 14,832 15,084 15,462 15,925 16,403 16,895 17,402 17,924 18,462 Other Activities Library Operating Cost Increase 250 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Total Expenditures Before Transfers 125,013 131,061 130,521 134,252 141,253 147,562 154,661 161,056 167,653 174,543 181,731 189,249 196,566 Transfers to Other Funds GF Transfer for Infrastructure CIP 8,062 6,180 6,180 8,501 8,844 9,211 9,604 10,024 10,474 10,955 11,470 12,021 12,610 Other Activities Infrastructure Contribution Increase 1,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Technology Fund Repayment 1,225 1,225 1,225 1,225 Public Safety Bldg. Budget Savings (2,700) GF Transfer for Other Capital Projects 6,586 3,720 3,720 1,747 1,636 1,685 1,735 1,786 1,838 1,892 1,947 2,003 2,063 Debt Service 1,082 1,086 1,086 1,080 929 752 749 754 751 753 752 754 234 Other 84 42 42 42 44 45 47 49 51 51 51 51 51 TOTAL EXPENDITURES 140,827 142,089 140,074 146,846 154,930 162,480 168,795 175,669 182,767 190,194 197,951 206,079 213,524 Net Operating Surplus/(Gap) 632 49 (1,833) (6,351) (9,042) (14,176) (15,113) (15,424) (15,585) (16,134) (17,119) (18,970) (19,569) Drawdown on Budget Stabilization Reserve 1,833 Comprehensive Annual Fin. Rpt. Recon. 177 Subtotal 177 - 1,833 - - - - - - - - - - GRAND NET SURPLUS (GAP) 809$ 49$ -$ (6,351)$ (9,042)$ (14,176)$ (15,113)$ (15,424)$ (15,585)$ (16,134)$ (17,119)$ (18,970)$ (19,569)$ (1) In FY 2010, $2.8 million in permanent budgeted compensation savings has been realized. (2) Police union (PAPOA) deferred their FY 2010 negotiated salary increase of $0.8 million to FY 2011 (3) Based on current 2.7% @ 55 formula; employee contribution towards health care premiums not included. Note: Assumption of no salary increase for SEIU and Mgmt./Prof. in FY 2010 and FY 2011 and no salary increase for Firefighters (IAFF) in FY 2011 LONG RANGE FINANCIAL FORECAST MODEL 2010 ($000) 8 City of Palo Alto FY 2009 FY 2010 ABFY 2010 PB FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 % Change % Change % Change % Change % Change % Change % Change % Change % Change % Change % Change % Change % Change Cumulative % Change, 2010- Revenues Sales Taxes (11.20%) (2.19%) (14.43%) 3.94% 3.97% 4.08% 4.34% 4.42% 4.50% 3.50% 3.00% 2.86% 3.81% Property Taxes 10.17% 1.26% 1.36% 0.50% 2.49% 3.74% 4.74% 4.99% 5.18% 4.86% 4.62% 2.38% 2.89% Utility User Tax 7.24% 1.99% 3.51% 9.60% 5.14% 3.95% 2.17% 5.22% 5.33% 5.44% 5.34% 5.06% 4.95% Transient Occupancy Tax (10.85%) (1.56%) (6.64%) 1.99% 2.20% 2.86% 4.24% 4.76% 4.99% 4.50% 3.26% 2.85% 3.08% Documentary Transfer Tax (42.54%) (9.45%) 5.10% 1.94% 2.44% 2.69% 2.94% 2.94% 2.19% 0.94% (0.57%) 0.44% 0.83% Other Taxes, Fines & Penalties (5.63%) 20.66% 1.11% 2.53% 1.97% 2.62% 3.14% 3.58% 3.60% 3.65% 3.39% 3.41% 3.36% Subtotal: Taxes (3.81%) 0.26% (3.55%) 3.24% 3.31% 3.69% 3.97% 4.72% 4.82% 4.36% 3.94% 3.01% 3.47%45.91% Service Fees & Permits (5.43%) 7.57% (2.44%) 4.81% 7.38% 1.87% 2.92% 3.94% 3.94% 3.95% 3.95% 4.29% 4.27% Joint Service Agreements (Stanfor 12.40% 0.78% (2.10%) 4.70% 7.07% 4.29% 4.61% 4.92% 4.93% 4.96% 4.97% 5.01% 5.00% Interest Earnings (10.04%) (5.38%) (17.23%) (0.96%) 1.82% 2.86% 3.54% 3.75% 3.83% 4.11% 2.55% 2.05% 3.25% Other revenues (4.36%) (10.98%) (8.85%) 1.65% 1.83% (10.89%) 2.55% 2.56% 2.56% 2.58% 2.59% 2.60% 2.61% Reimbursements from Other 1.32% (7.32%) (8.05%) 2.19% 3.41% 2.67% 3.46% 4.02% 4.04% 4.06% 4.08% 4.11% 3.81% Total Revenues Before Tran (2.87%) (1.11%) (4.69%) 3.18% 3.90% 1.50% 3.65% 4.31% 4.37% 4.12% 3.86% 3.37% 3.64%42.26% Transfers from Other Funds 2.24% 11.64% 14.72% (7.41%) 3.41% 2.68% 3.45% 4.03% 4.04% 4.06% 4.08% 4.11% 3.81% TOTAL REVENUES (2.27%) 0.48% (2.28%) 1.63% 3.84% 1.66% 3.63% 4.27% 4.33% 4.11% 3.89% 3.47% 3.66%40.30% Expenditures Base Salaries 2.77% 2.27% 1.30% 1.99% 3.22% 1.87% 2.92% 3.94% 3.94% 3.94% 3.94% 3.94% 3.95% Salary & Benefit Reductions to be Negotiated (1 N/A N/A PAPOA Salary Increase Deferral (2) N/A Savings from SEIU N/A 0.00% 2.00% 2.00% 3.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Savings from Mgmt./Prof. N/A 0.00% 2.00% 2.00% 3.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Benefits (4.54%) 9.25% 9.25% 3.63% 9.06% 5.15% 5.20% 5.26% 5.28% 5.31% 5.31% 5.36% 5.36% Subtotal: Salaries and Benef 0.30% 1.24% 0.23% 3.80% 6.36% 4.73% 5.70% 4.59% 4.53% 4.54% 4.55% 4.56% 4.25%59.20% Contract Services 7.37% (10.14%) (5.33%) 2.53% 1.50% 1.70% 2.50% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% Supplies & Materials (0.10%) 17.33% 12.17% 2.62% 1.50% 1.70% 2.50% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% General Expense (1.83%) 13.15% 14.18% (4.04%) 2.55% 2.61% 2.85% 3.00% 2.99% 3.00% 3.00% 3.00% 2.30% Rents, Leases, & Equipment (10.58%) 19.53% 16.33% 2.83% 1.50% 1.70% 2.50% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% Allocated Expenses (30.39%) 39.17% 39.17% 2.07% 1.50% 1.70% 2.50% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% Total Expenditures Before T (43.21%) 4.84% 4.41% 2.86% 5.21% 4.47% 4.81% 4.13% 4.10% 4.11% 4.12% 4.14% 3.87%50.60% Transfers to Other Funds GF Transfer for Infrastructure CIP 13.77% (23.34%) (23.34%) 37.55% 4.04% 4.15% 4.26% 4.38% 4.48% 4.60% 4.70% 4.80% 4.90% GF Transfer for Other Capital 39.50% (43.52%) (43.52%) (53.04%) (6.35%) 3.00% 2.97% 2.94% 2.91% 2.94% 2.91% 2.88% 3.00% Debt Service (0.01%) 0.38% 0.36% (0.54%) (13.99%) (19.07%) (0.40%) 0.68% (0.31%) 0.15% (0.10%) 0.31% (69.04%) Other 115.38% (50.00%) (50.00%) 0.00% 4.00% 4.00% 4.00% 4.00% 4.00% 0.00% 0.00% 0.00% 0.00% TOTAL EXPENDITURES (39.58%) 0.90% (0.53%) 4.84% 5.51% 4.87% 3.89% 4.07% 4.04% 4.06% 4.08% 4.11% 3.61%52.44% PERCENTAGE CHANGES IN FORECAST FOR REVENUES AND EXPENSES UPDATED MODEL 2010 City of Palo Alto 9 The discussion on page 9, highlights changes in revenues and expenditures from budgeted values, as well as comparisons to FY 2009 actual results. The updated Forecast shows a Net Operating Deficit line of $1.8 million in FY 2010, after implementing meas- ures to reduce a net $4.5 million from the initial $6.3 million gap. Staff suggests balancing the remaining funding gap using the Budget Stabilization Reserve (BSR) for this year , leaving the BSR at $22.9 million or 16.4% of General Fund expenditures. But with forecasted gaps of $6.4 million to $19.6 million from 2011 to 2020, if the BSR were used as the only tool to balance those budgets, it would be depleted some time in the middle of FY 2013. (See Gen- eral Reserve Summary above.) In this Base Case Forecast, revenues increase 40.3% over the ten years, while expenses increase 52.4%. As in earlier versions, the Forecast assumes a slow rate of growth for the overall economy and for City revenues. The Forecast does not include expected new revenue sources, such as new hotels planned for construction. Staff has added an Optimistic and a Pessimistic Scenario, which are discussed following the base forecast. R EVENUES Sales Tax FY 2010 sales tax revenue is now estimated at $17.2 million, compared to $19.7 million assumed in the FY 2010 adopted budget – a $2.5 million or 13% drop. This estimate is $0.4 million lower than in the December 1 report due to the lower-than-anticipated 3rd quarter 2009 results. The new figure represents a 14% drop in sales tax since FY 2009. Note that Fourth Quarter results, which include the Holiday season, are unknown as of the printing of this report. Since the FY 2010 budget was adopted, sales tax revenue projections have decreased by $2.5 million (13%), while property tax projections have held steady. UPDATED MODEL 2010 Adopted Projected FY 2009 FY 2010 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Budget Stabilization Reserve Beginning Balance 26,102$ 24,747$ 24,747$ 22,914$ 16,563$ 7,521$ (6,655)$ (21,768)$ (37,192)$ (52,777)$ (68,911)$ (86,030)$ (105,000)$ To/(From) Reserves 809 49 (1,833) (6,351) (9,042) (14,176) (15,113) (15,424) (15,585) (16,134) (17,119) (18,970) (19,569) CAFR adjustments 1,527 0 0 0 0 0 0 0 0 0 0 0 0 One-time Only Increases/(Decreases) (3,691) 0 0 0 0 0 0 0 0 0 0 0 0 Ending Balance 24,747$ 24,796$ 22,914$ 16,563$ 7,521$ (6,655)$ (21,768)$ (37,192)$ (52,777)$ (68,911)$ (86,030)$ (105,000)$ (124,569)$ % of Total Expenditures 17.6% 17.5% 16.4% 11.3% 4.9% (4.1%) (12.9%) (21.2%) (28.9%) (36.2%) (43.5%) (51.0%) (58.3%) GENERAL FUND RESERVE SUMMARY ($000) 10 City of Palo Alto Property Tax The property tax projection for 2010 is $25.8 million, just 0.1% above FY 2010 adopted budget, and 1.3% above FY 2009 receipts. In FY 2011, revenues are projected to remain at FY 2010 levels, or $0.5 million less than was projected in December 2009. The source of decrease in FY 2011 projected revenues is information from the County that the CPI used to calculate changes in assessed value will be negative 0.237% for FY 2011. Transient Occupancy Tax (TOT) The FY 2010 estimate for TOT is now $6.6 million, down 5% from the FY 2010 budgeted amount of $7.0 million and 7% less than actual FY 2009 revenues. FY 2011 revenues are projected to increase by just 2.0%. These estimates reflect the recent reports of dismal October and November 2009 TOT revenues, with declines of 20.7 and 7.2 percent, respectively, from one year prior. Documentary Transfer Tax Forecasted Documentary Transfer Tax revenue is $3.25 million in 2010, a 5% increase over last year’s actual revenues and a 16% increase over the 2010 budgeted amount. This increase results from signs that these revenues have bottomed out and are beginning to show signs of an upturn. Joint Service Agreements The Stanford contract – the Joint Service Agreements’ primary element – declined by $0.2 million for 2010, compared to the FY 2010 budgeted amount, due to reversed Technology Fund charges to the Fire Department and other midyear Fire department reductions. E XPENDITURES Salaries and Benefits Salaries and benefits for FY 2010 are now estimated at $91.8 million, compared to $92.7 million originally budgeted for this fiscal year. This represents a 0.2% increase over FY 2009 actual expenditures. The savings from SEIU and the Management and Professional groups, along with a Palo Alto Police Officers’ Association (PAPOA) salary deferral, contributed to this reduction. The cost savings were partially offset by health insur- ance premium increases and CalPERS (pension) rate increases: Health care premiums for current and retired General Fund employees (not including retiree medical li- ability) in FY 2010 are $1.4 million (12%) above FY 2009 levels. This is a continuation of a long-time trend in health care costs, which increased 159% between 1999 and 2009, and another 11% from FY 2009 to FY 2010. CalPERS implemented a recent increase for 2011 and 2012 which will cause General Fund cost increases of $0.4 million and $1.7 million respectively. In addition to this rate increase, CalPERS announced a future increase in retirement contributions from participating jurisdictions effective FY 2012, due to the loss in its investment portfolio. The City’s estimated additional increases will range from $1.0 million in FY 2012 to $5.4 million in FY 2015. UPDATED MODEL 2010 City of Palo Alto 11 The Forecast does not include benefit savings from a two-tier pension formula of 2.0% at 60 for new employ- ees, expected to be presented to Council for implementation in the spring of 2010. Nor does it include future employee contributions to health care premiums. Non-salary Expense Estimated non-salary expense increased 1% for 2010 compared to budget, and 16% over FY 2009 actual ex- penditures. The primary reason for the increase is the “skipping” of the Tech Fund allocation in FY 2009 and the planned repayment to the Fund over four years, beginning this fiscal year. Infrastructure The 2010 General Fund transfer to the Infrastructure Fund was reduced by $2.0 million, leaving that contribu- tion at $6.18 million, and General Fund funding for other capital projects was cut to $3.72 million from $6.6 million in FY 2009. In addition this forecast shows an expected savings of $2.7 million in FY 2010 funds from Public Safety Building design work that was budgeted but not spent. For 2011, the Infrastructure Fund transfer returns to $8.5 million, and the funding for other capital projects decreases by $2.0 million to $1.7 million. O THER L ARGE E XPENDITURES ON THE H ORIZON Among the City’s other Big-Ticket expense-related challenges are: The City’s most recent actuarial analysis dated January 1, 2009 indicated that the annual required contri- bution towards the citywide employee retiree medical liability will rise by $1.4 million per year, with the General Fund’s share at $0.7 million. Actuarial analyses are required every two years. The new library and community center expansions and rehabilitations require approximately $1.0 million in incremental annual operating expenses beginning in FY 2013. The Forecast assumes funding from the General Fund and Infrastructure Reserve of, on average, $11.9 million per year over the next five years, which is about $17.7 million (60%) less than what is required over the next five years to fund the $302 million 20-year infrastructure liability. This twenty-year amount includes backlogged work carried over from prior years as well as future needed work, and required work to maintain the City’s streets, sidewalks, parks, open space, buildings, and other facilities. In addition, staff identified an- other $208 million to replace existing facilities that have exceeded their useful life or need substantial im- provements. These include the replacement of improvement of: the Municipal Services Center, two Fire Sta- tions, the Animal Shelter, the Public Safety Building and the Junior Museum, among others. The addition of the Public Safety Building to this list increased its total from $148 million to $208 million. The stagger- ing estimate of $510 million in infrastructure reha- bilitation and replacement needs amplifies the se- verity of the City’s “structural” funding gap. Additional anticipated expenses include $0.7 million per year for retiree medical liability, $1.3 million per year in health care premiums, and $1.0 million per year for upgraded libraries and community centers. UPDATED MODEL 2010 12 City of Palo Alto 2010 CONCLUSION The following graph shows the growing gap between planned funding and needed funding over the next five years. Cumulative spending over those five years would be $61.7 million, or 40.6% of the estimated $151.9 million needed. The staggering estimate of $510 million in infrastructure rehabilitation and replacement needs amplifies the severity of the City’s “structural” funding gap. The following graph shows the growing gap between planned funding and needed funding over the next five years. Cumula- tive spending over those five years would be $61.7 mil- lion, or 40.6% of the estimated $151.9 mil- lion needed. O PTIMISTIC AND P ESSIMISTIC S CENARIOS For the Optimistic Scenario, staff assumed the local economy would bounce back somewhat more quickly, lowering the unemployment rate and increasing consumer income at a quickened pace compared to the base forecast. As a result, sales tax revenues would pick up more strongly in 2011 and out years, as would Property Tax and Transient Occupancy Tax revenues. The net result is that funding gaps in years 2011 through 2020 would decline to a range of $4.4 to $10.1 million. In other words, the structural problem would remain, even with a stronger recovery, albeit slightly less dramatically. In the Pessimistic Scenario, staff assumed the recovery would be hampered by unemployment lingering at 12% through 2012, with a resulting negative impact on retail spending. In this scenario, the funding gaps would rise to a range of $8.0 million to $31.4 million, and more draconian measures would need to be enacted in the short run to confront the larger anticipated 2011 gap. All three scenarios show continued General Fund funding gaps for years 2011 to 2020. The base Forecast shows that the City must make $6.4 million of permanent net changes in expenditure and/or revenue levels to avoid a funding gap in 2011, and those changes must grow in magnitude to head off funding gaps that would otherwise grow 200% Infrastructure Funding $25.5 $27.0 $28.6 $32.0 $34.0 $9.9 $10.2 $11.5 $13.3 $13.8 Infrastructure Funding Needed $30.3 Long Range Financial Forecast Transfer to Infrastructure $12.9 $ 5 $ 15 $ 25 $ 35 $ 45 2010 2011 2012 2013 2014 2015 F iscal Year Mi l l i o n s City of Palo Alto 13 2010 CONCLUSION FY 2009 FY 2010 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Actual Adopted Budget Projected Budget Revenues Taxes 69,102$ 69,285$ 67,233$ 70,182$ 73,475$ 77,123$ 81,028$ 85,389$ 90,491$ 94,553$ 98,271$ 102,512$ 107,651$ Total other revenues 43,260 42,546 40,860 42,736 44,898 43,901 45,309 46,997 48,755 50,577 52,447 54,483 56,611 Reimbursements from Other Funds 11,483 10,643 10,559 10,790 11,158 11,456 11,852 12,329 12,827 13,348 13,892 14,463 15,014 Transfers from Other Funds 17,614 19,664 20,207 18,709 19,347 19,865 20,550 21,378 22,242 23,145 24,089 25,078 26,034 TOTAL REVENUES 141,459 142,138 138,859 142,417 148,878 152,345 158,739 166,093 174,315 181,623 188,699 196,536 205,310 Expenditures Salaries and Benefits 91,581 92,717 91,787 95,272 101,335 106,128 112,179 117,330 122,647 128,217 134,045 140,163 146,123 Non-Salary Expenditures 33,432 38,344 38,734 38,980 39,918 41,434 42,482 43,726 45,006 46,326 47,686 49,087 50,442 Infrastructure Fund and Capital Projects 14,648 9,900 8,425 11,473 12,705 14,121 13,339 13,810 14,312 14,847 15,417 16,024 16,673 Debt Service, Other 1,166 1,128 1,128 1,122 972 797 796 803 803 804 803 805 285 TOTAL EXPENDITURES 140,827 142,089 140,074 146,846 154,930 162,480 168,795 175,669 182,767 190,194 197,951 206,079 213,524 Drawdown on Budget Stabilization Reserve - - 1,215 - - - - - - - - - - Comprehensive Annual Financial Rpt. Recon. 177 GRAND NET SURPLUS (GAP)809$ 49$ -$ (4,429)$ (6,052)$ (10,135)$ (10,056)$ (9,576)$ (8,452)$ (8,571)$ (9,252)$ (9,543)$ (8,214)$ LONG RANGE FINANCIAL FORECAST MODEL 2010 ($000) - OPTIMISTIC SCENARIO FY 2009 FY 2010 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Actual Adopted Budget Projected Budget Revenues Taxes 69,102$ 69,285$ 66,296$ 67,669$ 69,289$ 71,136$ 73,158$ 75,832$ 78,679$ 80,785$ 82,547$ 84,212$ 86,400$ Total other revenues 43,260 42,546 40,320 41,645 43,703 42,649 43,984 45,584 47,251 48,978 50,746 52,678 54,714 Reimbursements from Other Funds 11,483 10,643 10,559 10,790 11,158 11,456 11,852 12,329 12,827 13,348 13,892 14,463 15,014 Transfers from Other Funds 17,614 19,664 20,207 18,709 19,347 19,865 20,550 21,378 22,242 23,145 24,089 25,078 26,034 TOTAL REVENUES 141,459 142,138 137,382 138,813 143,497 145,106 149,544 155,123 160,999 166,256 171,274 176,431 182,162 Expenditures Salaries and Benefits 91,581 92,717 91,787 95,272 101,335 106,128 112,179 117,330 122,647 128,217 134,045 140,163 146,123 Non-Salary Expenditures 33,432 38,344 38,734 38,980 39,918 41,434 42,482 43,726 45,006 46,326 47,686 49,087 50,442 Infrastructure Fund and Capital Projects 14,648 9,900 8,425 11,473 12,705 14,121 13,339 13,810 14,312 14,847 15,417 16,024 16,673 Debt Service, Other 1,166 1,128 1,128 1,122 972 797 796 803 803 804 803 805 285 TOTAL EXPENDITURES 140,827 142,089 140,074 146,846 154,930 162,480 168,795 175,669 182,767 190,194 197,951 206,079 213,524 Drawdown on Budget Stabilization Reserve - - 2,692 - - - - - - - - - - Comprehensive Annual Financial Rpt. Recon. 177 GRAND NET SURPLUS (GAP)809$ 49$ -$ (8,033)$ (11,433)$ (17,374)$ (19,251)$ (20,546)$ (21,768)$ (23,938)$ (26,677)$ (29,648)$ (31,362)$ LONG RANGE FINANCIAL FORECAST MODEL 2010 ($000) - PESSIMISTIC SCENARIO 14 City of Palo Alto over ten years. In the optimistic scenario, the 2011 picture is 30% - or $2 million – better, but still the gaps grow by 130% over ten years. In the pessimistic scenario, an additional $1.7 million in cuts or new revenues must be found in 2011, and funding gaps quadruple in the next four years. Moreover, none of the three scenarios incorporates a full solution to the $302 million, twenty-year Infrastructure backlog. If there is one thing the economic optimists, pessimists and “realists” can agree on, it is that the City has a structural funding gap problem: given the general fiscal and expense structure of this service-based organiza- tion, the numbers do not add up to a sustainable budget. V. CONCLUSION AND NEXT STEPS This Long Range Financial Forecast and analysis demonstrate the irrefutable reality of the City’s structural funding gap, which will only get worse with each passing year. The City cannot continue to maintain the same portfolio of services at current levels given its shrinking revenue base. As Mr. Levy pointed out, “the arithmetic doesn’t work.” The presentation of this Forecast is the first step of a process of ongoing discussions to formulate plans for balancing the City’s budget. The chart on page 15 illustrates the one-time adjustments needed to achieve a balanced budget this fiscal year, as well as the magnitude of structural adjustments that will be required to balance the FY 2011 and FY 2012 budgets. The particulars of those $9.2 million in cuts will need to be deter- mined by all stakeholders, including community members, Council, businesses, staff, and others. Given the drop in City revenues over the course of the fiscal year, departments will need to close an expected $6.4 million gap in FY 2010. Staff will present a detailed Budget Balancing Plan for FY 2010 during the Mid- year Report to the Finance Committee on March 2, 2010, and will return in late March with a big-picture view and outreach plans for engaging stakeholders in closing the $6.4 million projected gap in FY 2011. Staff recommends embarking immediately on this multi-step process of reaching sustainable budgets for the future, including a clear timeline for presenting recommendations to Council. Initial revenue sources that should be pursued include adjusting cost recovery levels to 100% and reviewing subsidized facility rents. In addition, new revenue opportunities should be developed, including those that require voter approval. The opportunity to issue debt for financing infrastructure needs will also need to be explored, as will pursuing development strategies in the Comprehensive Plan. The process of making the difficult choices required to balance the City’s budgets going forward must begin now, for implementation in FY 2011. 2010 CONCLUSION City of Palo Alto 15 Staff will soon begin implementing a “Change by Design” effort by which interdepartmental Design Teams will be created to work on specific problems the City faces as an organization, including balancing the budget, streamlining operations, revenue generation, and others. In addition, efforts will be made in upcoming negotiations with Fire and Police units to seek salary and bene- fit concessions conceptually similar to those imposed on SEIU and acceded to by the Management and Pro- fessional group. While PAPOA already postponed a contracted salary increase, equity will be sought in dis- cussions with the Fire union and Fire Chiefs unit. These benefits concessions are a necessity in balancing the long-term structural gap problem the City faces, along with nearly every other city in California.. 2010 C O N C L U S I O N ADJUSTMENTS REQUIRED TO ADDRESS FY 2010 - FY 2012 DEFICITS $ (millions) FY 2009 FY 2010 (adopted) FY 2010 (projected)* FY 2011 (projected)* FY 2012 (projected) Funding Gap $8.0 $10.0 $6.3 $6.4 (additional gap) $2.8 (additional gap) One-time adjustments $8.8 $3.0 $6.3 Structural adjustments $7.0 $6.4 $2.8 Final 09 CAFR adjustments $0.8 Bottom line $0.8 $0 $0 $0 $0 *Subject to revision pending upcoming revenue data 16 City of Palo Alto VI. APPENDICES General Fund LRFF Revenue by Type Fiscal Year 2010 Int er est Ear nings 1.4% Joint S er vice Agr eement s ( S t anf or d Univer sit y) 6.5% S er vice Fees & P er mit s 13.4% Ot her Taxes, Fines & P enalt ies 2.0%Document ar y Tr ansf er Tax 2.8% Tr ansient Occupancy Tax 5.6% Ut ilit y User Tax 9.7% P r oper t y Taxes 21.8% S ales Taxes 14.6% Reimbur sement s f r om Ot her Funds 8.9% Ot her r evenues 13.3% Total Budgeted Revenues = $138.2 million Due to rounding error % may not equal 100% 2010 A P P E N D I C E S Fiscal Year 2010 General Fund Long Range Financial Forecast Expenditure by Type GF Transfer for Other Capital Projects 1.6 % GF Transfer for Infrastructure CIP 4 .4 % Allocated Expenses 10 .2 % General Expense 0 .8 % General Expense 7.3 % Supplies & M aterials 2 .4 % Contract Services 6 .8 %Benefits 2 0 .6 % Salaries 4 4 .9 % Debt Service 0 .8 % Total Budgeted Expenditures = $140.1 million Due to rounding error % may not equal 100% City of Palo Alto 17 General Fund Major Revenues Last 10 Years in Fiscal Year 2000 Dollars $10.8 $12.3 $20.2 Property Tax $15.9 Sales Tax $22.9 $24.2 $ 9.5 $ 12.0 $ 14.5 $ 17.0 $ 19.5 $ 22.0 $ 24.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fiscal Year Mi l l i o n s General Fund Major Revenues Last 10 Years in Fiscal Year 2000 Dollars $ 5.9 Utility User's Tax $ 8.8 $8.3 Transient Occupancy Tax $5.6 Documentary Tax $ 2.5 $ 4.4 $ 2.0 $ 4.5 $ 7.0 $ 9.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Fiscal Year Mi l l i o n s General Fund Total Rev. and Expenditures - No Budget Adjustment $144.7 $117.4 $160.2 $138.2 Revenue $116.5 $175.7 $144.2 Expenditure $141.8 $ 110 $ 120 $ 130 $ 140 $ 150 $ 160 $ 170 $ 180 $ 190 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Fiscal Year Mi l l i o n s 2010 A P P E N D I C E S 18 City of Palo Alto General Fund Total Rev. and Expenditures - Balancing Fiscal Years 2010, 2011, and 2012 Revenue $160.2 $117.4 $144.7 $145.9 $141.8 Expenditures $165.3 $116.5 $145.2 $ 110 $ 120 $ 130 $ 140 $ 150 $ 160 $ 170 $ 180 $ 190 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Fiscal Year Mi l l i o n s General Fund Total Rev. and Expenditures - Balancing Fiscal Year 2010, 2011, and 2012 with Infrastructure Funding $145.9 Revenue $160.2 $117.4 $144.7 $145.2 $141.8 Expenditures $165.3 $116.5 Expenditures with Needed Infrastructure Funding $185.3 $157.2 $ 110 $ 120 $ 130 $ 140 $ 150 $ 160 $ 170 $ 180 $ 190 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 F iscal Year Mi l l i o n s 2010 A P P E N D I C E S City of Palo Alto 19 General Fund Salaries and Benefits (Millions) $4 8 . 5 $5 4 . 2 $5 8 . 9 $5 7 . 3 $5 3 . 9 $5 5 . 1 $5 5 . 6 $5 7 . 0 $6 0 . 4 $6 2 . 1 $6 2 . 9 $1 6 . 3 $2 1 . 0 $1 9 . 0 $1 8 . 4 $2 4 . 5 $2 9 . 9 $2 9 . 5 $2 8 . 9 $2 7 . 3 $3 0 . 9 $1 3 . 5 $- $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fiscal Year Mi l l i o n s Salaries Benefits 2010 A P P E N D I C E S General Fund Salaries and Benefits (Millions) with Full-Time Equivalent Permanent and Hourly Employees $91 $92 $92$87$83$80 $72$76$72$75 $65 757 833 713 773 727733725718 757 801 820 $ - $ 20 $ 40 $ 60 $ 80 $ 100 $ 120 $ 140 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 F iscal Year Sa l a r i e s a n d B e n e f i t s (M i l l i o n s ) - 100 200 300 400 500 600 700 800 900 Fu l l - T i m e E q u i v a l e n t Em p l o y e e s 20 City of Palo Alto Citywide Healthcare Expenses $0 $5 $10 $15 $20 $25 $30 $35 Mi l l i o n s Active Employees Retirees Retiree Medical Liability Citywide Pension Expense 6.12 4.82 3.77 2.4 6.9 15.62 18.21 19.5 20.82 22.91 23.5 23.5 25.57 28.8 32.58 $0 $5 $10 $15 $20 $25 $30 $35 2000 2001 200 2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Mi l l i o n s General Fund Operating Expenditures: Last 10 Years in Nominal Dollars (in $000s) $5 $15 $25 $35 $45 $55 200 0 200 1 200 2 200 3 200 4 200 5 200 6 200 7 200 8 200 9 Mi l l i o n s Public Safety CSD & Library Admin.Public Works Planning 2010 A P P E N D I C E S City of Palo Alto 21 C ITIES’ ACTIONS TAKEN TO DEAL WITH FISCAL STRESS 2008-09 Source: Max Neiman and Daniel Krimm, “Perceptions of Local Fiscal stress During a State Budget Crisis,” Public Policy Institute of California, December 2009 (Average number of Cities responding = 220) ACTIONS TAKEN PERCENTAGE OF CITIES Cut spending for various services 81% Eliminated unfilled positions 60% Raised fees (any fee) 53% Imposed hiring freeze 71% Laid off employees 30% Used reserves to cover shortfalls 60% Reclassified open positions to lower levels 24% Reduced/eliminated allocation to reserve account 42% Implemented general, uniform cross-board cuts 37% Used work furloughs 14% Reduced benefits for new employees 15% Encouraged/provided incentives for early retirement 20% Raised taxes (any tax) 10% Reduced employee benefits for current employees 10% Reduced wages 13% 2010 A P P E N D I C E S 22 City of Palo Alto AVERAGE PERCENT MID-YEAR REDUCTION FOR LINE ITEMS IN RESPONDING CITIES, 2008-09 Source: Max Neiman and Daniel Krimm, “Perceptions of Local Fiscal stress During a State Budget Crisis,” Public Policy Institute of California, December 2009 BUDGET LINE ITEM AVERAGE PERCENT OF REDUCTIONS NUMBER OF RESPONDING CITIES Contribution to Reserve Fund 48.1% 29 Senior programs 16.8% 52 Streets and roads 13.9% 88 Planning 12.5% 106 Library 12.1% 42 Homeless 11.5% 9 Management and Admin. Services 10.8% 117 Animal Control 10.6% 69 Parks 10.2% 90 Fire & Emergency medical 9.9% 76 Economic development (not redevelopment) 9.1% 49 Adult & youth recreation 8.8% 84 Police services 8.5% 116 Public works 7.9% 95 Water & sewer utilities 7.3% 49 2010 A P P E N D I C E S City of Palo Alto 23 NOTES 1 Max Neiman, Daniel Krimm, “Perceptions of Local Fiscal Stress During a State Budget Crisis,” Public Policy Institute, De- cember 2009. 2 Rex Nutting, “for 2009, sales sank a record 6.2% to $4.14 trillion,” MarketWatch, Jan. 14, 2010 3 MuniServices, Economic Outlook, 4th Quarter 2009 News 4 US Commerce Department press release, January 14, 2010 5Alan Zibel: “Sales rise, prices drop so recovery still on hold,” San Jose Mercury News, January 26, 2010 6 New York Times Editorial, November 8, 2009 7 Tom Abate: “Smaller GDP growth might mean slower recovery,” quoting Bart van Ark, economist with the Conference Board, San Francisco Chronicle, December 23, 2009 8 “The Beacon Employment Report,” Beacon Economics, December 2009 9 Marisa Lagos, “Cuts hurt economy, group warns,” San Francisco Chronicle, February 3, 2010 10 “The Beacon Employment Report,” Beacon Economics, January 2010 11 Tom Abate: “State jobless rate flat at 12.4%,” San Francisco Chronicle, January 23, 2010 12 MuniServices Economic Outlook, 4th Quarter 2009 News 13 Jim Carlton, “Bay Area Housing Market Starts to Pick Up,” The Wall Street Journal, January 21, 2010 14 Ian Shepherdson of High Frequency Economics, as quoted in MuniServices, Economic Outlook, 4th Quarter 2009 News 15 UCLA Anderson Forecast, December 9, 2009 16 Tom Abate: “Recovery will be slow, forecasts say,” San Francisco Chronicle, December 9, 2009 17 MuniServices Economic Outlook 4th Quarter 2009 News 18 Alan Zibel: “Cold winter for home sales,” San Francisco Chronicle, January 6, 2010 2010 A P P E N D I C E S 24 City of Palo Alto THIS PAGE IS INTENTIONALLY LEFT BLANK 2010 A P P E N D I C E S AMERICANS WITH DISABILITIES ACT STATEMENT In compliance with Americans with Disabilities Act (ADA) of 1990, this document may be provided in other accessible formats. For information contact: ADA Coordinator City of Palo Alto 285 Hamilton Avenue (650) 329-2550 Visit our website at: www.CityofPaloAlto.org Acknowledgements Staff thanks City Manager, James Keene; Director of Administrative Services, Lalo Perez; Assistant Director of Administrative Services, David Ramberg; and, Deputy Director of Administrative Services, Joe Saccio; for their careful review and support in preparing this document. Contributors Nancy Nagel Tarun Narayan Christine Paras Dale Wong Graphics Cherie McFadden Printing Palo Alto Print Shop ………………………………………………………………………… The City of Palo Alto is located in northern Santa Clara County, approximately 35 miles south of the City of San Francisco and 12 miles north of the City of San Jose. Spanish explorers named the area for the tall, twin-trunked redwood tree they camped beneath in 1769. Palo Alto incorporated in 1894 and the State of California granted its first charter in 1909. Home to Stanford University and numerous innovative and world-famous businesses. ………………………………………………………………………… Phone:650-329-2100 Fax:650-325-5025 City of Palo Alto 250 Hamilton Ave Palo Alto, CA 94301 www.cityofpaloalto.org 30% post-consumer recycled TO: ATTENTION: FROM: DATE: SUBJECT: ATTACHMENT B HONORABLE CITY COUNCIL FINANCE COMMITTEE CITY MANAGER DECEMBER 15,2009 DEPARTMENT: ADMINISTRATIVE SERVICES CMR: 478:09 Additional Information Provided in Response to Finance Committee Questions on the 2009 Year-End Close RECOMMENDATION Staff recommends that the Finance Committee review and provide input on the additional information and responses requested on December 1, 2009 when the Committee reviewed the General Fund financial results for FY 2009 and FY 2010. BACKGROUND On December 1 staff presented to the Finance Committee the financial results for Fiscal Year 2009 and Fiscal Year 2010 as of November 20, 2009 (CMR:434:09, Attachment A). The presentation focused on the deficit that occurred at the end of Fiscal Year 2009 along with information provided on the local economy, the financial forecast through 2012, and budget reduction strategies for FY 2009 and FY 2010. After the presentation, Finance Committee discussion centered on important issues surrounding financial results for FY 2009, the financial condition of other municipalities, and the plans for addressing deficits FY 20 I O. The committee requested that staff return on December 15, 2009 with additional information and responses to their questions. DISCUSSION The Finance Committee wanted additional information for FY 2009 concerning the General Benefits and Insurance fund. This fund consists of three sub-funds. They are benefits including PERS payments, workmen's and liability. compensation other issues raised by the Finance Committee included deficits in other cities, public safety overtime and for FY 20 I 0 revenue projections for property documentary transfer taxes. CMR:478:09 Page I of7 Benefits As stated in CMR 434:09, staff maintained the General Fund benefit and insurance budget allocations for FY 2009 at the same levels as for FY 2008. The General Fund's benefit and insurance expenses at year-end, however, ended at approximately $1.8 million over budget. With such an overage, and in any other year, staff would look to the General Benefit and Insurance Fund (an Internal Service Fund) to cover this excess expense. As of June 30, 2008, unrestricted reserves in the General Benefit and Insurance Fund were $3.2 million (page 124 of the 2008 Comprehensive Annual Financial Report CAFR) which should have been sufficient to cover the $1.8 million overage. As background, many but not all benefits expenses and liabilities are centralized in the General Benefits and Insurance Fund (GBIF) and are then allocated to all City funds based on actual salary expense. Examples of these GBIF expenses include: pension, health care premiums for current employees and retirees, life insurance, disability insurance, paid leave, dental, and general and workers compensation liabilities. As a consequence of some of these expenses being higher than expected, the GBIF's reserves were reduced to $0.5 million at year end. These overages primarily were in the areas of unpaid leave liability and dental care premium expense. Since the GBIF balance was reduced to such a marginal balance, and to have some cushion to absorb unanticipated expenses for FY 2010, the GBIF was unable to absorb the General Fund's $1.8 million excess expense as it would have and did in prior years. While there were very small increases in general liability and workers compensation expenses, it must be clarified that they did not cause the reduction in the GBIF fund balance. In other words, the general and workers compensation liabilities were funded appropriately and there were no significant expense variances as previously thought. The GBIF balance of$0.5 million at the end ofFY 2008 will be replenished somewhat by health care premium savings in FY 2010 of $0.6 million dollars. This is a consequence of CALPERS reducing the charges for the Preferred Provider Organization (PPO) health care premiums for two months due to one-time adjustments. Staff is analyzing the current budget to actual trends to identify any additional funding requirements and could make a recommended revision to the budget that could result in an increasing budget deficit for 2010. Deficits in Other Cities Based on the Finance Committee's request, the following table provides information on deficits faced by surrounding cities: ($ millions) City Fiscal Year Budget Deficit % of Budget Palo Alto 2010 $143 $5.4 3.78% 2011 $145 $5.6 3.86% San Francisco (citywide) 2010 $6,600 $53 0.80% 2011 $6,600 $522 7.91% i Livermore 2010 $86 I $3.2 3.72% CMR:478:09 Page 2 of7 Oakland 2010 $430 $19 4.42% San Jose 2010 $984 $96.4 9.80% Mountain View 2011 $90 $4.1 4.56% • Santa Clara 2011 $158 $9 5.70% i Redwood Ci~ 2009 $85 $5.8 6.82% 2010 $86.6 $8.2 9.47% Walnut Creek 2011,2012 $143 $20 13.99% San Carlos 2010 $29 $2.7 9.41% As the data above indicates, Palo Alto is not alone in facing budget shortfalls. Overtime The Finance Committee requested data on overtime by quarter for the past several years. This information is provided in Attachment C. Salary Savings The Finance Committee requested confirmation that the salary savings projections in 20 I 0 will be realized. The City Manager has placed a hold on the hiring non-critical positions. With this freeze in place, it is expected that salary savings in the amount of $1.5 million will be achieved. This includes covering the cost of overtime as well as temporary salaries. Staff reported on December 1, 2009 that the General Fund's has 622.51 Full-Time Equivalents (FTE) of which there are currently 45 vacant FTE. Should the City maintain this vacancy rate, an estimated $4.1 million in savings can be realized by year end. Of the 45 FTE, however, 10 positions are considered critical for public health and safety and operations will be filled. This will reduce the vacancy savings by approximately $1.0 million. In addition, and because of overtime costs annually exceeding budget, anticipated salary savings must be further reduced by $1.6 million. The net anticipated vacancy or salary savings at year end is anticipated to equal $1.5 million at year end. The Table below shows these savings by department. CMR:478:09 Page 3 of7 City Manager Administrative Services Community Services Libra!2: Fire Human Resources Planning and Community Environment Police Public Works Non-departmental Total Revenue Information Documentary Transfer Tax 1,302 151 3,709 147 8,707 276 3,297 156 14,182 1,539 1,544 193 4,531 390 16,706 1,891 4,831 337 (\,313) (2,206) 60,015 · 151 I · 147 I (137) 139 -156 (679) 860 · 193 i (37) 353 (691) 1,200 (5\) 286 i · (?,206) 3,095 (1,595) 1500 During the December 1, 2009 Finance Committee meeting, the Committee requested trend analysis of the documentary transfer tax results for FY 2010 that incorporated different assumptions for growth in the remainder of the year. In the report delivered to the Committee (CMR: 434:09), staff stated that that this revenue source may have reached its trough and that revenues at year end were likely to equal $2.9 million. This conservative estimate assumed that revenues through the remainder of this fiscal year would not be materially different from December through June of the prior year. This assumption was based primarily on a persistently weak economy, poor credit availability, and data (through mid­ October) that indicated transactions were running nearly 22 percent below the prior year levels for the same period. In addition, staff stated that transfer taxes from July through November 30, 2009 equaled $1.5 million, similar in amount for the same period in the prior fiscal year. Since revenues began to decline considerably from December of 2009 through June of 2009, performance through the first four months of this fiscal year would appear to indicate a strengthening in transfer taxes. A straight annualizing of year to date revenues (based on 9 of 24 remittances) would result in revenues of $4.0 million at year end, an amount that does not appear achievable given prior year results and the economy. On December 9, staff received a remittance of$170,104 (#10 for the FY). This remittance exceeds that of the prior year period by $36,000 or 26.8 percent indicating further stabilization and possible growth in this revenue source compared to the prior year Before providing a reasonable range for year end revenues, the following factors affecting this revenue category should be considered: CMR:478:09 Page 4 of7 o Documentary transfer taxes ($3.30 per $1,000 of value) are dependent on the volume of transactions in any given year o These taxes are based on the mix of transactions between commercial and residential properties where one large commercial transaction can be the equivalent of numerous residential transactions o Seasonality plays a role in projections since there are a higher number of transactions during the period March through August than during the remaining months o One or two large commercial property transactions, which mayor may not occur in any given year, can skew trend analysis The graph below plots remittances and available transaction data and depicts the affect the above factors can have on under or over estimating revenues. .~, Ci ,. ., J:l "140 _____ ~ _____ J~Q(~JlmelJ~J:Y-Iransler Tax '{~ Nur:nber of Ir~n§.ac1i9_ns _____ .' _____ _ $713 $695 Ii I: " $3&3 $456 $:348 e 1;0 I " ;7. $750 $660 $550 I<l! -I $450 is ~ $350 ! '" $250 $150 $50 Keeping in 'mind these factors, as well as data indicating a possible firming of transactions, staff now believes a $2.90 million projection represents the lower end of a reasonable projection. Assuming that revenues will grow by 10 percent for the remainder of the year, a projection of $3.25 million is attainable. A 15 percent increase would result in $3.32 million in revenue. Should the City realize another large, commercial transaction during the remainder of this year, an additional $0.1 to $.2 million may be realized. Another approach to determining a reasonable range of transfer tax outcomes is to use the historical percentages (ratios) of July through mid-December revenues to total fiscal year revenues for prior years (note that revenues from July through mid-December, 2009 equal $1.66 million). The graph below shows these percentages, which range from a low of 31 percent in FY 2002 (dot.com boom period) to a high of 53 percent (Great Recession period) in FY 2009. Remittance data dating back to FY 2001 and the percentages cited in this text can be found in Attachment D. CMR:478:09 Page 5 of7 $5 $2 $1 Doc. Transfer Tax Receipts -Thru Mid-Dec. and Annual 2003 2004 2005 2005 2007 2008 Fiscal Year o Receipts to Mid-Dec. III A.n n ualRecei pts 2009 20'0 With the first remittance of December, it now appears that higher year-end revenue could be realized. For example, a lower percentage, such as 50 percent or 48 percent (a 48 percent ratio is similar to that experienced in FY 2004 when the City was recovering from dot.com bust) would result in revenues of$3.3 million or $3.4 million, respectively. Based on the analysis above and respecting the fragility and potential surprises from a still weak economy, staff believes transfer tax revenues could reach the $3.2 to $3.3 million levels by year end. Property Tax Revenues The Finance Committee requested additional analysis of property tax projections for FY 2010-11 and wanted information on the assessed value added to the roll by new developments and property transactions or turnovers/sales. The table below shows the secured property tax roll percentage changes for the City of Palo Alto dating back to FY 2005 Fiscal Secured Property Percentage Year Valuation Change 2010 $20.24 billion 4.4% I 2009 19.38 billion 11.5% 2008 17.39 billion 7.2% 2007 16.22 billion 8.9% 2006 14.89 billion 9.3% 2005 13.62 billion Although the county does provide statistics on growth due to change in ownership and new construction, it is on a countywide basis. There are several variables affecting growth, but based on the maximum 2 percent increase permitted by law and realized from 2006-2010, the City's growth rate to new ownership and construction is close to a low of 2.4 percent in 2010 to a high of 9.4 percent in 2009. A 1 percent increase in secured property value translates into approximately $175,000 in additional secured property tax revenue. CMR:478:09 Page 6 of7 At this time, the County is projecting that 2011 property values will have a negative .23 percent adjustment factor based on the California CPL This means that assessed values for City properties will decline by .23 percent and offset growth due to property transactions and development. Given the precipitous decline in the secured property assessed value from 2009 to 2010, growth is likely to be minimal for FY 2011. It is important to note that property tax movements lag behind the increases and decreases in the more immediately economically sensitive sales and transient occupancy tax revenues. The long range forecast attached to the December 1,2009 CMR projected an increase of2.3 percent increase for 2011. At this time, and given the most recent information that a negative CPI adjustment is likely, staff believes a I percent increase over the 2010 projection would be more prudent. RESOURCE IMPACT The discussion in this report and the financial results depicted in the LRFF indicate impacts to the City's General Fund. ENVIRONMENTAL REVIEW This is not a project for the purposes of the California Environmental Quality Act. PREPARED BY: Assistant Director of Administrative Services of Administrative Services DEPARTMENT HEAD APPROVAL: Director of Administrative Services CITY MANAGER APPROVAL: Qity anager / ATTACHMENTS l// Attachment A: CMR:434:09 Fiscal Year 2009 General Fund Discussion and Fiscal Year 2010 Financial Results as of November 20,2009 Attachment B: Excerpt from the Finance Committee Minutes of December 1,2009 Attachment C: General Fund Overtime Trends Attachment D: Documentary Transfer Tax Performance CMR:478:09 Page 7 of7 TO: ATTENTION: FROM: DATE: SUBJECT: ATTACHMENT A HONORABLE CITY COUNCIL FINANCE COMMITTEE CITY MANAGER DECEMBER 1, 2009 DEP ARTMENT: ADMINISTRATIVE SERVICES CMR: 434:09 Fiscal Year 2009 General Fund Discussion and Fiscal Year 20lO Financial Results as of November 20,2009 RECOMMENDATION Staff recommends: 1. That the Finance Committee review and provide input on the General Fund financial results for FY 2009 and preliminary results for FY 2010, including staff's proposed financial plans for each of the two fiscal years. 2. After Finance Committee review, direct staff to present this report to the full Council in January 20 10. BACKGROUND Staff is providing the 2009 fiscal year-end financial results for the General Fund (GF) earlier than usual due to the severe downturn in the economy and the impacts it has caused to the City's financial position. Because of a higher than anticipated budget gap in Fiscal Year (FY) 2009, staff is presenting year-end results in this report and will provide the final audited financial statements to the Finance Committee December 15. Looking at the cunent fiscal year, the continuing economic downturn requires revisiting revenue and expense perfonnance and potential options to close a higher than expected year-end budget gap. In the FY 2010 budget process, a $10 million General Fund deficit was identified. This gap was closed with a three pronged approach that relied on one-time reductions, program cuts, and reductions in employee benefits and salaries. The latter was achieved through reductions in benefits to SEIU and management employees and a postponement of a police union salary increase. Unfortunately, these reductions of approximately $10 million have proven insufficient to stem the tide of declining revenues and the City is facing an additional $5.4 million deficit. This deficit could continue to grow if revenues do not remain stable in the second half of this fiscal year. CMR:434:09 Page J of 13 The City of Palo Alto is not alone in facing this disturbing situation. The cities of San Francisco and Oakland have already pared their budget several times and are likely to face additional future drops in propelty taxes. Jurisdictions up and down the Peninsula are facing fluid, if disruptive revenue environments in which multiple budget adjustments are needed. Moreover, the size and nature of the revenue shortfalls, such as shifts in consumer spending patterns, likely require long­ term structural expense changes. An updated Long Range Financial Forecast (Attachment A) is provided to show the projected deficits the City faces in FY 2010 and beyond. DISCUSSION Fiscal Year 2009 General Fund Results The drop in key revenue sources in FY 2009 required midyear budget adjustments to OF revenues and expenditures. Early in the year, staff estimated the FY 2009 budget deficit to be $8 million and a plan was implemented to close this gap. The adjustments made to revenues at midyear were close to projections. Unfortunately, however, the adjusted expense budget underestimated expenditures at year end and resulted in a OF deficit of $4.8 million (in addition to the $8 million projection). This additional shortfall was mentioned briefly during the October 5, 2009 Council meeting, but since staff did not have the specific data reviewed by the outside auditor at that time, it has not been discussed in detail until this report. The components of the shOltfall are outlined in the following table and explained below. Table 1 FY 2009 General Fund Deficit Summary Salaries ($2,100,000) Overtime Police ($ 650,000) Fire ($ 250,000) Benefits ($1,800,000) Total ($4,800,000) Salaries The salary line item was over budget due to a miscalculation in the amount of expected salary savings. The adopted operating budget includes an annual factor for salary savings. These savings result from 1) an expected vacancy rate or the number of positions that are not filled at any given time throughout the fiscal year; and 2) a salary expense "cushion" resulting from salaries being budgeted at the top step compared to actual salaries that are, for many employees lower (e.g., new hires). During the midyear budget process, staff included a second round of salary savings that did not materialize. The miscalculation was not recognized in time to make additional expense adjustments. Staff has implemented monthly variance reports, as well as other controls, to avoid such occurrences in the future. CMR:434:09 Page 2 of 13 Overtime Overtime costs in the Police and Fire departments exceed the budget every year due to vacancies, disabilities, minimum staffing requirements, and staffing of Station 8 for fire protection in the summer and emergencies. In a typical year, these overages are covered by salary savings citywide or in the public safety departments. With the salary savings factor overestimated, however, the savings were not there to absorb th~ overtime excess. Therefore, the $900,000 in excess overtime for these two departments contributed to the FY 2009 deficit. It should be noted that Stanford University reimburses 30.3 percent of all operating expenditures including overtime and the State of California provided reimbursements for Fire Strike Team activities. The $900,000 is not offset by these reimbursements. The City will receive these reimbursements in FY 2011. Benefits The City has a General Benefit Fund (GBF) from which it pays its benefit expenses such as medical and workers compensation costs. This fund, like other Internal Service Funds (e.g., Technology, Vehicle), typically carries a positive balance in the form of retained earnings which covers operations and project or capital needs. In the past, the balance in retained earnings in the General Benefits Fund helped cushion against year-end benefit expense adjustments. Specifically, workers compensation and general liability costs, which reflect yearend actuarial adjustments (based on incurred but not reported expenditures) can fluctuate considerably but are not known until year end as they are based on the volume and severity of claims. In most years, the GBF and the Fund's retained earnings are sufficient to cover unexpected liabilities as well as any overages in other benefit categories such as medical premium expenses. Anticipating that retained earnings in the GBF were sufficient to cover benefit expenses in FY 2009, General Fund benefit expenses were held constant from FY 2008 to FY 2009. This practice has been implemented in past budget years in an effort to keep a reasonable balance between retained earnings balances in the GBF and what expenses are budgeted in and allocated to GF departments each year. Disappointingly, benefit expenses at the end of FY 2009 came in $1.8 million over budget due to higher than anticipated claims. Establishing an annual budget depends on a number of variables that can be difficult to predict and are subject to change. In high performing years, the City has enjoyed considerable cushion in its budget that has allowed midyear adjustments with negligible impact on the bottom line. In times of sustained economic downturn, cushions such as higher than anticipated revenues, are no longer present. Margins that are extremely tight due to falling revenues, low Internal Service Fund reserve balances, and prior expense reductions have become tighter and more difficult to maintain. Of the $4.8 million FY 2009 deficit shown in Table 1, only the $2.1 million in underestimated salary expenses could have been foreseen at midyear (midyear report was presented to the Finance Committee on March 10) and later. The remaining expenditures, on the other hand, are finalized at year-end and thus sufficient data is not available for earlier adjustments. CMR:434:09 Page 3 of 13 Budget Balancing Plan for Fiscal Year 2009 In order to solve the $4.8 million deficit for FY 2009, staff proposes postponing a budgeted $4.8 million transfer to the Technology Fund. This will have the effect of lowering GF expense and eliminating the General Fund deficit. This one-time deferral will reduce the Technology Fund's retained earnings to $51,000 net of encumbrances and re-appropriations. The $4.8 million transfer will result in planned technology projects such as radio infrastructure improvements and library RFID implementation being delayed. In addition, technology infrastructure replacement schedules will need to be revisited and adjusted accordingly. As a consequence of this action, the Technology Fund is at an exceptionally low balance and will need to be replenished via future transfers from the GF so as to not severely impact technology operations. Currently, repayment over a four year period is being contemplated. The only other immediately available option to solve the deficit would be to draw down the General Fund Budget Stabilization Reserve, but since the City is experiencing extremely volatile economic conditions which have implications for FY 2010 a reserve drawdown in FY 2009 is not recommended. Fiscal Year 2010 Financial Results To Date On September 8 and October 5 (CMR: 394:09 and CMR 358:09 in Attachment B), staff informed Council of potential further deterioration in General Fund revenues and the possible need for budget adjustments in excess of the $10 million in reductions already incorporated in the Adopted FY 2010 Budget. Due to the extended recession, City revenues will fall significantly below budget in FY 2010. Since FY 2008, sales, transient occupancy, documentary, and interest income have fallen by a combined $8.2 million. In addition, permit, golf course fee, and traffic fine revenue also have dropped by $1.1 million since FY 2008 due to the economic environment. Cumulatively, this represents a $9.3 million downward swing in GF resources over two years and it has caused an additional budget deficit for FY 2010 which is estimated now at $5.4 million. Attachment C shows the performance of revenues through November 20, 2009 relative to the budget. Due to the timing of payments (e.g., sales and property taxes) and seasonal factors, these results must be viewed cautiously. Revenue Performance in FY 2010 Sales Tax Sales Tax revenue is the General Fund's third highest revenue equaling 14 percent of its resources. In recent years sales tax has become a highly volatile and fragile source of City income. Whereas FY 2008 actual revenues were $22.6 million; it now appears the City will realize $17.7 million in FY 2010. This represents a $5 million or 22 percent decline in a very short period of time. To place it in perspective, this $5 million drop equals 77% of the FY 2010 Library budget. The projected $17.7 million in sales tax revenue is $2.0 million below the FY 2010 Adopted Budget. The primary cause for the decline is economic and the secondary cause is a dramatic decrease in the amount remitted by the State in its semi-annual "triple flip" payments for FY 2010. With the exception of one economic segment (electronic equipment), all sales tax segments -autos, department stores, miscellaneous retail, furniture/appliance had dreadful results in the second quarter. In fact, all of these areas had the lowest "benchmark year" performance in this quarter compared to 8 prior "benchmark year" quarters (a benchmark year is the current quarter reporting period plus the prior 3 quarters). New auto sales fell to $1.1 million CMR:434:09 Page 4 of J3 compared to $1.8 million in the second quarter of2007. For the same periods, department store sales have fallen from $2.7 million to $2.2 million, while miscellaneous retail sales dropped from $1.9 million to $1.5 million. Even the normally resilient restaurant sector has turned downward. The City's outside sales tax consultant believes that sales taxes may fall as much as 15 percent in the upcoming third quarter compared to the prior third quarter. This would be consistent with the prior 2 quarters and would not bode well for the critical fourth quarter holiday sales season. Furthermore, on October 14, the State notified jurisdictions of lower "triple flip" payments. Whereas the State advanced the City $5.7 million in FY 2009, in FY 2010 its payment dropped to $4.3 million, a 24.6 percent reduction. While there is a solid rationale for reducing the City's "triple flip" payment given the economy and statewide sales tax receipts dropping by 20.8% in the second quarter, the State seems to have underestimated what the City will realize in sales taxes at year end by around $0.4 million. The State eventually will reconcile its payments to actual results for FY 2010, but not until the following fiscal year. In contrast, the State's "triple flip" payment to the City for FY 2009 was higher than justified by actual results. Since the State reconciles its payments to actual results in the following fiscal year, consequently the "true up" for FY 2009 will result in a $0.8 million reduction in payment for FY 2010. By adopting the "triple flip" payment system to solve its budget dilemmas, the State has further complicated sales tax projections. Transient Occupancy Tax (TOT) City TOT revenues have been soft. Revenues from January through June 2009 were 29 percent below those of the prior year. In July 2009, revenues were below July 2008 by 21.3 percent. The Senior Games did have a salutary impact in that August revenues were only 8.7 percent below the previous August; but September's results resumed this sector's weak trend line being 21 percent below September 2008. Based on performance to date, a downward adjustment of around $0.2 million will be recommended at midyear. Investment Income With the Federal Open Market Committee (FOMC) keeping interest rates low for a longer than expected period, the City's interest income has declined. Although short-term interest rates on Treasury instruments are close to zero percent, the City is earning nearly 4 percent on its portfolio. This rate of return is a consequence of earlier, long-term investments that have not yet matured. This rate will decrease and staff believes a downward adjustment in inc.ome of $0.2 million is necessary. Property and Documentary Transfer Taxes Property taxes are tracking close to budget and are expected to be on target at year end. Despite a weak housing market, property values in Palo Alto have remained relatively stable. There are indications from the County, however, that a large number of commercial properties throughout the County are filing for reassessments which will lower future property tax receipts. No hard numbers are available at this time, but an impact on this revenue category can be expected in the next few years. Although the transfer tax has fallen from $5.4 million in FY 2008 to $3.1 million in FY 2009, receipts from July through October are only slightly lower compared to the same period of the CMR:434:09 Page 5 of 13 prior year. This may indicate that the bottom of this revenue source has been reached and will hold steady until year end. At this time, the budget of $2.8 million in FY 2010 for the transfer tax appears realistic and will likely be increased to $2.9 million at midyear. Utility Users Tax Results to date indicate the telephone tax will exceed estimates, while utility related revenues will be lower than anticipated. The net result is that this revenue source will likely be adjusted upward at midyear by around $0.2 million. Parking Violation Revenue The City has collected $0.4 million or 20 percent of the $2.0 million budgeted in Parking Violations to date. The number of first quarter citations issued is 29 percent lower than previous first quarter results, while, due to a decline in downtown occupancy and the slowdown of retail spending, the number of vehicles monitored has decreased 16 percent. Based on the 16 percent checked for compliance, year end Parking Violation revenue is projected to be $1.5 million, or $0.5 million short of budget. Staff will be reevaluating the cost recovery levels of the program and make recommendations to balance revenues and expenses. Permits Permit processing has declined approximately 14 percent or $0.6 million. Although the valuation of projects submitted for permit issuance is higher than the prior year, stricter lending qualifications and conservative spending practices have lengthened the time applicants require to finalize their projects. While some permit fees are collected at the beginning, most are recognized when the permit is finally issued. Projects that do not go to completion do not pay the costs of processing their permits part way. This collection system should be reevaluated to ensure that the program is covering its costs throughout the permit process. Plan Checking Fees Fees for the processing of applications have declined approximately 14 percent due to the recession. This line item is expected to be decreased at midyear by $0.3 million. Golf Course Revenue The economic environment has affected the number of golf rounds played in Palo Alto and throughout the industry. The projection for FY 2010 of 76,000 rounds at the course is being revised downward to 72,000 rounds, thus reducing revenues by an estimated $0.2 million. CSD is examining ways to keep the golf course competitive with other nearby municipal golf courses. It will be important to develop a long-term plan for the golf course (which is in need of additional maintenance and upgrades) given the significant drop in rounds and as the associated costs of running and maintaining the course continue to increase. It is important to note that the Golf Course suffered a $0.3 million loss in FY 2009. Staff will return during the fiscal year with further recommendations on how to address the golf course deficits and a long-term plan. Class R('!gistration Fees The Community Services Department (CSD) experienced a 6 percent decline in program and camp registrations this summer, demonstrating that the recession has had an impact on class and program activity. CSD fee revenue will be adjusted downward at midyear by approximately CMR:434:09 Page 6 of 13 $0.4 million. The department is working with class producers to look at new programs and revamp old ones by using evaluation information from participants. CSD will look at new methods of marketing (including banners through the city, school flyers and e-mail blasts from Friends groups). Cost recovery levels will need to be reviewed and difficult policy decisions made regarding programs that may not be recovering their costs or are being duplicated by surrounding competition. The City is likely at a point where it will no longer be able to sustain the number of Community Services programs offered, and a prioritization of programs will be needed with input from all stakeholders. Other Revenues This revenue source includes facility rentals, special events fees, and other miscellaneous revenues. It will be decreased by approximately $0.3 million, due to an economy related decrease in demand for these services. Attachment D shows, in considerable detail, GF revisions to revenue projections for FY 2010 and FY 20 II based on the discussion above. Expense Performance in FY 2010 With the exception of overtime, regular salary expenses are in line with their budgeted levels. This is supported by the discussion below on the salary savings expected in FY 2010 due to vacancies. These savings represent one of the proposed steps for solving the expected year-end deficit Overtime Expenditures Compared to Adjusted Budget General Fund Overtime Analysis: The following chart shows total overtime expenditures reaching 73 percent of the adjusted budget on a citywide basis while straight line usage would indicate 39 percent usage through November 20. The table below shows that Fire, Police, and Public Works Departments are the principal depmiments exceeding their budget. CMR:434:09 Page 7 of 13 Table 2: FY 2010 General Fund Overtime As of November 20 Library CITY OF PALO ALTO FISCAL YEAR 2010 MIDYEAR FINANCIAL REPORT AS OF NOVEMBER 20, 2009 GENERAL FUND OVERTIME (in thousands of dollars) 7 7 3 3 45 45 105 105 58 58 12 42 22 Fire 1,018 1,018 1,041 Human Resources 4 4 Planning and Community Environment 67 67 18 Police 1,000 1,000 568 Public Works 113 113 75 38% 102% • The Fire Department has used 102 percent of its annual overtime budget through November 20, 2009. This is due to Station #8 staffing ($0.2 million) and Medic-l staffing ($0.1 million), with the remaining amount of $0.7 million resulting from backfill for minimum staffing requirements due to sick leave, vacations, and workers' compensation light duty assignments. • The Police Department's has used 57 percent of its annual overtime budget. The customary work of busy shifts, case writing, investigations, and court appearances on off days as well as an increase in the 9-1-1 dispatch center as more senior Police Dispatchers train newer employees are the cause of Police exceeding budget to date. Traffic control services at Stanford football games and other events are partially offset by reimbursements from the university and organizations. • The Public Works department has used 66 percent of its overtime budget. The department has had limited staffing in custodial and maintenance areas and has used overtime to maintain minimum service levels. The department is currently using limited hourly personnel to assist with custodial and maintenance services. Overtime costs are expected to rise further as the temporary salary budget is exhausted. This department's OT budget is small in comparison to the Fire and Police departments. CMR:434:09 Page 8 of 13 For historical and more detailed information on public safety overtime costs see Attachment Budget Balancing Plan for Fiscal Year 2010 Although department expense budgets, as a whole, are within their expected target range, the dramatic fall in revenues requires immediate action to achieve a balanced budget. The following table shows the revenue adjustments discussed above and the actions recommended to close the expected $5.4 million gap. These actions are explained below. Table 3: FY 2010 Proposed Budget Balancing Plan Revenue Impacts -OOOs- Sales Taxes -2,005 : Parking Violations -460 Fees/Permits -1,551 Return on Investments -238 Other Revenue -186 I Increases in Specific Revenues 144 i : Total Revenue Impacts ·4,296 Expense Impact -1,131 : Total GF Impact -5,427 I Expense Offsets -Proposed Salary savings -hiring freeze 1,500 I Public Safety Building 2,700 i Budget Stabilization Reserve 1,279 I Repayment of the IT Loan -1,225 ! Non-Salary Savings 1,000 • $3 Million Solution Salary and Benefit I Gap to Offset 173 I Total Proposed Offsets 5,427 I Net Change 0 Salary Savings Staff is now monitoring salary savings due to vacant positions on a monthly basis. The General Fund's has 622.51 Full-Time Equivalents (FTE) of which there are currently 45 vacant FTE. Should the City maintain this vacancy rate, an estimated $4.1 million in savings can be realized by year end. Of the 45 FTE, however, 10 positions are considered critical for public health and safety and operations will be filled. This will reduce the vacancy savings by approximately $1.0 million. In addition and because of overtime costs annually exceeding budget, anticipated salary CMR:434:09 Page 9 ofl3 savings must be further reduced by $1.6 million. The net anticipated vacancy or salary savings at year end is anticipated to equal $1.5 million at year end. Attachment F shows these savings by department. Public Safety Building It is proposed that the remaining encumbrance for the public safety building capital project be reduced by $2.7 million. These funds were designated for completing design work and since this project has been postponed and there is no land currently identified for the building, it is recommended they be returned to the original source of funding the General Fund's Budget Stabilization Reserve. This project will then retain $0.3 million to allow for evaluation of alternative facilities. Budget Stabilization Reserve The extraordinary economic conditions, precipitous fall in revenues, and time required for implementing further expense reductions, cause staff to reluctantly recommend a one-time draw on the General Fund Budget Stabilization Reserve (BSR) of $1.3 million. With the City's participation in the California Securitization Program (CMR 413 :09), the $2.5 million property tax "loan" by the State (cited in CMR: 394:09) that would have required a draw on the Budget Stabilization Reserve has been neutralized. The City will now receive bond proceeds through the Program at the time property taxes are deducted from the State, thereby keeping the GF whole. The one-time $1.3 million drawdown will reduce the BSR to $24.6 million or 17.4 percent of budgeted expenditures. City policy requires that the BSR remain at a minimum of 15% of expenditures. If the reserve falls below this level the policy will need to be amended or an exception will need to be approved by the CounciL Having a healthy level of reserves is critical for emergencies or severe economic dislocations such as the one we are enduring. Therefore, it is appropriate to use it in FY 2010. In future years, however, additional expenditure reductions or revenue enhancements will be required to avoid drawing down the BSR below required minimum levels (see Attachment A -the Long Range Financial Forecast). Additional FY 2010 Budget Reductions and Expenses To minimize the draw on the BSR, staff will attempt this fiscal year to find $1.2 million in non­ salary and other savings. Contracts, travel and training, and materials and services will be scrutinized to achieve this before year end. Staff had hoped to find such savings in FY 2009 (to offset the $1.131 million expense impact cited in Table 3 above), but was unable to identify them. Without these reductions, an additional draw on the BSR may be needed. This will be a challenging but necessary exercise to close the anticipated gap. Because of the $4.8 million drawdown on the Technology Fund in FY 2009, it is important to replenish the Technology Fund. To do so requires a $1.2 million annual payback over four years. This payment is reflected in the Table 3 above. FY 20 I 0 and Future Fiscal Year Challenges Although staff believes that if all of the above budget solutions are implemented and revenues do not further decline, a balanced budget would result at year end, the tenuousness of the economy and uncontrollable expenses such as general liability losses and workers compensation could CMR:434:09 Page 10 of 13 further adversely impact the budget. The City has already made repeated and painful expense reductions to balance its budget beginning with the dot.com bust and earlier and there are only more painful reductions left. Meanwhile, the City faces sizeable, new expense challenges. The Long Range Financial Forecast (LRFF) presented to Council on October 5, 2009 (CMR: 394:09) has been updated based on recent revenue and expense data. The Net Operating Surplus (Deficit) line in the forecast for FY 2010 shows a deficit of $5.4 million in FY 2010. Below this line are the recommended solutions (discussed above) to solve the projected deficit. Even with the solutions proposed for FY 2010, the General Fund still shows continuing Net Operating Deficits in Fiscal Years 2011 through 2020. Compounding these deficits are additional costs and liabilities the City will face in the near future. These "below the line" liabilities and costs cause the City's deficit to equal $5.6 million in FY 2011 and to grow considerably until 2020. These include: 1) CalPERS will increase retirement contributions from participating jurisdictions starting in FY 2012 due to significant losses in its investment portfolio. The City of Palo Alto estimated increases will rise from an additional $1.0 million in FY 2012 to $5.4 million inFY2015. 2) The annual contribution towards the citywide employee retiree medical liability will rise by $1.4 million per year with the General Fund's share at $0.7 million 3) The new library and community center expansions and rehabilitations require approximately $1.0 million in incremental annual operating expenses beginning in FY 2013. 4) The current rate of funding from the General Fund and Infrastructure Reserve, which is around $9 million per year, is about $6 million less than what is required to fund the $302 million infrastructure backlog or liability. Moreover, the Infrastructure Reserve balance currently stands at $6.4 million and is expected to decline to $2.7 million in FY 2011. New revenues or a reallocation of expenses are necessary to fund needed infrastructure work. Offsetting these deficits, but not included in the LRFF, are the savings from certain benefit changes implemented for SEIU and management employees. These include a second tier retirement plan (2 percent at 60) for new employees and an employee contribution to medical expenses that is to take effect in FY 2011. Similarly, the City will need to seek salary and benefit savings from Fire and Police whose costs represent 39 percent of the OF's budget. It should be noted that the CalPERS Board recently adopted a plan to share excess reserves in the preferred provider organization health plan with local agencies by providing a two month "premium holiday." This results in a savings to the General Benefit Fund of approximately $0.7 million citywide in FY 2010. Given the minimal balance in the GBF, staff proposes that these savings be used to bolster the Fund's balance in preparation for any year end unanticipated liability expenses. CMR:434:09 Page 11 of 13 The recommendations to balance the FY 2010 budget primarily consist of one-time adjustments (e.g. draw on reserves, vacancy savings) to get us through the current fiscal year. During this time, the Council, community, and staff will need to address the long-term deficits the City faces. In addition to further contributions by employees, expense reductions will be necessary and must involve prioritizing City programs. Also, additional revenues must be explored. During the FY 2010 budgeting process, the Finance Committee discussed what has come to be known as "Tier Two" reductions (Attachment G). These reductions were placed in abeyance until such time as a clearer revenue picture emerged in FY 2010 and need now to be revisited. In addition, and because of the magnitude of the City's financial challenges, a list of near, medium, and long-term alternatives are presented to foster further discussion of how to balance the General Fund's budget (Attachment H). It is important to note that many of these options have significant policy ramifications and/or legal or other obstacles. They are being introduced at this time, however, as examples of issues to discuss and with the expectation that they will generate other related solutions. The Executive Leadership Team (ELT) has scheduled a retreat to take a comprehensive look at these initial recommendations and it is expected that this list will undergo further refinement before it is presented to the full Council. ELT will examine the best practices identified in a recent League of California Cities publication ("Municipal Fiscal-Health Contingency Planning:' Western City, pp. 18-23) to plan for the difficult cost reduction process ahead and for proposals to Council. General strategies recommended include, for example: o Proposing reductions that reflect the fewest service impacts to the community o Describe service impacts and make process transparent to all involved parties o Crafting operating expenditure reductions that are real and feasible o Reductions must be ongoing and net of any related revenues, fees or grants o Maintain essential facilities, infrastructure and equipment at reasonable levels Once ELT develops a process and identifies possible reductions, staff will propose these to Council. Conclusion Critical revenues sources have declined by a total of $9.3 million since FY 2008. The recovery in these revenues is expected to take multiple years, and it is entirely possible that some revenue sources never regain the levels reached in peak years. Beginning in FY 2010 the City has taken proactive measures to begin paring back its expenses. By establishing a two-tier retirement structure and requiring employees to contribute to medical expenses (still to be negotiated with Fire and Police unions), the City has taken a major step toward addressing its unsustainable expense structure. But there is considerable work ahead. Even with the current year deficit closed, expenses will outpace revenues in each future year. The City must decide how to cut those expenses back -which programs and services are lowest priority. This is likely a multi­ year process. CMR:434:09 Page 12 of 13 RESOURCE IMPACT The discussion in this report and the financial results depicted in the LRFF indicate impacts to the City's General Fund. ENVIRONMENTAL REVIEW This is not a project for the purposes of the California Environmental Quality Act. PREPARED BY: DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: ATTACHMENTS Assistant Director of Administrative Services ~ LALOPEREZ Director of Administrative Services JAMES KEENE City Manager Attachment A: Long Range Financial Forecast Attachment B: CMR:394:09 Fiscal Year 2010 Budget Update CMR:358:09 Review of Preliminary FY 2009 Revenue Analysis Attachment C: Fiscal Year 2010 General Fund Financial Report as of November 20 Attachment D: General Fund Revenue Changes for FY 2010 and 2011 Attachment E: Police and Fire Departments Public Safety Overtime Analysis for Fiscal Years 2005 through 2009, with Fiscal Year 2010 Data through November 20,2009 Attachment F: FY 2010 Salary Savings by Department Attachment G: Tier 2 Reductions Attachment H: Budget Reduction Options CMR:434:09 Page 13 of 13 CITY OF PALO ALTO LONG RANGE FINANCIAL FORECAST General Fund ($000) Attachment A ,~ "" ' tONG RANGE FINANCIAL FORECAST MODEL 2009 ($000) , FY 2009 FY2010 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Actual $ 20,089 25,445 11,030 7,111 5,440 7,796 2,008 17,246 19,650 $ 17,645 $ 17,982 $ 18,430 $ 18,983 $ 19,647 $ 20,434 $ 21,200 $ 21,941 $ 22,599 $ 23,051 $ 23,588 25,752 25,778 26,379 27,325 28,379 29,689 31,136 32,735 34,337 35,936 36,804 37,879 11,250 11,417 12,513 13,156 13,676 13,973 14,703 15,486 16,328 17,200 18,071 18,966 7,000 6,650 6,987 7,140 7,344 7,656 8,019 6,420 6,799 9,065 9,344 9,631 5,633 5,274 5,390 5,510 5,656 5,828 6,016 6,187 6,338 6,418 6,464 6,592 7,857 1.900 15,352 7,857 8,166 1,662 6,529 1,676 6,940 1,724 13,977 9,356 1.765 14,330 9,816 10,306 1,923 15.070 10,620 2,002 15,456 11,360 2,053 11,932 2,095 16,264 12,533 2,163 16,666 141,472142,138 137.840 140,631 145.600 147,939 153,127 159,569 166,341 173,248 180,037 186,061 192,523 62.104 63.512 63.512 64.007 66.074 67,309 69,271 72.002 74,641 77,792 60,860 84.049 87,365 (3.000) 29,477 91.581 10.100 3,023 9,008 1,014 10.287 92,117 9,076 3,647 10,193 1.212 14.316 10,3976,180 4.251 3,720 1.082 1,086 84 .42 (794) (1.222) (1.222) (1,246) (1,271) (806) (606) (822) (839) 32,205 92,895 10,076 a.547 10,193 1,212 14,316 32.935 94,914 9.804 3,460 9,870 1.213 14,613 34.713 98,718 9,951 3,532 10,121 1.231 14,832 36.772 101,971 10,120 3,592 10,385 1,252 15,084 (1.310) (864) 38.715 105,813 10,373 3,682 10,681 1,283 15,462 (1.362) (1,416) (89B) (934) 40.769 110,511 10,664 3.193 11,002 1,322 15.925 42.943 115,433 11.005 3,906 11,330 1,362 16.403 (1,473) (972) 45,243 120,590 11,335 4,023 11,670 1,402 16,896 (1,532) (1.010) 47.668 125,986 11.675 4,144 12,020 1,445 17,402 (1,593) (1.051J 50,245 131,650 12.025 4,269 12.381 1,488 17,924 (1.657) (1.093) 52,963 137,578 12,386 4,397 12,665 1.532 18,462 Additional Retirement Contribution Increase III (1,03l) (735) (250) (1.000) (1,225) (2,774) (4,963) (735) (1,000) (2,000) (5.389) (735) (1,000J (2,000) {5,756J (735) , (1,000) (2.000) (6,140) (735] (1,000J (2,000) (6.542) (735) (1.000) (2,000) (6,963) (735] (1,000) (2,000) Retiree Medical Cost Increase Library Operating Cost Increase Infrastructure Contribution Increase Technology Fund Repayment Public Safety Bldg. Budget Savings Non-salary Reductions 10 be Determined Salary & Benefit Reductions to be Negotiated Vacant Positions Salary Savings (735) (1.225) (1,225) 2,700 1.000 173 1,500 1,279 967 986 (735) (l,OOOJ (2.000) (1,225) 1,006 1,036 1,078 1,121 1,166 1,212 1.261 1.311 Drawdown on Budget Stabilization Reserve --------------------------------------------------------------~ Subtotat • Other Activities GRAND NET SURPLUS (DEFICrn (1) In FY 2010, $2.8 million in budgeted salary savings realized. an additional $185 thousand in savings stili needs to be achieved Police union (PAPOA) deferred their FY 2010 negotiated salary Increase of SO.S million to FY 2011 (3) Based on current 2.7% @ 55 fonnula Assumption of no salary Increase for SEIU and MgmUProf. in FY2010 and FY 2011 and no $alary Increase for Firefighters (IAFFJ In FY 2011 Attachment A CITY OF PALO ALTO LONG RANGE FINANCIAL PLAN General Fund ($000) , , PERCENTAGE CHANGES IN FORECAST FOR REVENUES AND EXPENSES' , FY2009 FY 2010 AB FY 2010 PB FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY2017 FY 2018 FY 2019 FY 2020 % % % % % % % % % % Change % Change % Change Change Change Change Change Change Change Change Change Change % Change Service Agreements (Stanford University) Interest Eamings I RellrnbUirsemenlS 110m Uther Funds Total Revenues (11.20%) 10.23% 7.24% (10.85%) (30,88%) (3.79%) (5.43%) 12.40% (10.04%) (4.36%) 1.32% (2.86%) 2.24% (2.19%) 1.21% 1.99% (1.56%) 3.55% 0.25% 7.57% 0.78% (5.38%) (10.98%) (7.32%) (1.12%) 11.64% (12.17%) 1.31% 3.51% (3.67%) (3.05%) (3.11%) (2.44%) 0.78% 1.91% 2.33% 9.60% 2.00% 2.20% 3.42% 4.82% 3.93% (17.23%) (0.96%) (11.66%) 1.63% (7.31%) 1.46% (4.59%) 3.17% 11.64% (4.86%) 2.49% 3.59% 5.14% 2.19% 2.23% 3.34% 7.38% 4.45% 3.00% 3.86% 3.95% 2.86% 2.65% 3.46% 1.87% 4.82% 1.82% 2.86% 1.81% (11.34%) 2.58% 2.83% 3.68% 1.42% 2.58% 2.83% 3.50% 4.62% 2.17% 4.25% 3.04% 3.72% 2.91% 4.65% 3.54% 2.53% 3.45% 3.51% 3.46% 4.01% 4,87% 5,22% 4.74% 3.23% 4.58% 3.94% 4.94% 3.75% 2.55% 4.03% 4.23% 4.03% 3.75% 5.14% 5.33% 5.00% 2.84% 4.63% 3.94% 4.97% 3.83% 2.55% 4.04% 4.28% 4.04% 3.50% 4.89% 5,44% 4.50% 2,44% 4.42% 3.95% 4.99% 4,11% 2,56% 4.07% 4.17% 4.06% 3.00% 4.66% 5.34% 3.25% 1.26% 3.98% 3.94% 4.99% 2.55% 2.58% 4.08% 3.89% 4.08% 2.00% 2.42% 5,06% 2.85% 1.03% 2.76% 4.29% 5.04% 2.05% 2.59% 4.10% 3.23% 4.10% (2,26%) 0.47% (2.57%) 2.02% 3.53% 1.61% 3.51% 4.21% 4.24% 4,15% 3.92% 3,35% Sataries ~ 2,77% & Benefit Reductions to Negolialed (1) Salary Increase Deferral 2) Savings from SEIU Savings from MgmLlProf. (4.54%) 0.30% 7.37% (0.10%) (1.83%) (10.58%) (30.39%) (43.21%) 46.73% (9.96%) (0.01%) 115.38% (39.58%) 2,27% 0.99% 2.06% 3.23% 1.87% 2.91% 3.94% 3.94% 3.94% 3.94% 3.94% NfA NIA NIA NIA NIA 9.25% 9.25% 2,27% 5.40% 5.93% 5.28% 5.31% 5.33% 5.36% 5.36% 5.41% 1.24% (10.14%) 17.33% 13.15% 19.53% 39.17% 4.84% (40.56%) (12.49%) 0,38% (50.00%) 0.90% 1.43% 2.17% 4.01% (0.24%) (2.70%) 1.50% 17.33% (1.89%) 1.50% 13.15% (3.17%) 2.55% 19.49% 0.12% 1.50% 39.17% 2.07% 1.50% 3.29% 1.70% 1.70% 2.61% 1.70% 1.70% 3,77% 2.50% 2.50% 2.85% 2.50% 2.50% 4.44% 3.00% 3.00% 3.00% 3.00% 3.00% 4,450/, 3.00% 3.00% 2.99% 3.00% 3.00% 4.47% 3.00% 3,00% 3.00% 3.00% 3.00% 4.47"10 4.50% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 5.78% 1.25% 3.360/. 2.90% 3.43% 4.03% 4.05% 4.06% 4.07% 4.09% (40.56%) (12.49%) 0.36% (50.00%) 37,55% (53.04%) (0.54%) 0.00% 4.04% (6.35%) (13.99%) 4.00% 4.15% 3.00% (19.07"10) 4.00"10 4.26% 2.97% (0.40"10) 4.00% 4,38% 2.94% 0.68% 4.00% 4.48% 2.91% (0.31%) 4.00% 4.60% 4.70% 2.94% 2,91% 0.15% (0.10%) 0.00% 0.00% 4.80% 2.88% 0.31% 0.00% 1.73% 1.39% 3.15% 2.84% 3.46% 4.03% 4.04% 4.06% 4.08% 4.11% 2.33% 2.92% 4.95% 3.07% 1.67% 3.10% 4.27% 5.04% 3.25% 2.59% 3.81% 3.95% 5.41% 4.50% 3,OOfl' 3.00% 2.30% 3.00% 3,00% 4.05% 4.90% 3.00% (69.04%) 0.00% 3.81% Attachment A CITY OF PALO ALTO LONG RANGE FINANCIAL PLAN General Fund ($000) , , , , GENERAL FUND RESERVE SUMMARY ($000) Adopted Projected FY 2009 FY 2010 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Budget Stabilization Reserve FY 2018 FY 2019 Beginning Balance $ 26,102 24,637 $ 24,637 24,637 $ 19,012 $ 11,519 $ (1,369) $ (15,333) $ (29,660) $ (44,243) $ (59,272) $ (75,192) To/(From) Reserves 645 49 0 (5,625) (7,493) (12,887) (13,964) (14,327) (14,583) (15,029) (15,919) (17,942) CAFR adjuslments 1,581 0 0 0 0 0 0 0 0 0 0 One-time Only Increases/(Decreases) (3,691) 0 0 0 0 0 0 0 0 0 0 Ending Balance $ 24,637 $ 24,686 $ 24,637 $ 19,012 11,519 (1,369) $ (15,333) $ (29,660) $ (44,243) $ (59,272) $ (75,192) $ (93,134) % ofTolal Expendilures 17.5% 17.4% 17.2% 13.1% 7.7% (0.9%) (9.6%) (17.9%) (25.6%) (33.0%) (40.2%) (47.9%) LRFP 2009.xls Exhibits '·3 with IR 11/25/200910:16 AM FY 2020 $ (93,134) (18,842) 0 0 $(111,976) (55.4%) TO: CITY COUNCIL FROM: CITY MANAGER DATE: OCTOBER 5, 2009 ATTACHMENTB DEPARTM,ENT: ADMINISTRATIVE SERVICES CMR: 394:09 SUBJECT: Fiscal Year 2010 Budget Update RECOMMENDATION Staff recommends that Council review and provide input on the FY 2010 1st Quarter Update and structural budget issues identified in this City Manager Report (CMR). BACKGROUND As a consequence of the "Great Recession" and the decline in economically sensitive revenues such as sales and transient occupancy taxes (fOT). budget deficits were identified for FY 2009 and FY 2010. In the FY 2010 Operating Budget process, the City identified a General Fund $10 million budget gap. This projected deficit would have risen to $12 million had the City incorporated a pay raise for management and SEID emp]oyees. Hence. the. budget proposal assumed zero increases for these groups. To solve the $10 million deficit, the City implemented $3.1 million in savings from department and service reductions (this included the elimination of 20.3 Full Time Equivalents based on vacancies and retirements); a $1.4 milIionrevenue enhancement; $2.2 million in temporary reductions in transfers to the Capital Improvement and Retiree Medical Liability Funds; and $3.0 miUionin employee compensation and benefit reductions. The latter category savings was dependent on the City negotiating compensation and/or benefit concessions from management and City unions. The City is still in the process of negotiating with SEIU, discussing benefit changes with management, and finalizing a salary deferral with the Police union (approximately $800,000). The Fire union has decided to take its contracted salary increase this fisca1 year. The Management and Professional Group has already made a contribution in the variable management compensation program (VMC) totaling $657,000 for the General Fund. The Citis latest proposal to SEIU is available on the City"s website at http://www.cltyofpaloalto.orgllabornegotlatlons In the City Manager's FY 2010 Operating Budget transmittal letter, the possible need to revisit deeper service cuts and savings strategies was discussed. These deeper service cuts were described as the ~~Tier 2" list (Attachment C) and they included, for example: eliminating the disaster preparedness program; eliminating the Police traffic team; and contracting out golf and parks maintenance work. Layoffs could result with these recommendations, which the City has CMR:394:09 Page 1 of7 sectors~ a permanent change in consumer spending would have a substantial effect on the City's General Fund finances. Results to date for the transient occupancy and documentary transfer taxes have not changed since the September 8 report. TOT receipts from January to June in FY 2009 were -30 percent lower compared to the prior year period and July 2009 revenues were -21.3 percent under those in July 2008. As with sales tax, if receipts do not improve, midyear adjustments of between $0.2 and $0.5 million may be needed. Documentary transfer taxes, which feU from $5.4 million in FY 2008 to $3.1 million in FY 2009, continue to show weakness. Revenues through September 2009 were -36 percent below the same prior year period. At this time, however, staff does not foresee adjustments to the $2.8 million to be collected in this category forFY 2010. Attachinent B shows. actual revenue receipts through the middle of September in comparison to the FY2010 Adopted Budget. As mentioned, it is too early to draw firm conclusions from this information, but in addition to the areas cited above,those that bear further scrutiny and close monitoring are parking violations, plan checking fees, and building permits. These areas had especiallY weak results in FY 2009 which may continue into FY 2010. Property taxes, the GeneralFunds' highest single revenue source, is expected to be close to budget at yearend based on recent County projections. FY 2010 Expenses As with revenues, it is too early in the year to detect important expense vru.iances. With the exception of overtime in the Police and Fire departments, which typically exceed their budgets due to minimal staffing requirements, there isnodiscernable expense trend causing concern at this time. lfthe City cannot achieve the $3 million insalal'Y and benefit savings discussed above and incorporated into the FY2010budget, a deficit would result. "Tier 2') Items and Action Should revenues not perform as forecast or salary or benefit concessions by the unions and management not be realized, the City will be forced to utilize "Tier 2~~ expenditure reductions. During the FY.2010 Finance Committee budget hearings, these reductions were discussed at length and they were called to the attention of the full Council at budget adoption. Again, Attachment C lists these items and provides a description of the potential cuts. These include, for example: o Eliminating the current Disaster Preparedness program o Eliminating the City'S shuttle service o Contracting out parks and golf maintenance work o Eliminating Police traffic control services Tier 2 reductions will impact services to the community and will result in position reductions. Stl'uctural or Systemic Budget Issues To substantiate the position that the City faces structural budget issues, staff has modified the Long Range Financial Forecast (LRFF) presented in the FY 2010 Adopted Budget. Based on new data and known liabilities, the Net Surplus (Deficit) line in the forecast has been adjusted CMR:394:09 Page 3 of7 The current rate of funding from the General Fund and Infrastructure Reserve, which is around $9 million per year, is inadequate to meet the annual $15 million needed to offset the $302 million liability in any predictable or reliable way. The Infrastructure Reserve balance currently stands at $5.2 million and is expected to decline to $1.6 million next fiscal year. Without replenishment from General Fund surpluses over the next few years, which will not occur, the ability to sustain $9-$10 million of annual General Fund .infrastructure work is unlikely. New reVenUeS81'e necessary. 5. Although one-time in nature and supposedly to be repaid in 3 years, the City faces a $2.5 million property tax takeaway by the State to solve its budget deficit. This cut will decrease the General Fund's Budget Stabilization Reserve, impact the City's cash flow and intel'estearnings (the Citycurrentlyeamsaround 4 percent on its investments and the State has proposed repaying the principal with a 2 percent·interest rate), and reduce flexibility in dealing with unforeseen needs. The City, with the League of California Cities is exploring our options. Even.with statutory protections against State takeaways of locall'evenues,the State can withhold revenues in fiscal emergencies and the State's record on coping with such emergencies is well-documented. Having solid and ~ubstantial reserves protects the City froin the State risk. In addition to the structural issues cited above, the City faces additional threats on the revenue side. Outlined each year in the Long Range Financial Forecast, City revenues and the services they fund face an array of risks. These can include, for exampl~, risks to sales tax and the TOT through: community opposition.to new business and hotel development (e.g., the loss of Hyatt Rickey's); the potential exodus of automobile dealerships; surrounding big box stores that cause leakage of local spending and sales tax to surrounding jurisdictions; loss of sales tax to Internet sales; and, most recently, the threat of conswners .spending less in retail areas such as the downtown and. Stanford Shopping Center. It is important to note that nearly 50 percent of the General Fund's roughly $20 million in annual sales tax is generated by 25 businesses. The loss of one ofthese enterprises can have a substantiai impact on continuing services as we know them today. . Additionally. the impact of Statewide initiatives and legislation such as Proposition 13 (property tax); Proposition 218 (revenue thresholds); and required super majority (2/3) approval for General Obligation bond funding limit the City's revenue raising options. And of course, the financial markets crisis and impact on lending as well as the dysfunction of State government all impact the City. Conclusions Actual revenue and expenditure data to date do not definitively indicate new downward budget adjustments at this moment. As additional revenue and expenditure data materializes, however, further adjustments at midyear may be necessary. As indicated in a prior report (October 2007) on maintaining a Sustainable Budget (CMR: 387:07), the City may be faced with determining its long-term service priorities. It must be recognized that the City provides a wide and high level of service and dedicates sizeable annual resources in such areas as the school district ($6.6 million in FY 2009 for the Covenant Not to Develop as well as additional expenditures on field maintenance and outreach programs) and to CMR:394:09 PageS of7 PREPARED BY: DEPARTMENT HEAD APPROVAL: ~~!ji~r;;;:;::;:-"""':::::;:'-­ L Director 0 Administrative Services CITY MANAGER APPROVAL: --.........y,:..;--.L..----r-t-------~-- CMR:394:09 Page 7 of7 ATTACHMENT A City of Palo Alto City Manager's Report TO: FINANCE COMMITTEE FROM: CITY MANAGER DATE: SEPTEMBER 8, 2009 DEPARTMENT: ADMINISTRATIVE SERVICES CMR: 358:09 SUBJECT: Review of Preliminary FY 2009 Revenue Analysis RECOMMENDA TION Staff recommends that the Finance Committee review and discuss preliminary General Fund revenue perfo~ance for FY 2009. . BACKGROUND As a result of the current recession and consequent decline of key Genera] Fund revenue sources, the Finance Committee requested a late summer assessment of FY 2009 revenue performance. This assessment was to include a comparison or actual revenue receipts to the FY 2009 Adjusted Budget and to prior year results. The variance analysis could lead to necessary mid year budget aqjustments and allow the City to be proactive in resolving unforeseen budget gaps. It is critical to note that the FY 2009 numbers presented in this report are unaudited and that there are potential accruals that may result in subsequent changes. Staff is not presenting a year end expense analysis at this time. Since accruals and incurred, but not reported, expenses in such areas as workers' compensation .and genera] liability have not been fully booked and allocated to departments, staff believes an expense report is premature and could be potentially misleading. In addition, the Committee requested an earlier review of FY 2010 quarterly 'revenue and expense results. Staff anticipates presenting a full analysis in late October 2009, but offers the following insights into preliminary trends in this report. DISCUSSION The crucial backdrop to the results.in this report is the dismal state of the economy. In what has come to be called the "Great Recession," the City's key and economically sensitive revenue sources have declined significantly since FY 2007·08. Rising unemployment rates, tightening credit markets, deteriorating residential and commercial property markets, and diving consumer confidence have driven down public revenue streams across the country. The City ofPaIo Alto has not been immune from the recession. CMR:358:09 Page J of5 ./' Documentary Transfer Tax This important revenue source, which is based on the number and value of commercial and residential property sales, has moved down sharply during the recession. Rising to the mid $5 million level for the past 5 years, it retreated to $3.1 million in FY 2009. While close to the adjusted budget, this result was 42.5 percent or $2.3 million below FY 2008 results. The poor performance is a consequence of the commercial and residential markets coming to a virtual standstill. Commercial transactions decreased due to low occupancy rates and residential transactions were minimal due to sellers holding onto their homes during a period of market softness. In addition, credit conditions were abysmal due to the collapsing credit markets for commercial and jumbo home ]08I1S. As with sales tax and TOT, documentary transfer tax revenue estimates for 2010 may require a midyear adjustment. Results for the month of July 2009 were nearly 40 percent under those for July 2008. Cun-ently, the adopted budget for FY'2010 projects $2.8 million in transfer taxes, $0.3 million be]ow actual FY 2009 revenues. With credit markets slowly returning to more normal activity. staff hopes this revenue source will rebound and obviate the need for a midyear adjustment. . Fines & Penalties This revenue category consists primarily of parking violations and library fines. Revenues are' below the FY 2009 Adjusted Budget by 16.6 percent or $0.5 mi11ion. and 4.7 percent or $0.1 million below prior year results. The negative variance is primarily due to parking violations. which came in 28 percent or $0.6 million below the adjusted budget. The combination of industrial injuries to Community Service Officers and fewer cars in violation of parking regulations have led to ihis drop. Should vacancies continue, an adjustment to adopted budget revenues may be necessary. Permits & Licenses The downturn in the economy has heavily and negatively impacted building related fees. Permit and license fees were 16.5 percent or $0.9 million below the adjusted budget and 17.4 percent or $0.9 million below the prior year. Compared to the budget, new construction permit fees are down 13.7 percent or $0.4 million while plan check fees were down $0.1 million. In the new fiscal year, July 2009 building fee revenues are up by $0'.1 million in comparison to July 2008. This may signal an upturn in this revenue category. which would preclude a midyear adjustment. Return on Investment Interest income came in higher than the adjusted budget for 2009, but was under prior year results by 6.9 percent or $0.2 million. With the Federal Reserve keeping interest rates low to stimulate the economy. the City's portfolio yield has declined to the low 4 percent range over the' past two years. It is expected that yields will continue to decline as higher yielding instruments mature and the City continues to buy securities in the 3 to 4 percent range. An adjustment at midyear may be necessary if interest rates do not trend upward. CMR:358:09 Page 3 of 5 PREPARED BY: > c., --SHARON BOZMA Budget Manager. Administrative Se DEP ARTMENT HEAD APPROV AL: ~:-;-;:;:~~;--t-:;;:;;::;:;,"-::==-- Director of Administrative Services ~ CITY MANAGER APPROVAL: ---......."...~~~~~A--- CMR:358:09 JAMES CityM Page 5 of5 Attachment B CITY OF PALO ALTO REVENUE AND EXPENSE RESULTS THROUGH MID-SEPTEMBER COMPARED TO THE ADOPTED FY 2009 BUDGET GENERAL FUND (In thousands 01 dollsrs) I Adopted I Adjusted Categories Budget Budget Pre Adjusted I I I %of Encumbr Encumbr Actual Budget • Revenues & Other Sources Salas Tax Property Tax Transient Occupancy Tax Utility Users Tax Other Taxes and Fines Charges tor Services Permits & Licenses Return on Investment Rental Income From Other Agencies Charges To Other Funds Other. Revenues 19,650 25.752 7,000 11,250 5,633 20,238 5,056 1.900 13,655 92 10,643 1,605 19,650 25,752 7,000 11,250 5,633 20,238 5,056 1,900 13,655 92 10,643 1;605 ...... , . ,'122474' Operating Transfers-In Encumbrances and Rea ro rlatlon : TO.t&1 SCiurcesofFunds Exeendltures & Other Uses City Attorney City Auditor City Clerk CltyCounci! City Manager AdmInIstrative Services Community Services Fire Human Resources Library Planning and Community Environment Police Public Works Non-De rtmental lotaf Ex ,n~ltures Operating Transfers-Out Be innln Reserves 19,664 19,664 6,564 ,142138. '148~702. 2,569 999 1,512 296 2,395 6,761 21,876 25,166 2,837 6,385 9,858 29,998 13,484 6,925 ..•. :131061· 11,028 . '·49'. 3,343 1,143 1.524 ' 309 2,646 6,910 22,770 25,546 2,970 6,668. 10,603 30,239. 14,177 8,778 . 137,6~4. 11,028 22,176 22,176 « Excludes encumbrances, reappropriation and Infrastruoture reserve 21 33 5 203 99 667 246 17 35 61 187 2,839 495 126 164 658 385 934 1,682 77 578 2,357 1,204 2,613 943 5 2,450 15 539 152 486 70 487 1,296 . 4,173 4,800 501 1,169 1,940 5,433 2,443 1 Attachment C \ City of Palo Alto Internal Budget Hearings -FY 2010 Summary Tier 2 Items General Fund Department Other QptlorlS_ Revel'lue~nse FTE FIR CSD CSD PtA POL POL PQL PQL PWD PWD Eliminate Disaster Preparedness Div Park Maintenance -Contract out net expense Golf Course Maint -Contract out net expense Eliminate Shuttle Traffic Team c. School Res Officer Prg Pol Record Specialist· Front Desk Records Program Asst I -Crime Analysis Eliminate Tree Trimming Contract Contract out Tree Trimming Subtotal Additional Finance Committee 'ParkinQ Lot' Recommendations (33,400) (1oo,000) (133.400) FIR Evaluate future organization of OES Consolidation/Coordination FIR Regionalization options for Fire Services Police Regionalization options for Police Services (442,826) (122,957) (176.352) (256,000) (1.00) Occupied (5.00) Occupied (7.00) 7 Occupied (626.433) (4.00) Occupied (161, m) (1.00) Occupied (82,773) (1.00) Occupied (94,037) (1.oo) Occupied (379,000) . (46,737) (1.00) VaC<ll1t (2,388,887) (21 :00) Police Retluce the Police Department Budget by $500,000 -Police Chief to identify reductions Police Reduce the Police Department Budget by $492,000 -Finance Committee recommended reductions Add back 0.5 Fte Volunteer Coordinator (Salary & Benefits) Reduce the Traffic Team by one-half (instead of elimination) 1.0 FTE Police Officer (salary & benefits) 1.0 FTE Police Agent (salary & benefits) Add back revenue Reduce positions listed below by one-half instead of elimination SchOOl Resource Officer (0.5 FTE Pofice Agoot) Crime Analyst Program (0.5 FTE Crime Analyst) Police Outreach (0.5 FTE Program Assistant I) $ 52,000 (154,000) (158,000) 50,000 (79,000) (56,000) (47,OOO) Planning & Community Environment -$ 256,000 Eliminate the City's shuttle service. There are not City FIE associated with this program and its termination would result in $256,000 in annual savings. Eliminating the shuttle program would reduce mobility and transportation alternatives within the City. Police Department -$ 865,015 Eliminating the Traffic Team would result in the reduction of $626,000 in expenditures and $100.000 in revenue. Included is the reduction of four FfE. The duties normally assigned to 'the Traffic Team would be assumed by patrol units. Eliminating the School Resource Officer (SRO) Program: During the FY 2010 budget hearings, one vacant SRO position was eliminated. The Tier 2 reduction would eliminate the remaining SRO position which is currently filled. The expenditure reduction is estimated at $,162,000. Elimination of the Crime Analysis Program. This would result in the reduction of one FfE with an estimated expenditure reduction of $94,000. Elimination of Community Policing/Outreach program. This would result in the reduction of one FTE with an estimated expenditure reduction of $83,000. The Finance Committee also discussed the possibility of evaluating the future of regionalization options for the Police Department. Staff has not reviewed the costlbenefit strips to property owners. It would require a change to policy and to the Municipal Code. It would not impact Utilities line 01' emergency tree trimming clearing. The other alternative for the Public Works Department is the contracting out of Tree Trimming. This would result in the elimination of 1 FfE and a net expenditure reduction of $46,000. The Public Works Department is recommending either/or for these options, not both. Attachment C CITY OF PALO ALTO FY 2010 FINANCIAL REPORT as of 11-20-09 GENERAL FUND (in thousands of dollars) . I Adopted I Adjusted Categories Budget Budget Pre Adjusted I I I %of Encumbr Encumbr Actual Budget Revenues & Other Sources Sales Tax 19,650 19,650 5,510 28% Property Tax 25,752 25,752 3,140 12% Transient Occupancy Tax 7,000 7,000 1,781 25% Utility Users Tax 11,250 11,250 4,360 39% Other Taxes and Fines 5,633 5,633 2,092 37% Charges for Services 20,238 20,238 ·6,209 31% Permits & Licenses 5,056 5,056 1,455 29% Return on Investment 1,900 1,900 633 33% Rental Income 13,655 13,655 4,780 35% From Other Agencies 92 92 62 67% Charges To Other Funds 10,643 10,643 3,540 33% Other Revenues 1,605 1,605 959 Total Revenues 122,474 122,474 Operating Transfers-In 19,664 19,664 Encumbrances and Rea ro riation 6,564 Total Sources of Funds 142;138 148,702 Ex~enditures & Other Uses City Attorney 2,569 3,343 8 601 970 47% City Auditor 999 1,143 229 296 46% City Clerk 1,512 1,524 16 655 44% City Council 296 309 31 107 45% City Manager 2,395 2,646 6 62 814 33% Administrative Services 6,761 6,910 156 2,267 Community Services 21,876 22,770 86 2,308 7,993 46% Fire 25,166 25,546 10 648 9,156 38% Human Resources 2,837 2,970 5 104 911 34% Library 6,385 6,668 48 145 2,110 35% Planning and Community Environment 9,858 10,603 158 953 3,331 42% Police 29,998 30,239 337 319 9,877 35% Public Works 13,484 14,177 104 936 4,510 39% Non-De artmental 6,925 8,778 19 772 Total Ex enditures 131,061 137,624 Operating Transfers-Out 11,028 11,028 Total Uses of Funds 142,089 148,653 49 49 Be innin Reserves 22,176 22,176 Projected Ending Reserves 22,225 22,225 • Excludes encumbrances, reappropriation and infrastructure reserve Attachment D City of Palo Alto General Fund Revenue Changes for FY 2010 and FY 2011 -Detail ($000) axes Property Taxes Detail Transient Occupancy Tax Utility User's Tax City Utilities Telephone SUb-total Utility User's Tax Other Taxes and Fines Vehicle In-Lieu Documentary Transfer Parking Violations General (Fines, Forfeitures & Penalties) Sub-tota/-Other Taxes and Fines Total Taxes and Fines Charges for Services Stanford FirelPolice Service Reimbursement Golf Related Fees Class Program Fees Paramedic Fees Plan Checking Fees Cable Franchise Other Fees Sub-tota/-Charges for Services Permits and Licenses Street Cut Fee Permits Licenses SUb-tota/-Permits and Licenses Charges to Other Funds Cost Plan -Admin. Support to Other Funds Communication -Utility Reimb. for 911 Support Public Works Admin. Support to Ent. Funds Other Reimbursements SUb-tota/-Charges to Other Funds Rental Income Utilities Facility Charges Property Rental-CubberJey Tenants Use of City Facilities Other Sub-tota/-Rental Income From Other Agencies Return on Investments (Interest Income) Unrealized Gain/loss on Investment Revenue Total Revenues (Prior to Oper. T'fers-In) erating Transfers-In Equity & Utility Transfers Parking Districts Other Sub-total -Operating Transfers-In Total Source of Funds 8,233 512 563 1252 10,560 10,311 10,311 1,719 1,801 1,518 1,440 106 81 13,655 13,633 92 92 1,900 1,662 (238) 150 150 1,646 (254) 1,502 $121 922 Attachment E Police and Fire Departments Overtime Analysis for Fiscal Years 2005 through 2009 With Fiscal Year 2010 Data Through November 20, 2009 Fiscal Year Ending June 30 2005 2006 POLICE DEPARTMENT OVertime Expense Original Budget $974,426 $981,862 Current Budget 1,028,337 1,009,705 Net Overtime Cost· see below 1,096,077 780,647 Remaining Budget !$67,740~ $229,058 Overtime Net Cost Actual Expense $1,229,851 $1,405,155 Less Reimbursements Stanford Communications 30,941 30,937 Utilities Communications Reimbursement 17,404 17,402 Local Agencies (A) 32,617 34,565 Federal Gra nts State Grants (9) 8,135 65,835 Police Service Fees 37.188 49,185 Other 7,489 Total Reimbursements 133,774 197,924 Less Department Vacancies 375,515 426,584 Net Overtime Cost $1,096,077 $780,647 Department Vacancies (number of days) 1,642 1.733 FIRE DEPARTMENT Overtime Exponse Original Budget $962,674 $959.389 Current Budget 982,674 959,389 Net Overtime Cost· see below 877,892 637,310 Remaining Budget $104,762 $322,079 Overtime Net Cost Actual Expense $1,956,529 $1.582,858 Less Reimbursements Stanford Fire Services (0) 592.828 479,606 Cal-Fire/FEMA (Strike Teams) 66,269 State Homeland Security Grant Program (SHSGP) (C) 17.203 72,254 Urban Area Security Initiative (UASI) 26,782 Department of Homeland Security (E) Total Reimbursements 610,031 644,911 Less Department Vacancies 468,606 300,637 Net Overtime Cost $877,892 $637,310 Department Vacancies (number of days) 1,980 1,230 NOTES: (A) InCludes Animal Services contract with Los Altos, Mountain View and Los Altos Hills. (9) State Office of Traffic Safety and ABC grants. (C) Included in the SHSGP and UASI reimbursements is a small amount of per diem reimbursement. (D) Stanford reimburses 30.3% of Fire expenditures, 2007 2008 $1,015,620 $1,036,815 1,074,399 1,071,005 1,025,718 1,096,894 $48,681 ($25,8891 $1,785,657 $2,009,542 39.342 65,079 22,130 36,607 36,457 41,770 63,344 4,672 43,218 67,390 12,447 18,157 216,938 233,675 543,001 678,973 $1,025,718 $1,096,894 2,280 2,766 $1,032,674 $892,674 1.032,674 996,674 737,768 863,442 $294,906 $133,232 $1,860,757 $1,744,076 563.809 528.455 85,531 140,224 40,897 10,164 1,150 690,237 679,993 432.752 200,641 $737,768 $863,442 1,740 810 (E) Reimbursement from U.S, Department of Homeland Security for HazMat Continuing Challenge Training Conference (Sep 2009) unaudited Ihru 11120 2009 2010 $999,900 $999,900 1,016,900 999,900 886,568 215,550 $130,332 $784,350 $1,665,842 $567,870 42,160 17,468 23,715 9,826 37,413 13,413 10,998 53,812 48,035 15,982 184,080 595,194 263,578 $886,568 $215.550 2,402 508 $1,017.674 $1,017,674 1,353,058 416,610 $936,448 $1,591,261 $1,040,777 482,152 315,355 453,619 43,000 4,342 5,800 940,113 358,355 234,538 168,737 $416,610 $513,685 780 636 11/2512009 Attachment F FY 2010 Salary Savings by Department In Thousands - City Attorney 1,374 124 124 City Auditor 487 25 25 City Clerk 593 67 67 City Council 65 5 5 City Manager 1,302 151 151 Administrative Services 3,709 147 147 Community Services 8,707 276 (137) 139 Library 3,297 156 156 Fire 14,182 1,539 (679) 860 Human Resources 1,544 193 193 Planning and Community Environment 4,531 390 (37) 353 Police 16,706 1,891 (691) 1,200 Public Works 4,831 337 (51 ) 286 Non-departmental (1,313) (2,206) (2,206) Total 60,015 3,095 (1,595) 1,500 ATTACHMENTG "Tier Two" Reductions Dept. Other Options Revenue Expense FTE Eliminate Disaster Preparedness FIR Div (33,400) (442,826) (1.00) Park Maintenance -Contract CSD ~ out net expense (122,957) (5.00) i Golf Course Maint -Contract out ; CSD net expense (176,352) (7.00) PLA Eliminate Shuttle (256,000) : POL Traffic Team (100,000) (626,433) (4.00) i School Resource Officer i POL Program (161,772) (1.00) Program Asstl -Police Outreach • POL Program (94,037) (1.00) Crime Analyst -Crime Analysis POL Program (111,353) (1.00) Eliminate Tree Trimming PWD Contract (379,000) PWD Contract out Tree Trimming (46,737) (1.00) Subtotal (133,400) (2,417,467) (21.00) Near-Term Cost Savings Attachment H Budget Reduction Options 1. Institute a hiring freeze except for positions absolutely required for public health and safety. The City will look at reorganization around vacant positions (short­ term within departments and long-term among departments), but it must be noted that significant staff reductions and efficiencies have been implemented since the "dot-com" bust 2. Freeze or cut all travel and meeting budgets unless critical to immediate public health and safety issues 3. Institute furloughs 4. Review all consultant contracts, particularly those just starting, to determine if needed 5. Defer any Capital Improvement Projects (CIPs) that are not absolutely essential 6. Close public safety building design CIP and return funds to reserves 7. Evaluate need for temporary positions including retirees who have been hired back to work 8. Review staffing levels in departments where fee, fine or permit revenue has dropped, e.g., CSD classes, parking violations, and in development center. Design flexible budgets for these areas 9. Consider instituting a 2.5% reduction for small departments and 5% for remaining departments 10. Institute full cost recovery for programs that provide unique and limited service to small populations 11. Institute full cost recovery for adult classes. Revisit the non-resident fees and examine all programs where non-residents are not paying fees for use of City facilities. 12. Use the Budget Stabilization Reserve to balance the budget along with other initiatives in 2010. The goal would be to make longer term decisions during the fiscal year 2010 timeframe. The draw down should not take the reserve lower than 15 percent of General Fund adopted budget expenditures Medium Term 1. Institute a 5.0-7.5% equity transfer on dark fiber fund 2. Enhance and expand the Economic Develop Plan 3. Negotiate away minimum staffing levels in Fire Department 4. Have fire department use newest employees for OT work rather than most senior staff; same for police (Le., staff according to reverse seniority) 5. Have Fire department complete an evaluation (funds have been budgeted) on need for current levels and configurations of fire service based on predominant number of calls for paramedic service 6. Institute a two-tier retirement plan for public safety personnel 7. Contracting out services such as parks and golf 8. Decrease rental subsidies at Cubberley or restart negotiations with Foothill College 9. Review all support to PAUSD to determine what the City can continue to provide 10. Review the Cubberley Lease and the Covenant Not To Develop agreement with PAUSD to determine affordability and course of action going forward. 11. Revisit all HSRAP services to non-Palo Alto institutions with new budget cycle and focus resources on needy seniors, children, and teens in trouble. 12. Revisit residents and businesses paying for cost for sidewalk work at 10% per year and cap at 50% in year 5 13. Revisit policy on property rental rates to be at or close to cost recovery as agreements come up for renewaL 14. Move all employee groups toward assuming greater share of PERs "employee" contribution and all groups contribute towards the cost of health care. 15. Consider assessment districts -parks. sidewalks, fire and/or public safety. 16. Begin GF service priority setting process with Council and community Long·Term 17. Revisit new conference hotel in Palo Alto 18. Develop LATP site as a source of rent or sell the land to Enterprise Funds 19. Negotiate away no minimum staffing requirement for Police 20. Review all police services for efficiencies and potential reduction in least essential services 21. Contract out, with reasonable response time specifications, paramedic service to outside agencies e.g., AMR 22. Begin discussion with neighboring cities e.g., Mountain View on sharing public safety services e.g. dispatch center, SWAT, white collar units, border fire response 23. Explore and implement new revenue opportunities 24. Revisit land use policies to provide the most benefit to the community ATTACHMENTB ORDINANCE NO.XXXX ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING THE BUDGET FOR FISCAL YEAR 2010 TO REINSTATE A $ 8 09 , 000 TRANSFER FROM THE GENERAL FUND BUDGET STABILIZATION RESERVE TO THE TECHNOLOGY FUND. The Council of the City of Palo Alto does ORDAIN as follows: SECTION 1. The Council of the City of Palo Alto finds and determines as follows: A. Pursuant to the provisions of Section 12 of Article III of the Charter of the City of Palo Alto, the Council on June 15, 2009 did adopt a budget for Fiscal Year 2010; and B. On December 1, 2009, staff reported to the Finance Committee a one time budget change to solve a $4.8 million def t for the Fiscal Year 2009; and C. The one-time budget change deferred a $4.8 million cost allocation transfer from the General Fund to the Internal Service Fund-Technology Fund in FY 2009; and D. Pursuant to discussions with the Finance Committee, a motion was passed to approve staff's recommendation to close out the 2009 Fiscal Year by deferring the $4.8 million transfer to the Technology Fund; and E. The Finance Committee also passed a motion recommending staff submit a Budget Amendment Ordinance to Council amending the FY 2010 Technology Fund Budget in the amount of $800,000, which was the excess from FY 2009 year end close, plus any amount necessary to fund all of the Tech expenditures that had been planned FY 2010; and F. City Council authorization is needed to transfer $809,000 from the General Fund to the Internal Service Fund­ Technology Fund. SECTION 2. A. The Budget Stabi zation Reserve is hereby decreased by the sum of Eight Hundred Nine Thousand ($809,000). As a result of this change the Budget Stabilization Reserve will be reduced from Twenty Two Million Twenty Two Thousand Three Hundred Sixty One($22,022,361) to Twenty One Million Two Hundred Thirteen Thousand Three Hundred Sixty One ($21,213,361). B. The Internal Service-Technology Fund is hereby increased by the sum of Eight Hundred Nine Thousand ($809,000). As a result of this change the Internal Service-Technology Fund Reserve will be increased from Fifty One Thousand Four Hundred ($51,400) to Eight Hundred Sixty Thousand Four Hundred ($860,400). SECTION 3. As specified in Section 2.28.080(a) of the Palo Alto Municipal Code, a two-thirds vote of the City Council is required to adopt this ordinance SECTION 4. The Council of the City of Palo Alto hereby finds that this is not a project under the California Environmental Quality Act and, therefore, no environmental impact assessment is necessary. SECTION 5. As provided in Section 2.04.350 of the Palo Alto Municipal Code, this ordinance shall become effective upon adoption. INTRODUCED AND PASSED: AYES: NOES: ABSTENTIONS: ABSENT: ATTEST: City Clerk APPROVED AS TO, FORM: City Attorney APPROVED: Mayor ty Manager Director Services of Administrative ATTACHMENT B FINANCE COMMITTEE EXCERPT FROM THE REGULAR MEETING DECEMBER 1, 2009 2. Fiscal Year 2009 General Fund Discussion and Fiscal Year 2010 Financial Results as of November 20, 2009. City Manager, James Keene stated due to a higher than anticipated budget gap in Fiscal Year (FY) 2009, Staff will be presenting the year­ end budget review earlier than usual/ and would provide the final audited financial statements on another date. The intent was to call attention to the upcoming challenges in the forthcoming fiscal years. He spoke on the continuing economic downturn and declining revenues projected in the next four years, and beyond. In the FY 2010 budget, a $10 million General Fund deficit was identified by Staff. This gap was initially closed with a three pronged approach, but had proven insufficient to stem the tide of declining revenues. The City was facing an additional deficit. Staff would discuss in detail the shortfalls and issues in the closing of the FY 2009 Budget. In the wake of the FY 2009 issues, the City's Buqget Manager voluntarily left, and the Administrative Services Department (ASD) had restructured creating an Office of Management and Budget within the ASD Department. The ASD Department was currently recruiting for a Budget and Management Officer. He spoke on the recommendation to balance the FY 2010 with one-time adjustments to get the City through the current fiscal year, and systemic adjustments would be required for future drop-offs in revenues. Director of Administrative Services, Lalo Perez stated the purpose of the report was a follow-up to discussions with the Finance Committee on September 8, 2009 and October 5, 2009, to provide new information depicting a worsening financial condition! and to layout plans for addressing the current projections and future deficits. He gave a PowerPoint presentation that highlighted the following topics: 1) background on Palo Alto's financial position; 2) four-year view on the challenges that lay ahead; 3) FY 2009 General Fund results; 4) FY 2010 General Fund results to date; 5) long range financial forecast; 6) future challenges; and 7) budget reduction options. He stated that Palo Alto has lost $9.3 million in revenues since the end of FY 2008. FIN: 091201 EXERPT 1 FINANCE COMMITTEE He stated that the net deficit for 2008 was $4 million. He projected that in 2010 the deficit will be $5.4 million, driven by a decline in revenues. Staff recommended one-time adjustments for 2010. A $5.6 million structural adjustment to the General Fund Budget will be required and was subject to change. He stated the City would face an additional deficit of $1.9 million in 2012. Mr. Keene added that the additional $1.9 million in 2012 was predicated on the $5.6 million in 2011 being systemic and ongoing. Council Member Klein inquired whether the deficit projections in the four-year view were in addition to the $10 million deficit when the FY 2010 budget was prepared. Mr. Perez stated that was correct. He spoke on FY 2009 General Fund results. The drop in key revenue sources in FY 2009 required midyear budget adjustments to the General Fund revenues and expenditures. The salary line item was over budget due to a miscalculation in the amount of expected salary savings. The General Fund deficit consisted of $2.1 million in employee salaries, $0.9 million in overtime, and $1.8 million in employee benefits. The miscalculations were not recognized in time to make additional expense adjustments. Staff had implemented enhanced monthly variance reports, a department restructuring, as well as other controls, to avoid such occurrences in the future. He stated that Staff's recommended solution was a one­ time adjustment to the FY 2009 General Fund by eliminating the $4.8 million transfer to the Technology Fund. He said that given the downturn in revenues it was important to not draw on the Budget Stabilization Fund first. The result of the error was an overage of $2.1 million in salaries, a $900,000 overage in overtime, and a $1.8 million overage in benefits. He stated that the Fire Department and Police Department covered their overtime through vacancies and reimbursements. Regarding the benefits overage, he stated that in previous years the City was able to rely on the Benefit Fund Balance to cover overages. In recent years the balance has dried up as the City had used it to balance the budget and can not absorb the overage any longer. After the close of the year Staff realized that there was not going to be sufficient budget to cover the overages in the General Fund. The impacts of not transferring the $4.8 million to the Technology Fund will be delayed projects. This may be acceptable in the short term, but this was not a fund that could forego these FIN: 091201 EXERPT 2 FINANCE COMMITTEE projects. The money will need to be put back in order to support the organizations technology needs. Staff was recommending a pay back over a four year period. The projects being considered for deferral were the Radio Infrastructure Improvements, the Library Radio Frequency Identification, the replacement schedule for on-going items, and restrictions on any future technological initiatives until the funds were put back. After accounting for encumbrances and reappropriations there will only be $51,000 left in the Technology Fund. Mr. Keene iterated that Staff was proposing an approach to close the books on FY 2009. And how to replenish, over a four-year period, the Technology Fund, if the City Council chooses that alternative to close the FY 2009 General Fund gap. He stated the FY 2010 deficit challenge contained $1.2 million from FY 2009, totaling a FY 2010 projected deficit that totaled $5.4 million. He spoke on the impact on the Technology Fund. Chair Burt spoke on how the City Council should proceed with the subsequent discussions regarding this Agenda Item. Council Member Klein stated the City Council Member's questions should be answered thoroughly before moving forward. Vice Mayor Morton stated $4.8 million from the Technology Fund was a transfer, and not an expenditure that had been made. He inquired whether the City CounCil was asked to solve a booking in payroll savings error in FY 2009 by deferring to the Technology Fund. Mr. Perez stated that was correct. Vice Mayor Morton stated a draw of $800,000 from the Budget Stabilization Fund could be transferred to the Technology Fund to minimize the future impact on said fund. Mr. Perez stated that was the intent of Staffs recommendation. Vice Mayor Morton stated his preference to transfer $800,000 from the Budget Stabilization Fund this Fiscal Year. He requested clarification on how employee vacancy savings became a misidentification in General Fund deficit. FIN: 091201 EXERPT 3 FINANCE COMMITTEE Mr. Perez spoke on the process leading up to the miscalculation. He spoke on tile line item tllat was over budget, due to a miscalculation made on the expected vacancy salary savings. Vice l\1ayor Morton inquired wllether there was an option to not transfer funds from the General Fund to the Tec~lnology Fund to solve the FY 2009 Budget problem. Mr. Perez stated yes and that the miscalculation was not a system error. Vice Mayor Morton left tile meeting at 7:54 p.m. Council Member Schmid inquired whether the miscalculation in salary savings from vacancy rates was $2.1 million, and whether the error accounted for the overtime and benefit shortfall. Mr. Perez stated the FY 2009 General Fund deficit consisted of $2.1 million, plus $900,000 for overtime costs. Council Member Schmid inquired whether the benefits were a separate issue. Mr. Perez stated this was correct because they were not covered under the General Fund. He indicated there were a number of variables that could be difficult to predict. Council Member Schmid stated there were a growing number of vacancies during the time period contributed to the miscalculation. Mr. Perez stated that was correct. Council Member Schmid stated the vacancies should have created a budget positive. He inquired whether the issue was an overestimate. Mr. Perez stated that was correct. He spoke on the three components that contributed to the miscalculation. Council Member Schmid stated the miscalculation was not what was owed to the retired employees. FIN: 091201 EXERPT 4 FINANCE COMMITTEE Mr. Perez stated the payroll was correct, and the amount that should Ilave been paid out was in line with the adopted budget, with the exception of benefits. Council Member Schmid stated the benefits showed a $1.8 million shortfall due to workers compensation and general liability costs. He requested clarification for the underestimation of funds to cover benefits. Mr. Perez stated the City's actuarial consultant analyzed the existing and new claims and made a determination on what the payout would likely be. He stated the consultant's amount was booked against the General Benefits Fund. The benefit expenses at the end of FY 2009 came in at $1.8 million over budget due to a higher than anticipated cost of the claims. Council Member Schmid stated Mr. Perez was implying there was an underestimation in the funding to cover benefits. Mr. Perez stated that was correct. Council Member Schmid stated $1.8 million was a sizable amount. He inquired on the total amount booked in a given year for workers compensation claims. Mr. Perez stated $15 million. Council Member Schmid stated the error was roughly 10 %• Mr. Perez stated the shortage was in benefits. He stated assumptions were made at the beginning of the Fiscal Year to book the liability in the General Benefits Fund, and that amount was not sufficient to cover the unanticipated expenses. Council Member Schmid stated the amount requested at the beginning of the Fiscal Year was deemed as reasonable at the time. In addition, there was a sizable and growing vacancy in the City's workforce. He questioned whether something happened inside the workers compensation area that created larger payouts. FIN: 091201 EXERPT 5 FINANCE COMMITTEE Mr. Perez stated the deficit in benefits included many factors, including workers compensation claims, cost of employee pensions, and general liability. He indicted the majority of the increases came from general liability costs. Council Member Schmid spoke on the General Benefit Fund. He stated with every payroll, the City was putting away funds for pension liability, medical liability, vacation, and standard workers compensation. Mr. Perez stated the general liability and workers compensation were difficult to predict, and were subject to change. Council Member Schmid inquired whether more employees were not working or on workers compensation than in prior years. Mr. Keene stated general liabilities cover minor aCCidents, such as slips, trips or falls. Council Member Schmid stated the City Council should have received a leading indicator in regards to general liabilities from the City Attorney on expenditures outside the City's boundary. Mr. Perez stated that was not necessarily the case. He iterated the process involving the City's actuarial consultant. He stated the process was regulated by governmental accounting practices. Mr. Keene stated the General Fund benefit expenses were held constant from FY 2008 to FY 2009. This practice had been implemented in past budget years in an effort to keep a reasonable balance between retained earnings balances in the General Benefit Fund and what expenses were budgeted in and allocated in General Fund departments each year. In times of sustained economic downturn, cushions such as rligller than anticipated revenues, were no longer present and resulted in a deficit. Council Member Schmid stated Ilis concern was that Staff did not pick up and catch leading indicators in planning the FY 2009 budget. Mr. Perez stated it was difficult to determine the General Fund Budget. He stated the importance of establishing retained earnings to help FIN: 091201 EXERPT 6 FINANCE COMMITTEE cushion against year-end benefit expense adjustments. In most years, the General Benefit Fund and the Fund's retained earnings were sufficient to cover unexpected liabilities. Given the difficult times, the reserves have been used and not replenished to resolve the deficit. He stated there would be a concern in ongoing Fiscal Years if funds were built backup. Council Member Schmid stated there was an expense impact of $1.1 million in the Fiscal Year 2010 budget. Staff had hoped to achieve savings, which was unsuccessful, implying that no savings were achieved in Fiscal Year 2009. Mr. Perez stated these savings were intended to be achieved in Fiscal Year 2010. He stated difficult decisions would need to be made in order to achieve these savings. Council Member Schmid inquired why Staff did not recommend solving the deficit by drawing funds out of the Budget Stabilization Fund and not the Technology Fund. Mr. Perez stated this option was available. He stated the City was experiencing extremely volatile economic conditions which had implications for FY 2010, and a reserve drawdown in FY 2009 was not recommended. Not making adjustments in the Budget Stabilization Fund in FY 2009 was recommended to maintain the level of reserves to assist in significant challenges in future years, and demonstrate to the rating agency that the City can maintain a certain level of reserves. Mr. Keene stated the 2010 budget balancing plan included repaying the Technology Fund $1.2 million by drawing it down from the Budget Stabilization Reserve. Mr. Perez added tllat it's important to maintain a ratings agency review as the City has a goal to get reaffirmed for a AAA credit rating. The general obligation and assessments have gone by a vote and been secured, there was a strong backing and Staff was trying to add to that. Council Member Klein said he was very unhappy with the report. He was disappointed that the Staff used a passive voice, "errors were FIN: 091201 EXERPT 7 FINANCE COMMITTEE made" to get out of responsibility. Regarding the General Benefits Fund, he didn't understand how liabilities were a benefit. Mr. Perez agreed the title may be wrong. He confirmed all liabilities were included. Council Member Klein said the Council and public have been misled. When compensation claims were made by third parties it's very different than employee claims. He said it doesn't make sense for the City to say they were on track. Benefit expenses were Worker's compensation claims not third party claims, he asked how there could be a variable. Mr. Perez said there was an increased cost in Worker's compensation claims. He said the actual name was General Benefits and Insurance Fund. It was listed incorrectly on the report. Council Member Klein requested a breakdown of the $1.8 million of insurance type claims 'from third parties and any other categories. Mr. Perez said they can get the exact numbers, but he believed the majority were general liability claims. Council Member Klein requested more detail and reconciliation. An actuary with regard to trying to calculate claims made against the City. He stated there were a significant number of additional claims, and the City was only responsible for the first million dollars in claims. Mr. Perez said Staff would follow up at the Finance Committee Meeting on December 15, 2009 with more information. Council Member Klein asked why the problem wasn't brought to Council's attention in September or October when it was first discovered. Mr. Perez said it was on October 5th • Mr. Keene said it was mentioned to the Council that there was a year­ end closing problem and a deficit. Staff wanted to make sure it was accurate and the information was clear prior to bringing the full report FIN: 091201 EXERPT 8 FINANCE COMMITTEE to the Council. They also needed to develop recommendations which required having a better estimate on the 2010 budget. Council Member Klein said this might have impacted the election; the Council and public would have liked to have known the facts. Mr. Perez said he did not yet understand the magnitude of the problem. He lost confidence in the reporting system and had to do a complete analysis. He also wanted the Auditors to validate what he found prior to bringing it to Council. Council Member Klein asked if any of this would continue into the 2010 fiscal year. Mr. Perez said that it would due to the repayment of the $4.8 million over a four year period. Council Member Klein said what he meant to ask was if the errors the former budget director made were continuing into 2010. Mr. Perez said they were not; the process has been revised. The process has changed to a biweekly, multi position system that has some "out of the system" components to validate findings. Council Member Klein asked if the numbers being used to track 2010 can be considered accurate. Mr. Perez said they were accurate. Council Member Klein asked for clarification on the errors regarding the $2.1 million with the salaries. He said the number in the budget for savings was on vacancies not being filled. To determine if the budget was being met, the Budget Director was providing the Administrative Services Director a report. Due to errors in the reports the City was not on track. Mr. Perez said that in May he received a report saying the City was $600,000 ahead. It wasn't until the books were closed and actuarials came in that it was found to be negative. FIN: 091201 EXERPT 9 FINANCE COMMITTEE Council Member Klein asked if positions were filled that might not have been if the numbers 11ad been accurate. Mr. Perez said it was possible that some positions were, but 20.5 positions had to be carried forward with the plan. Some were allowed to go forward as they were essential to the operations. If this budget shortfall had been noticed Staff may have come to Council with recommendations on service level cuts or furloughs. Staff would have been able to see something in March and come to Council with a different plan knowing the savings was not going to be realized. Council Member Klein asked if the budget goal for achieving savings through not filling vacancies was ever achievable. Mr. Perez said there would have been some level of achievement. Council Member Klein said he agreed. Mr. Keene said that some of it would have been achieved by not filling the positions but it probably wouldn't have been enough. Other service cuts would have been considered. Council Member Klein said the higher level economists tend to be more optimistic about the direction of the economy than Staff is. He asked if Mr. Perez had compared Palo Alto's numbers to what other officials were doing. Mr. Perez said there were some reports that were questioning whether or not the GDP was even being tracked correctly. He said that since the closing of 2008 Palo Alto had lost $9.3 million in revenues. Not all of the neighboring cities were responding the same way Palo Alto is, there were different circumstances for each city. San Francisco had a defiCit of $53 million In addition to what they had to begin with. Livermore, since 2008, lost $8.7 million in revenue and was cutting 11.5 positions out of 482 and was reducing library hours. Their total budget was $86 million and their deficit was an additional $3.2 million. This information, he said, indicates that California in general was not normal. Tax revenues were declining and that was why those assumptions were being made. FIN: 091201 EXERPT 10 FINANCE COMMITTEE Mr. Keene said that there were other reports that claimed recovery now. Some experts were saying employment needed to come back before any real recovery could happen. Council Member Klein said that it would be helpful to have a report on what other cities were doing by percentage of their general fund. Mr. Perez said they would pull those numbers together for the December 15th meeting. Chair Burt asked if the Stanford reimbursement for the Fire Department expenditures was 30.3% of overall operating expenses/ and not recovered until the following fiscal year. Mr. Perez said that the adopted budget was used to formulate the amount of fees l and then it was reconciled with the actual data at year end. That occurs after the fiscal year closes. The revenue was collected in the current year and then adjusted the following fiscal year. Chair Burt said the Staff Report said 2011. Mr. Perez said it should say 2010. Chair Burt said that page four of the Staff Report said sales tax segments had dreadful results in the second quarter. He asked if that was referring to the fiscal or calendar quarter. Deputy Director of Administrative Services l Joe Saccio said that it was referring to calendar quarters. Chair Burt requested that they identify that going forward. The Staff Report said based on Incurred but not reported expenditures he asked if they were reported or expended. Mr. Perez said they were recorded as part of the actuarial process. The actuarial makes assumptions based on projected valuations that must be budgeted for. It may not materialize that way. It's recognized based on that valuation. FIN: 091201 EXERPT 11 FINANCE COMMITTEE Chair Burt asked why it was stated as being incurred but not reported. He asked if that was the term for when an incurred expenditure was not spent. Mr. Perez said the acronym was IBI'lR, it was an accounting term meaning incurred but not recorded. Chair Burt said there was a difference between recorded and reported. Council Member Klein said page six said a decline in number of rounds being played on the golf course resulted in the deficit. He asked how that deficit was being accounted for. Mr. Perez said the golf course operation was under the general fund and it was covered by that. $326,000 was lost last fiscal year attributing to part of the budget deficit problem. Council Member Klein asked if there was a profit in previous years. Vice Mayor Morton arrived 8:37 Mr. Perez said specific amounts will show on the Staff Report on December 7, 2009. He stated that last year and this year it had shortfalls. Council Member Klein asked if the profit, when there was one, was put back into the golf course operations. Mr. Perez said that in previous years it would go back to the general fund. Recently it was invested back into the golf course. Chair Burt said according to the Staff Report, Documentary Transfer Tax receipts from July through October were only slightly lower compared to the same period last year. He said this didn't indicate the annual run rate and asked, based on recent revenue per quarter, what the current annualized run rate was. Mr. Saccio said that in Fiscal Year 2010 there was $2.8 million and Staff predicted that to be on target, it may even be $2.9 million. It was 1.5% below July through October of the prior year. FIN: 091201 EXERPT 12 FINANCE COMMITTEE Chair Burt asked what it would be annually based on the current run rate. Mr. Saccio said it was $2.9 million. Chair Burt asked what the revenue was for the July through October period. Mr. Saccio said that the data was for July through November and it was $1.5 million. At the same time last year it was $1.514 million Chair Burt said Staff's conclusion was based on something other than the current run rate. The current run rate was $300,000 per month for the last five months which would be $3.6 million. One of the things discussed in the past, was during periods when there was rapidly changing economic trends, if something was trending sharply downward one year, and marginally trending upward the next, the same year over year numbers didn't necessarily imply the same outcome for the fiscal year. He requested trend lines to be examined on that basis. IVlr. Saccio said they do look at a trend line based on performance year to year. To extrapolate this category on a straight line basis has some issues. The volume and mix of transactions differs quite a bit. Chair Burt said he didn't mean it was a straight line. His disagreement was that it was presenting a one dimensional interpretation of the data. If this time last year the trend was downward and now it was upward, the extrapolation for the balance of the fiscal year would not be the same conclusion as a year over year with no net change. He said the Committee was not being presented with the pertinent data to understand the projections. Mr. Keene said Staff will add that information as a recommendation of what will be done at mid year. Vice Mayor Morton asked if they need to make a recommendation on 2009. Chair Burt he said it was currently the question period and then they would come back. FIN: 091201 EXERPT 13 FINANCE COMMITTEE Vice Mayor Morton said they had not seen the presentation on 2010 so they will do presentation, then questions and then come back. Chair Burt said that was correct; first the Committee would ask questions on 2009, and then wrap that up! and then presentation on 2010 and questions on 2010. Vice Mayor Morton asked if the deficit of $4.8 million! including the technology transfer and the current proposal! was to bring that to zero by reversing the technology transfer. Mr. Perez said that was correct. Vice Mayor Morton asked if a portion of the technology transfer should be pulled out of the Budget Stabilization Reserve. Mr. Keene said that was one idea. Mr. Saccio said that due to revenue performance the adopted budget must be adjusted down by $4.3 million. The main category being reduced was sales tax. In two years during the 1997 dot com bust it dropped over $2 million to 17.6%. The level in nominal dollars was projected almost to 1997 revenue levels. There was a precipitous drop. In two years time it dropped $2 million compared to the adopted budget! but $5 million over the last two years. Almost every category has dropped. Auto and department store sales being the worst. Calendar quarter to quarter drops of 15-30% were being experienced. California overall was down 20%. Neighboring communities were down 20%. Third quarter receipts will come in mid­ December and will likely be in the double digit range. The Transient Occupancy Tax hit came last year going down considerably. So far this year will be relatively close to what we experienced in terms of actuals. Revenues were down 29%. July & Sept were 21 % below. Staff viewed this as a potential bottoming out. Staff was taking a conservative approach. $2 million of the $4.3 million were explained by the sales tax decrease. The remainder was also economically induced as it's affected the miscellaneous fees and fines. One area of concern was property taxes. The County recently notified Staff that there were many commercial properties appealing their valuations. The county was collecting them and projected more coming. There FIN: 091201 EXERPT 14 FINANCE COMMITTEE isn't information yet as it takes about a year to process, it may not hit until 2011-2012. Vacancy rates on the peninsula were at 20% and Palo Alto was estimated 10.3%. Vice Mayor Morton asked if the Transit Occupancy Tax was as delayed as Sales Tax was until late December Mr. Saccio said there would be a report coming out shortly about that, but July & September were down 21 0/0 compared to prior, in August it was only 8.7 % attributed to the Senior Games. Vice Mayor Morton asked if that was adjusted or if Staff was waiting for the real numbers in December. Mr. Saccio said the Transient Occupancy Tax information doesn't come out until a month and half after the month closes. Vice Mayor Morton confirmed Staff doesn't have it for August. Mr. Saccio said that was correct. Vice Mayor Morton asked if Staff was confident in the 8%. Mr. Saccio said they were, but the question was how to extrapolate beyond the month of September. Vice Mayor Morton asked if January and February were hard to predict. Mr. Saccio said the first quarter was traditionally the weakest. Council Member Klein asked what VLF stood for on the property tax line of the presentation. Mr. Saccio stated it was the Vehicle License Fee. Staff wanted to show that the only reason the Property Tax went up was because the VLF was embedded into the property tax payments. Council Member Klein said he thought Palo Alto didn't get anything from VLF. Mr. Saccio said that we do. FIN: 091201 EXERPT 15 FINANCE COMMITTEE Council Member Klein asked how much the City gets from VLF. Mr. Saccio said about $4,000-500,000. Mr. Keene said the City gets $25.8 million in revenues but the property tax base growth was the amount without it. Chair Burt clarified the top line on the graph was with VLF and the bottom line was property tax alone. Council Member Klein said that Chop Keenan and Jim Baer said there will be very little appeals of commercial property tax assessments in Palo Alto because of the long tenure of commercial properties downtown. Staff can determine how many appeals there were in Palo Alto as the records were public and available at the County Assessors Office. Mr. Saccio said that Staff was attempting to gather that information. Palo Alto has few foreclosures compared to other cities. When the county experiences a hit on these assessed values for one year they distribute that hit across all jurisdictions. They do not calculate each city's percentage until the next year. Council Member Klein said this was a multi year projection so it isn't necessary to use county wide data. Staff could get a good idea on Palo Alto reassements. Mr. Saccio said Staff will take a look at that. Chair Burt said there were three factors on the property taxes; one where there was a reassessment downward, second was a gradual 2% increase should normal appreciation occur, third was when a property was flipped and reassessed at the current valuation. Most of the increases have been because of property transfers. He asked if Staff was looking at the property tax projections of the assessed valuations with an overlay of property transfers and the assessment that goes along with that. Mr. Saccio said the report included one year worth of projections. Staff had been using the County's projections for the past few years. FIN: 091201 EXERPT 16 FINANCE COMMITTEE For the following fiscal year, the school district was projecting a negative CPI adjustment which will negate the 2 % adjustment for all jurisdictions. Because of this it was possible there will be no increase in 2010-2011. Chair Burt asked if that meant there was no increase from CPI or no increase including the Property Transfer Tax. Mr. Saccio said Staff will clarify that. Chair Burt said that the amount that was attributable to reassements from transfer and the amount attributable to CPI increase were important. He asked for that information to be included on the list for the December 15th follow up items. Mr. Perez said that for the 2010 fiscal year Staff was projecting a $5.4 million deficit in addition to the $10 million originally identified. Staff felt that a review with all Stakeholders was needed to determine how to approach the situation. Combine that with the pending Council transition, time was needed for these conversations, so Staff recommended one time adjustments. Recommended areas for savings include salary savings from open positions. Another recommendation was to close down the public Safety Building Design CIP as the City no longer had the ability to acquire a property. The funds that were used to create the design funding for the CIP came from the Budget Stabilization Reserve bringing down from 18.5 % to 15 %• The recommendation was to defund the project and put the money back in the General Fund, a total of $2.7 million. A further proposal was to draw down $1.2 million from the Budget Stabilization Reserve. The $800,000 mentioned by Council Member Morton was embedded in this amount, delayed from one year to the next, leaving a projected balance of $20.3 mlliion or 14.3 % of the adopted budget expenditures. The $1.2 million deferment to the Technology Fund will be repaid over four years. An additional million dollars in non salary savings will need to be achieved. Lastly, the original $10 million plan called for $3 million in contributions from employee compensation, only $2.8 was achieved, so the balance will need to be made up. Mr. Keene added that there was still potential risk exposure with the PPOA issue. The $800 1 000 in 2010 was still being counted on from that contract roll over. FIN: 091201 EXERPT 17 FINANCE COMMITTEE Council Member Klein asked for clarification regarding the technology acquisitions that would be deferred under the proposal. He said that $1.2 million would be paid back into the fund this year for expenditures, and previously $1.5 million was planned. Mr. Perez said the expenditure was higher than before. The $1.2 million will be available for the Technology Fund operations. Council Member Klein said this plan meant that only $300,000 would be deferred from the Technology Fund. Mr. Keene clarified that was correct for 2010. Mr. Perez said Staff was committed to putting the money back in the fund to avoid the potential vulnerability of an underfunded Technology Fund. Council Member Klein said he was concerned that the Technology Fund was kept up. He then asked if savings on the Utility costs could be factored in. Mr. Perez said that for the first quarter there was a savings of $40,176 across the department. The target was $133,000 for the year. So far the savings were on target. Chair Burt said that one quarter isn't enough for a trend line. He thought this would be a building savings, and savings would increase as further measures were implemented. He asked if it was expected to be greater savings each year. Mr. Keene said he believed it would be. Chair Burt said he was hopeful that based on the first quarter, the savings on environmental measures could be better than projected. Mr. Keene agreed. He reminded Council that he negotiated half of the savings for the credit. Council Member Klein said it should offset another issue. FIN: 091201 EXERPT 18 FINANCE COMMITTEE Vice Mayor Morton requested that some language change in the recommendation to reflect that the Technology Fund doesn't have $4 million to loan. He recommended "reinstatement of IT Transfer" instead. He voiced concern about not knowing the total deficit. He said the risk wasn't about falling short on a $5 million shortfall; it was falling short on a $15 million shortfall. He said the total exposure didn't get defined in each year. Mr. Perez agreed to do a better job of explaining what had been accomplished and what was being carried forward. It was about $3.7 million in reductions from staffing and services. If PPOA materializes it's another $2.8 million in salary concessions. Vice Mayor Morton said it was important for the new Council Members to know that assumptions have been built in but the exposure was still there. It's important to note that these were additional savings on top of what was already anticipated. Chair Burt asked what the projected savings from the Fire Department wage freeze would have been. Mr. Keene said it would have been approximately $600,000. Council Member Schmid said the 2010 budget was dependent upon one-time offsets. He was concerned about a long range string of imbalances that would go into double digits by mid-decade. He asked if there were any items in the 2010 budget that would have an impact on those structural items. He noted that in 2010 there was a high incidence of overtime, by the last week of November over 73% of the total calculated had been used. Part of it was due to vacant positions, but it seemed the City was at a 7.2% vacancy rate, yet the dollar savings was only 2.5% because of the overtime expenditures. He said that when an employee leaves they get their regular pay, unpaid­ accrued vacation pay, and unpaid-accrued sick leave pay. Mr. Perez said that sick days were only paid out to employees hired prior to 1983. Council Member Schmid said tllat employees that leave get their regular pay, vacation pay, and overtime pay. He asked how much of that was reportable to Cal Pers as the last years pay. FIN: 091201 EXERPT 19 FINANCE COMMITTEE Mr. Perez said that overtime and vacation pay cash outs were not Persable. The base pay was Persable, when there was a VMC that was Persable as well. Council Member Schmid confirmed that while a lot of current salary savings was being used in overtime, there was no accumulation of benefit obligations. Mr. Perez said that was correct. Staff will bring, on December 15th , a more detailed report on tile estimate for achieving the $1.5 million. The Fire Department had a significant portion of their overtime during this the part of the year being reviewed. Council Member Schmid said the wording in the report implied there was no unusual circumstances involved to cause the overtime and that the overtime was due to sick leave, vacations, Worker's compensation and other regularly occurring incidents. Each year by November 20 the Fire Department reaches 100 % of overtime. The Police Department also states their customary overtime work was busy shift case writing, implying a standard overtime rate applies to them as well. Mr. Perez said the Fire Chief would have to speak to the Fire Department circumstances if there were any specific inCidents not mentioned in the report. Chair Burt asked if the overtime includes amounts the City will be compensated for from the State. Fire Chief, Nick Marinaro stated there had been limited Fire Strike Team deployments this Fiscal Year and reimbursements from the State were anticipated in the amount of $50,000 to $60,000. He stated the reimbursements would be provided after the State's reconciliation, and were expected early next year. Council Member Schmid stated the Fire Department's Budget had reached 102 % of its annual overtime. He inquired whether the Fire Department's budget would need to be reevaluated and changed by the year end. FIN: 091201 EXERPT 20 FINANCE COMMITTEE iVJr. Marinaro stated it was not unusual for the Fire Department's budget to be close or over budget in the first and second quarter of the Fiscal Year, due to Station No.8 Staffing, Medic-1 Staffing, and Staff vacations. He stated the current Fiscal Year had an unusually high number of Worker's compensation claims which created overtime due to limited Staffing levels. Council Member Schmid stated long-term Worker's compensation claims should be taken into account when creating the Fire Department's budget for anticipated higher than normal overtime salaries. Mr. Perez stated Staff did not typically increase the budget due to projected long-term Worker's compensation costs, but salary savings were exercised based on trends seen in vacancies, Fire Strike Team reimbursements, and reimbursements from Stanford University. He stated, based on these projections, the budget was on target and would be monitored. Council Member Schmid stated with the reimbursements, the Fire Department covered 39% of the time period, and there was approximately 60 % to 70 % of the overtime payments made. Mr. Keene stated a year-by-year comparison by fiscal year quarters and year-end numbers could be created and presented on the Finance Committee Meeting scheduled for December 15, 2009. Council Member Klein requested an update on the hiring of a consultant to analyze the standards of coverage structure of the Fire Department. Mr. Marinaro spoke on the efforts from the Deputy Chief and the Assistant to the City Manager on forming the scope of services. He stated securing the funding for this project was a challenge. He indicated the Request for Proposal (RFP) was on schedule and would go out in the middle of December 2009. Council Member Klein was hopeful the RFP would be out before December 15, 2009. FIN: 091201 EXERPT 21 FINANCE COMMITTEE Mr. Keene stated the results of the study would be completed by April and incorporated into the budget discussions. Mr. Marinaro stated that was correct. Council Member Klein stated it was essential for the chosen vendor to commit to having the report done in time to include as part of the budget considerations for FY 2011. Mr. Marinaro stated a completion date would be stipulated within the RFP. Chair Burt inquired whether the stipulation would create a penalty if the completion date was not achieved by the chosen vendor. Mr. Marinaro stated in the EMS Master Study, if the vendor could not meet the timeline, they were not considered a viable candidate for the project. He stated decisions where made based on past experiences from the vendor's work performance. Chair Burt inquired whether Staff would select a vendor whom they felt would have a high priority in completing the project in the timeframe set. Mr. Marinaro stated yes. Break: 9:34 -9:46 Director of Administrative Services, Lalo Perez said in addition to closing a $10 million budget gap in FY 2010, the General Fund faced systemic financial challenges. There were four factored into the Long Range Financial Forecast (LRFF) cumulatively causing long-term deficits that require resolution: 1) Recent and poor CalPers portfolio performance required general fund to ramp up retirement contributions from $1.0 million in FY 2012 to $5.4 million by FY 2015; 2) Retiree medical cost increase of $0.74 million annually; 3) AntiCipated and incremental library operating costs of $1 million per year when new and renovated libraries and community center become operational; 4) The City's $302 million backlog and the need for an additional $147 million for facility replacements required more than the general fund and the Infrastructure Reserve had available; 5) FIN: 091201 EXERPT 22 FINANCE COMMITTEE Repayment of the loan from the Technology Fund at $1.2 million per year for four years. He clarified no recommendations were being made to the Council tt-lis evening regarding "Tier 2 Budget Reductionsll items as noted in his presentation. The City did not anticipate a growing deficit of $5.4 million. Given such a large amountr the whole processing system including Tier 2 Items would need to be revisited and with a focus on all segments of services. Budget Reduction Options noted in Attachment H of Staff Report CMR:434:09 lists Near­ Term Cost Savings; Medium Term, and Long-Term suggestions were not concrete. They were conversation starters and needed to be discussed with the Council and all stakeholders. In summary, critical revenues had declined to $9.3 million since FY 2008 and the recovery time would take several years. Expense reductions would be the first step in FY 2010 and foresee additional cuts beginning in FY 2011 and beyond, necessary to eliminate deficits. Vice Mayor Morton said due to no new revenues the LRFF looked grim. He said a closer review had to be made on how to come back with a Measure. A good time would be when there was a school Measure on the ballot since it would have the same population that cared about services. Core services as well as supplemental services would need to be reviewed and some were included in Attachment H. He said one way of solving the deficitr since the Technology Fund was not an immediate demand, would be to transfer a lesser amount or to forgo a transfer for a year. He suggested transferring $1 million to the Technology Fund leaving a lesser burden for the future. Over the next four years, the $1.2 million would be 20% of the budget deficit. Council Member Klein said there had been no discussion about an increased revenue source. The Business License Tax was going to be one revenue source. He said the Honda Dealership issue needs to be revisited, if the owner wasnl interested it should be opened to other organizations. He asked if Staff had recent contacts with the Honda Dealership. Planning Director, Curtis Williams said they had not had any contact with Mr. Anderson at the Honda Dealership in two months. Mr. Anderson/s last indication was that he wanted to wait for the situation to develop. The animal shelter site and signage were possible items to look into. He said he was not ready to move forward with his sales being down. FIN: 091201 EXERPT 23 FINANCE COMMITTEE Council Member Klein said that in effect the City was giving him a no cost option. He should be nudged or other options should be sought. The dealership was on a valuable piece of property. If he wants an option he should pay for it. He wanted to know if Staff was thinking about options out side of the box. City Manager, James Keene said that the Leadership Team Retreat will have that issue on the agenda. After the start of the year he was going to launch a forum for ideas and options from front line people. Community partnerships were going to have to get a lot more inventive. The City also needed to look at every service provided, and if there were outside providers, they should be considered. Internally the Staff will have to get less bureaucratic and will need to be faster to change. Council Member Klein said his goal would be no reductions in the amount being spent on technology in the current year. He said his motion would be to approve a transfer to the Technology Fund of that amount which would be necessary to fund all the technology plans for FY 2010, getting down to about $4 million, with the remainder to come from the Budget Stabilization Reserve and the repayment to be in the four increments suggested by Staff. He asked Staff what the amount transferred to the Technology Fund, in his plan, would be. Mr. Keene said it would be $323,000 in order to meet the eXisting schedule for 2010, assuming the $1.2 million that was programmed in the 2010 deficit was maintained. Mr. Perez said it was $1.8 million in future CIPs deferred: $800,000 for radio infrastructure, $800,000 for the library RFID, $100,000 for telephone replacement, $66,000 for city wide GIS data, $25,000 for enterprise application infrastructure and $16,000 for collection software. Council Member Klein said to reduce the amount of transfer to Technology Fund, instead of zero as proposed by Staff, to that amount when taking into consideration the repayment, will allow all of the technology purchases currently scheduled for FY 2010. FIN: 091201 EXERPT 24 FINANCE COMMITTEE MOTION: Council Member Klein moved, seconded by Vice Mayor Morton to reduce the amount transferred to the technology fund to compensate for technology purchases and improvements scheduled for Fiscal Year 2010, with the remainder to come from the Budget Stabilization Reserve and the repayment to be made in increments suggested by Staff. Mr. Keene said itls in the ballpark of the amount they were discussing. Vice Mayor Morton asked if they were anticipating an. $800,000 profit, if the Technology Fund was not funded, that would have gone into the Budget Stabilization Reserve anyway. So the net number was zero. The technology transfer would be around $3 million. Council Member Klein added that it's important to keep the technology fund going. Vice Mayor Morton agreed with Council Member Klein. If this isn't fixed this year it pushes into what will be worse deficit years. He said they should fund in this fiscal year the balance of the proposal. Chair Burt said that he was looking forward to receiving some additional information at the next meeting. He's not sure if that will have an impact on his decision to support the motion or not. Mr. Keene suggested the Staff bring back two alternatives. One was as proposed and the second would be with Council Member Klein's changes showing how the trade offs turn around. Vice Mayor Morton said this decision impacts how FY 09 was closed. He said if tl1e issues weren't resolved at the current meeting the audit wouldnlt be able to be closed. Mr. Perez said it would be less costly to close it the way Staff was recommending with the lack of $4.8 million transfer to the Technology Fund. It could be changed by drawing down on the Budget Stabilization Fund. The books have to be closed. Vice Mayor Morton agreed the books must be closed. He voiced concern over waiting two more weeks. FIN: 091201 EXERPT 25 FINANCE COMMITTEE Chair Burt disagreed, saying Staff was making a different pOint. Mr. Perez said the books will close with not making the $4.8 million transfer and Staff would reimburse whatever amount the Committee wanted in this fiscal year out of the Budget Stabilization Fund. Chair Burt clarified that 2009 would close as Staff proposed, tonight. The motion made tonight or in two weeks would not make a difference on the transfer with the Technology Fund. Mr. Perez said the City must close the Financials before the end of the month. Mr. Keene recommended that course of action. The expenditures in 2010 were what were at stake. Vice Mayor Morton voiced a reservation that Staffs proposal left a phantom profit of $800,000. He stated it seems misleading. He didn't want to end up not making the transfer to tile Technology Fund as it would seem that there was almost $1 million dollars of free money. Mr. Perez said the Auditor would have to come in and reopen the audit and make an adjusting entry for the $800,000. Vice Mayor Morton asked if the Auditor would close the books with an $800,000 sign of profit. Council Member Klein said the budget amendment process was troublesome as it will be a new Council. He was concerned about the timing. He said it was possible that the approval for the proposed amendment will come too late in the Fiscal Year for the expenditures to be made. Mr. Perez said it would be on December 15th with the amendment that increases the Budget Stabilization Reserve. The motion now or then would decrease those dollars out. Council Member Klein asked for clarification from Mr. Perez about which meeting. Mr. Perez said the December 15th Finance Committee Meeting. FIN: 091201 EXERPT 26 FINANCE COMMITTEE Council Member Klein stated that if it comes before the Committee on December 15 th , it won't go before the Council until January 11, 2010. Mr. Perez said that was correct. Council Member Klein stated that the new CounCil, on January 11th/ will need more information. A vote wouldn't take place until sometime in February. Mr. Keene agreed that it would be an issue to have this Council make a decision about this. Mr. Perez said Staff could draw from the Budget Deficit Reserve as it was right now, by bringing an item affecting that amount. It would have to be done on December 14th. Mr. Keene stated that was possible but the Finance Committee might want to know the exact dollar amount so they can direct Staff to come back to COLincil. He clarified that the current Council wants to make a decision regarding the full funding for the Technology fund 2010 out of an additional draw on the Budget Stabilization Reserve which would be best accounted for by a Council action on December 14, 2009. Vice Mayor Morton said if the recommendation was approved at the current meeting the Auditor would still be able to make the adjustment. He asked if the audit has been printed. Mr. Keene said it was printing currently. Vice Mayor Morton said he didn't see a way to fix the audit unless they reprinted it. He reiterated that $1.8 million of the Technology improvements could not be made because it had to come from the next year's budget. Mr. Keene said he didn't see it the same way. He said the only issue was the $800/000 not the entire amount. The budget must be zeroed out. Chair Burt said his focus had not been the timing for getting this to Council/ but he did agree now and tll0Ught it should be approved. FIN: 091201 EXERPT 27 FINANCE COMMITTEE Council Member Klein said he supported the motion but could not approve what Staff had done. The understanding was that Staff would bring this to the Council on December 14th, a budget amendment funding the Technology Fund to the extent of $800,000 plus the amount needed to insure all planning purchases in technology will be made in FY 2010. Mr. Keene agreed Staff could accommodate that request. Vice Mayor Morton agreed with Council Member Klein. Council Member Schmid said that was exactly what was being done. The 2010 budget included the repayment of the IT loan for $1.2 million. Council Member Morton said the expenditure was $1.8 million. MOTION RESTATED: Council Member Klein moved, seconded by Vice Mayor Morton to approve the Staff recommendation for closing the Fiscal Year 2009 budget by eliminating the transfer to the Technology Fund, and the Finance Committee recommends to the City Council a budget amendment for the Fiscal Year 2010 budget to fund the Technology Fund with the approximately $800,000 excess from Fiscal Year 2009, plus the amount needed to fund all scheduled technology expenses for Fiscal Year 2010 with funds from the Budget Stabilization reserve. MOTION PASSED: 4-0 Chair Burt said this item would be carried forward to December 15th with the open items. FIN: 091201 EXERPT 28 Fire Police 2007 1,026,674 1,074,399 2008 1,004.174 1,296,050 2009· 1,353,056 1.016,900 2010i 1017 674 999900 42% 41% ATTACHMENTC General Fund Overtime Trends Fiscal Years 2007 through 2010 Ae of November 201 2009 Adjusted Budget PlanninQ Public Works CSD Other Depts 66,554 112,564 207.129 119,286 73.033 94,564 169,626 110,288 66,553 112,564 137,928 109,288 66553 112554 104590 116287 3% , 4Yo 6% 4% Total Ad' Budnet 2,606,606 2.767.737 2,796,291 2417,568 . 1001'0 Numbers In bold are calculated as a percentage of actual, based on percentage of department's adjusted overtime budget. Attachment D Documentary Transfer Tax Performance Tax Collection Tax Receipt Period Timeframe FY 2001 FY 2002 1) 2) July 3) 4) 5) 6) 7) 8) 9} August September October 10) November 11 ) 12) December 13) 14} January 15) 16) February 17) 18} March 19) 20} April 21) 22) May 23) 24) June I I Late July $ iMid August I Late August . I Mid September ; Late September ! Mid October lLate October I Mid November I Late November I Mid December Late December! .. Mid, January . Late January Mid February Late. February Mid March Late March Mid April LateApril Mid May Late May Mid June Late June Mid Refunds 98,567 $ 419,927 158;075 203.;394 99,497 203,336 163,785 184;797 111,796 74,527 275,9611 217,065 i 128,626 96,584 78,624 2.38;448 96,148 197,227 1:,14,517 82,677 38,303 144,327 69,435 214,417 66,079 ! $ 150,471 57,074 1A1~665 38,213 93,723 57,358 110,672 65,372 122,822 56;886 134,305 34,398 156,895 93;920 178;950 99,398 205,231 . 148,157 182,494 137,985 158,352 169,115 214,467 : FY 2003 153,386 i $ 119,830 48;79$ 155;559 142,582 131,561 189;529 154;384 69,891 168,048 ! 97299 162;729 43,979 82,387 35;780 165;661.1 I 96,803 I 190,128· 93,256·. 151,696 125,095 180,699 219;553 534,725 FY2004 155,778 225,016 $ 157;061 1,275;269 90,553 172,834 114;681 193,214 149,023 158,585 .115;695 177,887·" 50,049 165,734 38,5351 ...•...•. .1 154,227 1 211,007 i 292,715 1 2 .•. 3 .... 9 .... ,2(30 .•.... · .. 1' 263,6133 168,021 I 405,882 I 204;0921 FY.2005 22.1.,.9.8.7 ... 1 1 190,091 1l:j3,212 I 299,076 139,041 227.,061 251,410 187,193 221,560 15~,430t 36t;624 1 i 287,096 "168;586 . ....... I 187,357 267,702 i I 218,212 i 194>559 1 309,647j 179,412 160,077 40!5i540 ·258;558 (3,412) $ FY.200SFY 2007 190,941 $ 198,299 192,862 489,885 239,467 388,511 154,956 225;472 99,349 219,192 39,355 172;159 97,809 107,385 217,6~5 169,854 122,584 306,926 237;713 206;601 238,695 764,774 72,458 573,657 (776) 126,927 1 $ 251,356 24Q;094 513,5.83 136,354 114,263 106,199 191;635 209,670 174,773 110;839 131,434 328,734 108;3Ei4 196,844 224,634 259,561 248,824 306;161 534,476 331,332 246,610 652,082 FY2008 149,867 $ 203,087 270,469 424,244 203,331 231,227 273,762 254,656 112,244 197,214 76.525 ! 636,936 93,768 286,526 76;522 172,4Q:6 143,069 260,256 210,130 176,116 195,682 167,093 301,980 272,593 i FY2009 i 295,462 I $ 286,904 192,971 126,041 127,699 150,978 62,030 189,680 82,147 134,184 87,763 77,474 40,826 62,965 65,912 FY 2010 135,089 209,049 93,166 363,082 \ Actual 81,835 FY 2010 160,011 $ 1,661,825 122,196 171,229 156,066 170,104 96,539 85,222 44,908 69,262 72,503 Forecast FY 2010 109,889 120,878 (, (10% 73,337 80,671 Increase 90,119 99,131 Over 87,170 95;888 FY 2009) 98,715 108,.587 $ 1 .. 588,583 136,982 150,681 164,531 180,984 155,902 171;492 192,581 211,840 4~:::~~)j Total Documentary Tax ~ceipts i $3,730,0631 $2,874,OOO! $ 3,513,3551 $ 5,598,389! $5,080,017 i $ 5,725,754 i $5,843,329 i $ 5,389,7061 $ 3,092,264: $ 3,250,408 ReceiPts from July throughtnidcDe.cember) $1.717;702·. $~03',44~ $ 1;~3~,5~5 Total Anilual Receipts .. $3,730;063$2,874,000· $3,51'3. ;3.55 %ofRe~ipt(Ju!y thrumid'-Dec. DivIded by . . ... . Total Receipts) 46% 31% 38% ~,~~~~01~ .• $1:930;6~P . $ 2,398,934 $2,064'~?4$2,320,1P3 $1,648,098$~~!3q1;825 5;59l'l;~$89 \~5i080.017 $ 5,72$,754 $5'.843.,329 $ 5,389,706 $ 3,092,264, $3.459;408 1 ~ 48% 38% 42% 35% 43% 53% 51%